{"id":171241,"date":"2024-04-26T13:06:43","date_gmt":"2024-04-26T19:06:43","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=171241"},"modified":"2024-06-15T10:26:48","modified_gmt":"2024-06-15T16:26:48","slug":"passive-real-estate-investment-risks","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/passive-real-estate-investment-risks","title":{"rendered":"Think Passive Real Estate Is Safe? Here Are 9 Hidden Risks That Could Cost You"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC8710057092\" width=\"100%\"><\/iframe>\r\n  \n\n\n\n\n<p><span data-preserver-spaces=\"true\">You can\u2019t eliminate all risk from investments. After all, the zombie apocalypse could strike tomorrow and probably wipe out your entire portfolio. But you can reduce risk, even among high-return investments.&nbsp;<\/span><span data-preserver-spaces=\"true\">In fact,<\/span><span data-preserver-spaces=\"true\">&nbsp;these are precisely the investments you want to minimize risk for\u2014your Treasury bonds don\u2019t need it.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">I&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/gaining-financial-freedom-using-long-and-short-term-rentals\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">love real estate syndications<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;as high-return investments.&nbsp;<\/span><span data-preserver-spaces=\"true\">They\u2019re completely passive: You don\u2019t have to worry about financing or contractors, permits or inspectors, tenants or property managers<\/span><span data-preserver-spaces=\"true\">. You don\u2019t have to become<\/span><span data-preserver-spaces=\"true\">&nbsp;a&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/what-is-a-landlord\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">landlord<\/span><\/a><span data-preserver-spaces=\"true\">, yet<\/span><span data-preserver-spaces=\"true\">&nbsp;you still get all the benefits of real estate ownership, including&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/rental-property-cash-flow-analysis\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">cash flow<\/span><\/a><span data-preserver-spaces=\"true\">,&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/what-is-appreciation-in-real-estate\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">appreciation<\/span><\/a><span data-preserver-spaces=\"true\">, and&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/essential-tax-breaks-every-real-estate-investor-should-know\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">tax advantages<\/span><\/a><span data-preserver-spaces=\"true\">.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">If you find terms like \u201creal estate syndication\u201d or \u201cprivate equity real estate\u201d intimidating, don\u2019t. They\u2019re just group investments, where a professional investor takes on silent partners to help fund the deal. You effectively become a fractional owner in a large property like an apartment complex, mobile home park, or industrial or retail property.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">So which risks should you&nbsp;<\/span><span data-preserver-spaces=\"true\">watch out for<\/span><span data-preserver-spaces=\"true\">&nbsp;when screening potential investments?<\/span><span data-preserver-spaces=\"true\">&nbsp;Here are nine to keep in mind.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">1. Sponsor Risk<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Before&nbsp;<\/span><span data-preserver-spaces=\"true\">looking at<\/span><span data-preserver-spaces=\"true\">&nbsp;specific investments,&nbsp;<\/span><span data-preserver-spaces=\"true\">start by evaluating<\/span><span data-preserver-spaces=\"true\">&nbsp;syndicators (also known as sponsors, general partners or GPs, and operators).<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">An experienced, skilled sponsor who puts their investors first can find ways to salvage&nbsp;<\/span><span data-preserver-spaces=\"true\">deals that go sideways<\/span><span data-preserver-spaces=\"true\">. Inexperienced or loose-scrupled sponsors can find ways to mess up even good deals.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">While you should ask sponsors many questions, a few to start with include:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">How many deals have you done in your career? How many of those were sponsored syndication deals?&nbsp;<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Of those, how many have gone&nbsp;<\/span><span data-preserver-spaces=\"true\">full<\/span><span data-preserver-spaces=\"true\">&nbsp;cycle? What kinds of returns have you delivered for your investors?<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Have you ever lost investors\u2019 money? Have you ever lost your own money on a deal?&nbsp;<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Have you ever done a capital call?<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Tell me about some deals that went sideways&nbsp;<\/span><span data-preserver-spaces=\"true\">on you<\/span><span data-preserver-spaces=\"true\">&nbsp;and how you responded.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">What\u2019s your niche strategy, and why did you choose it?&nbsp;<\/span><\/li>\n<\/ul>\n\n\n\n<p><span data-preserver-spaces=\"true\">Do not invest with any investor&nbsp;<\/span><span data-preserver-spaces=\"true\">that you don\u2019t feel<\/span><span data-preserver-spaces=\"true\">&nbsp;100% confident&nbsp;<\/span><span data-preserver-spaces=\"true\">in<\/span><span data-preserver-spaces=\"true\">.<\/span><span data-preserver-spaces=\"true\">&nbsp;If you don\u2019t feel a \u201chell yes!\u201d attitude about a sponsor, consider them a hard no.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">2. Debt Risk<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Plenty of<\/span><span data-preserver-spaces=\"true\">&nbsp;syndication deals have fallen apart over the last two years&nbsp;<\/span><span data-preserver-spaces=\"true\">due to risky financing<\/span><span data-preserver-spaces=\"true\">.<\/span><span data-preserver-spaces=\"true\">&nbsp;Too many syndicators borrowed short-term or variable-interest loans, only to find themselves in trouble when interest rates shot upward.&nbsp;<\/span><span data-preserver-spaces=\"true\">They ended up with weak or negative cash flow<\/span><span data-preserver-spaces=\"true\">,&nbsp;<\/span><span data-preserver-spaces=\"true\">perhaps unable to refinance at today\u2019s higher rates.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">When we vet deals in our Co-Investing Club, one of the first things we look at is the debt structure. We ask questions like:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">What\u2019s the loan term?<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">What\u2019s the interest rate? Is it fixed or floating?<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">If it\u2019s floating, is the sponsor buying a rate cap or rate swap or some other protection against rates rising further?<\/span><\/li>\n<\/ul>\n\n\n\n<p><span data-preserver-spaces=\"true\">We turned down an investment&nbsp;<\/span><span data-preserver-spaces=\"true\">last year that&nbsp;<\/span><span data-preserver-spaces=\"true\">was<\/span><span data-preserver-spaces=\"true\">&nbsp;financed<\/span><span data-preserver-spaces=\"true\">&nbsp;with a two-year bridge loan.<\/span><span data-preserver-spaces=\"true\">&nbsp;I\u2019m&nbsp;<\/span><span data-preserver-spaces=\"true\">not willing<\/span><span data-preserver-spaces=\"true\">&nbsp;to&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/stop-relying-on-the-fed-and-adapt-your-strategy-for-risk\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">gamble on interest rates<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;and cap rates dropping within the next two years.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Instead of that deal, we invested in a deal where the sponsor assumed a fixed 5.1% interest loan from the seller. Clinching the deal: It had nine years remaining on the term.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">I don\u2019t know what the market will do in the next two years. But I\u2019m pretty sure that at some point over the next nine years, there will be a good market for selling.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">3. Market Risk<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Markets constantly change and evolve, driving upward or falling&nbsp;<\/span><span data-preserver-spaces=\"true\">down<\/span><span data-preserver-spaces=\"true\">. They rarely sit still.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">If&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/cap-rate-real-estate\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">cap rates<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;rise, income property prices drop.&nbsp;<\/span><span data-preserver-spaces=\"true\">That\u2019s<\/span><span data-preserver-spaces=\"true\">&nbsp;great for investing in new deals&nbsp;<\/span><span data-preserver-spaces=\"true\">and bad for your<\/span><span data-preserver-spaces=\"true\">&nbsp;existing real estate investments.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/will-there-be-a-recession-in-2024\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Recession risk<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;falls under the umbrella of market risk. In a recession, rent defaults rise, as do vacancy rates.&nbsp;<\/span><span data-preserver-spaces=\"true\">Both hurt the&nbsp;<\/span><span data-preserver-spaces=\"true\">net operating income of the property<\/span><span data-preserver-spaces=\"true\">&nbsp;and, therefore,&nbsp;<\/span><span data-preserver-spaces=\"true\">both<\/span><span data-preserver-spaces=\"true\">&nbsp;its cash flow and&nbsp;<\/span><span data-preserver-spaces=\"true\">its<\/span><span data-preserver-spaces=\"true\">&nbsp;value.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">You can\u2019t control cap rates or recessions. Markets move, sometimes in your favor and sometimes not. But you can invest conservatively in properties that cash flow extremely well, with long-term, low fixed-interest loans.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">As a final thought on market risk, all real estate investments are local. When people talk about \u201cmarket risk,\u201d they may worry about the macroeconomic market and broader economy. But what&nbsp;<\/span><span data-preserver-spaces=\"true\">really<\/span><span data-preserver-spaces=\"true\">&nbsp;matters to real estate investors is the local market: local cap rates, vacancy rates, and rents and expenses. That\u2019s what impacts your&nbsp;<\/span><span data-preserver-spaces=\"true\">real<\/span><span data-preserver-spaces=\"true\">&nbsp;returns on that particular investment.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Fortunately, you can&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/how-living-overseas-made-me-a-better-investor\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">invest passively from anywhere in the world<\/span><\/a><span data-preserver-spaces=\"true\">, in any city in the country. I certainly do, from my current home base in Lima, Peru.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">4. Concentration Risk<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">I&nbsp;<\/span><span data-preserver-spaces=\"true\">don\u2019t know<\/span><span data-preserver-spaces=\"true\">&nbsp;what will happen in any given city or state or, for that matter, in any given asset class (multifamily, mobile homes, retail, industrial,&nbsp;<\/span><span data-preserver-spaces=\"true\">etc.)<\/span><span data-preserver-spaces=\"true\">.<\/span><span data-preserver-spaces=\"true\">&nbsp;That\u2019s precisely why we go in on these deals together: to spread small amounts of money across many different properties, regions, and property types.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">I own an interest in around 2,500 units in two dozen properties in 15 states at last count. In most cases, I only have $5,000 to $10,000 invested in each property.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">That means I don\u2019t need a crystal ball. I don\u2019t have to predict (gamble?) on the next hot market or asset class.&nbsp;<\/span><span data-preserver-spaces=\"true\">I&nbsp;<\/span><span data-preserver-spaces=\"true\">simply<\/span><span data-preserver-spaces=\"true\">&nbsp;keep investing in different properties in different regions&nbsp;<\/span><span data-preserver-spaces=\"true\">every single month<\/span><span data-preserver-spaces=\"true\">&nbsp;as a form of&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/dollar-cost-average-real-estate\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">dollar-cost averaging<\/span><\/a><span data-preserver-spaces=\"true\">.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Because let\u2019s<\/span><span data-preserver-spaces=\"true\">&nbsp;face it: Any given local market could shoot up or drop unpredictably. You avoid that risk through&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/warren-buffett-is-wrong-diversification-is-not-just-for-ignorant-investors\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">diversification<\/span><\/a><span data-preserver-spaces=\"true\">:&nbsp;<\/span><span data-preserver-spaces=\"true\">spreading smaller eggs among many baskets.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">5. Regulatory Risk<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Local cities and states impose their&nbsp;<\/span><span data-preserver-spaces=\"true\">own<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.american-apartment-owners-association.org\/landlord-tenant-laws\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">landlord-tenant regulations<\/span><\/a><span data-preserver-spaces=\"true\">. Some are investor-friendly, and others tilt heavily toward protecting tenants at the expense of property owners.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Properties subject to tenant-friendly regulations come with extra risk. It takes far longer to enforce lease contracts and evict defaulting or other renters in violation. I\u2019ve seen evictions take 11 months in tenant-friendly jurisdictions!<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">In some markets, owners&nbsp;<\/span><span data-preserver-spaces=\"true\">are forced<\/span><span data-preserver-spaces=\"true\">&nbsp;to renew troublesome tenants even when their leases expire. They can\u2019t non-renew lease agreements.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">That doesn\u2019t mean we never consider investments in anti-landlord markets. But we prefer nonresidential investments in those markets. For example, we\u2019ve invested in a short-term cabin rental business in Southern California\u2014<\/span><span data-preserver-spaces=\"true\">in<\/span><span data-preserver-spaces=\"true\">&nbsp;an unincorporated mountain town supported by tourism. There is zero risk of&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/guides\/the-ultimate-guide-to-short-term-rental-properties\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">short-term rentals<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;<\/span><span data-preserver-spaces=\"true\">being banned<\/span><span data-preserver-spaces=\"true\">&nbsp;or eviction nightmares when these cabins only support guest stays for up to a week.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">6. Cash Flow Risk<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">I touched earlier on the risk of local rents stalling or even dropping. That can pinch cash flow.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Your cash flow can also get crunched from the other direction&nbsp;<\/span><span data-preserver-spaces=\"true\">in the form of<\/span><span data-preserver-spaces=\"true\">&nbsp;rising expenses. Look no further than the&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/real-estate-819\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">skyrocketing insurance premiums<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;of the last two years or sharply higher labor costs.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">So, how does our investment club protect against cash flow risk? We look for deals with conservative projections, including low rent&nbsp;<\/span><span data-preserver-spaces=\"true\">growth<\/span><span data-preserver-spaces=\"true\">&nbsp;and high expense growth. If the numbers still work out, even assuming&nbsp;<\/span><span data-preserver-spaces=\"true\">hard<\/span><span data-preserver-spaces=\"true\">&nbsp;market conditions, you have some wiggle room if things go awry.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">7. Construction Risk<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">When syndicators plan to add value through renovations, they need a great team to&nbsp;<\/span><span data-preserver-spaces=\"true\">actually<\/span><span data-preserver-spaces=\"true\">&nbsp;swing those hammers and get the work done on budget and&nbsp;<\/span><span data-preserver-spaces=\"true\">on<\/span><span data-preserver-spaces=\"true\">&nbsp;schedule.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Who\u2019s doing the work? Is the construction team in-house or hired out? Either way, how&nbsp;<\/span><span data-preserver-spaces=\"true\">many times<\/span><span data-preserver-spaces=\"true\">&nbsp;has the sponsor worked with this team on prior deals?&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">If<\/span><span data-preserver-spaces=\"true\">&nbsp;it\u2019s the sponsor\u2019s first rodeo with this crew<\/span><span data-preserver-spaces=\"true\">, watch out<\/span><span data-preserver-spaces=\"true\">.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">8. Property Management Risk<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">The same principle applies to property management.&nbsp;<\/span><span data-preserver-spaces=\"true\">Who\u2019s going to<\/span><span data-preserver-spaces=\"true\">&nbsp;manage the properties day to day?<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><span data-preserver-spaces=\"true\">Whether the property management team is in-house or hired out, how&nbsp;<\/span><span data-preserver-spaces=\"true\">many times<\/span><span data-preserver-spaces=\"true\">&nbsp;has the sponsor worked with them&nbsp;<\/span><span data-preserver-spaces=\"true\">before<\/span><span data-preserver-spaces=\"true\">?<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Poor property management is a recurring theme in syndication deals that go south. Our investment club&nbsp;<\/span><span data-preserver-spaces=\"true\">looks for<\/span><span data-preserver-spaces=\"true\">&nbsp;deals with proven PM teams to reduce this risk.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">9. Partner Risk<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">In&nbsp;<\/span><span data-preserver-spaces=\"true\">larger<\/span><span data-preserver-spaces=\"true\">&nbsp;syndication deals, you sometimes see a primary sponsor and several supporting sponsors.&nbsp;<\/span><span data-preserver-spaces=\"true\">Make sure you understand who exactly<\/span><span data-preserver-spaces=\"true\">&nbsp;will manage the assets, and focus your vetting on them.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">I\u2019ve seen a deal where a supporting partner sponsor had a strong track record<\/span><span data-preserver-spaces=\"true\">,&nbsp;<\/span><span data-preserver-spaces=\"true\">but&nbsp;<\/span><span data-preserver-spaces=\"true\">they weren\u2019t<\/span><span data-preserver-spaces=\"true\">&nbsp;the lead sponsor or in charge of asset management.<\/span><span data-preserver-spaces=\"true\">&nbsp;The lead sponsor bungled the deal, leaving others to clean up the mess.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">This brings us full circle back to sponsor risk and&nbsp;<\/span><span data-preserver-spaces=\"true\">making sure you understand<\/span><span data-preserver-spaces=\"true\">&nbsp;exactly who you\u2019re entrusting your money with.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Final Thoughts<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">If you account for these nine risks when you invest in passive real estate projects, you can slash your risk even while earning 15%-plus returns. You can also manage risk by&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/should-you-invest-in-real-estate-debt-or-equity-right-now\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">investing in real estate debt instead of equity<\/span><\/a><span data-preserver-spaces=\"true\">.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">A few months ago, our Co-Investing Club invested in a rolling six-month note paying 10% interest, secured by a first-position lien under 50% loan-to-value. Property prices could go up or down, as could interest rates, and we\u2019ll still feel secure. Granted, that\u2019s not the 15%-plus plus annualized returns we typically aim for as a club. But the short, flexible term and incredible collateral leave us&nbsp;<\/span><span data-preserver-spaces=\"true\">feeling<\/span><span data-preserver-spaces=\"true\">&nbsp;confident about the risk.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">You\u2019ll never&nbsp;nix&nbsp;risk entirely. But&nbsp;you can mitigate and manage it by finding those asymmetrical returns&nbsp;paying&nbsp;well with modest risk.&nbsp;<\/span><\/p>\n\n\n\n    \n  <div id=\"visibility-group-block_00658c64b20df981a2f601ea3e76d60e\" class=\"visibility-group  hidden\">\n        \n\n<div id=\"hero-block_2dd0e5d602732003c16689e5f2bb650f\" class=\"first:mt-0 hero-block py-4  alignwide   has-background has-theme-gold-light-background-color has-text-color has-theme-gold-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-theme-gold-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">Get the Best Loan Today<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color\" style=\"font-size:16px\">Find trusted, <em><strong>investor-friendly<\/strong><\/em> lenders who specialize in your strategy. <\/p>\n\n\n\n<p><\/p>\n\n\n\n<div id=button-custom-event-block_7afe60332233e3ec1ba0480eb4ec21e6 class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/business\/finder\/lenders\" x-on:click=\"window.analytics.track(&#039;Blog Block | B2C Marketplace Lender Finder&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/passive-real-estate-investment-risks&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-gold-background-color has-text-color has-white-color\" target=\"_blank\">Find a Lender<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\" first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"2\/2022\/08\/Marketplace-Blog-Blocks-Lender-v3.png\" alt=\"investor friendly lender, investor friendly real estate loans\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n  <\/div>\n  \n\n\n<div class=\"wp-block-group\"><div class=\"wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained\">\n    \n  <div id=\"visibility-group-block_64dd31c79f00f\" class=\"visibility-group  \">\n        \n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div id=\"hero-block_64dd2875dba9d\" class=\"first:mt-0 hero-block py-4    has-background has-slate-100-background-color has-text-color has-theme-slate-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<h3 class=\"wp-block-heading my-0 tracking-tight font-extrabold has-theme-slate-dark-color has-text-color has-large-font-size\">Join the community<\/h3>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color\" style=\"font-size:16px;font-style:normal;font-weight:400\">Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more. <\/p>\n\n\n\n<div id=button-custom-event-block_64dd2888dba9e class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/signup\" x-on:click=\"window.analytics.track(&#039;Blog Block | Acquisition | Free Membership Signup&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/passive-real-estate-investment-risks&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Sign Up<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n            <\/div>\n<\/div>\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n  <\/div>\n  <\/div><\/div>\n","protected":false},"excerpt":{"rendered":"<p>You can\u2019t eliminate all risk from investments. After all, the zombie apocalypse could strike tomorrow and probably wipe out your entire portfolio. But you can reduce risk, even among high-return [&hellip;]<\/p>\n","protected":false},"author":158586,"featured_media":171244,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7363,7119],"tags":[],"class_list":["post-171241","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-reits-passive-investing","category-biggerpockets-daily"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/171241","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/158586"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=171241"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/171241\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/171244"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=171241"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=171241"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=171241"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}