{"id":185210,"date":"2025-10-15T11:37:46","date_gmt":"2025-10-15T17:37:46","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=185210"},"modified":"2025-10-15T11:37:48","modified_gmt":"2025-10-15T17:37:48","slug":"red-and-green-flags-to-look-for-in-passive-real-estate-investments","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/red-and-green-flags-to-look-for-in-passive-real-estate-investments","title":{"rendered":"Passive Real Estate Investments Can Be Risky\u2014These are the Red and Green Flags to Look For"},"content":{"rendered":"\n

Most passive real estate investments forecast returns in the 12%-20% range. Some come with high risk, while others come with low or moderate risk. The critical question for investors is, \u201cHow can I tell which passive investments come with high risk versus lower risk?\u201d<\/span><\/p>\n\n\n\n

Risk is only one <\/span>dimension affecting investment returns<\/span><\/a>. Other dimensions include minimum investment amount, time commitment, tax benefits, personal values, and access for non-accredited investors, among others.  <\/span><\/p>\n\n\n\n

Once you wrap your head around that fact, you can start looking for investments offering asymmetric returns with relatively low risk. Here are a few of the first things we look at in our co-investing club, as we vet deals to go in on together with $5,000 apiece. <\/span><\/p>\n\n\n\n

Red Flags<\/span><\/h2>\n\n\n\n

In particular, I watch out for these red flags among passive real estate investments.<\/span><\/p>\n\n\n\n

Short-term debt<\/span><\/h3>\n\n\n\n

Real estate deals fall apart for one of two reasons: The operator either runs out of money or time. <\/span><\/p>\n\n\n\n

From 2022 through 2025, it\u2019s been a bad market for either selling or <\/span>refinancing<\/span><\/a>. High interest rates drove up cap rates, which means lower property values. <\/span><\/p>\n\n\n\n

Operators who took out short-term bridge loans that have come due during this period have run out of time and found themselves in a terrible position. If they sell, they lose <\/span>huge<\/span> amounts of money. <\/span>If they refinance, they also need to <\/span>cough up<\/span> huge<\/span> amounts of money, <\/span>since<\/span> their <\/span>properties are now worth 25-30% less<\/span><\/a> on average.<\/span> Read: capital calls or bailouts from supplemental loans. <\/span><\/p>\n\n\n\n

Floating rates with no protection<\/span><\/h3>\n\n\n\n

There\u2019s nothing inherently wrong with floating-rate <\/span>commercial<\/span><\/a> loans\u2014if the operator has protection in place against higher rates. <\/span><\/p>\n\n\n\n

That could mean a rate cap, or a rate swap, or some other way to limit the risk of higher rates. Just make sure the monthly payments won\u2019t go through the roof if loan rates rise, and that the operator\u2019s projections featured the highest possible rate. <\/span><\/p>\n\n\n\n

No expertise in the asset class or market<\/span><\/h3>\n\n\n\n

In our co-investing club, we <\/span>want<\/span> to diversify across <\/span>many different<\/span> asset classes beyond <\/span>multifamily<\/span><\/a>, including industrial, retail, mobile home parks, raw land, secured debt, and <\/span>so forth<\/span>.<\/span> But when we meet each month to vet an investment, we want the operator to be a deep expert in <\/span>their one narrow niche<\/span><\/em>. <\/span><\/p>\n\n\n\n

In other words, we want our portfolios shallow and wide, with small investments across many asset classes. But each <\/span>individual<\/span> investment should be narrow and deep, with a niche expert operator.  <\/span><\/p>\n\n\n\n

For example, we want to invest with a specialist operator who\u2019s done 30 industrial sale-leaseback deals\u2014not a multifamily operator who\u2019s making their first foray into industrial real estate. <\/span><\/p>\n\n\n\n

The same logic applies to geographical markets. <\/span>We want to invest with operators who know a specific market inside and out<\/span>, <\/span>with<\/span> a proven local team on the ground.<\/span><\/p>\n\n\n\n

First-time local management collaboration<\/span><\/h3>\n\n\n\n

When I first pre-vet a deal, one of the questions I ask is, \u201cHow many properties do you currently own in this submarket, managed by the same local team who will manage this new property?\u201d <\/span><\/p>\n\n\n\n

Operators sometimes brag about being \u201cvertically integrated\u201d and having their own property management and construction teams. I don\u2019t care about that. <\/span>What matters is how many properties they\u2019ve <\/span>worked<\/span> with the <\/span>exact<\/span> same team<\/span><\/em> on managing<\/span> in the past.<\/span> <\/span><\/p>\n\n\n\n

I don\u2019t want to hear an operator say, \u201cWe\u2019re expanding into a new market, and we\u2019re really excited about the property management team who will be taking over.\u201d Instead, I want to hear them say, \u201cWe own 10 other properties within a three-mile radius, and the same property management team manages all of them.\u201d<\/span><\/p>\n\n\n\n

Optimistic projections<\/span><\/h3>\n\n\n\n

Every sponsor claims \u201cconservative underwriting.\u201d Obviously, not all of them do. But short of picking through every cell of every spreadsheet, how can you tell? <\/span><\/p>\n\n\n\n

A few quick items I look at include:<\/span><\/p>\n\n\n\n