Does risking 90% to 100% of your investment with passive investing make sense?

[Bryn Kaufman]

I was shocked to learn that I might lose 90% of my passive investment with Open Door Capital, run by Brandon Turner.

I did not realize passive Real Estate investing is so much riskier than the stock market.

I was foolish enough to think it was safer when I made my investment.

For stock market investing, one is always looking at the risk vs. reward for every investment, every trade.

In the stock market, if you lose 1%, or 10% or whatever percent makes you uncomfortable, you can always pull your money out and wait until conditions are more favorable, unlike passive Real Estate investing.

In the stock market, if you are in an index fund, you know it will eventually recover. Unlike a passive Real Estate investment that goes bad, there might be no hope of recovery.

Also, the risk-to-reward ratio of simply putting your money into an S&P index fund seems much better. As a comparison, even if you held on through the COVID crash, you lost 34% (not 90% or 100%), and 8 months later, you recovered.

Also, you can put in the exact amount of money you want, so things like dollar cost averaging can help mitigate risk if you think the market is high. Compare this to passive Real Estate investing, where your entire investment has to be made at one time.

Summary of passive investing: You can lose all your money, you can't pull out your money if you feel things are not going well, you can't control the size of the loss, your money is gone for many years with no access, you have to put in a large fixed amount of money at one time, and you are counting on perhaps one or two people, rather than relying on the strength of the best businesses in America.

So my question is, does passive Real Estate investing make sense with such a huge risk?

In my opinion, as I go through this experience, I would say no. I would never put money into a passive Real Estate investment again.

Maybe there are others who disagree, but that is my opinion.

[Zach Lemaster]

@Bryn Kaufman this is one of the more transparent posts I've seen in a while.  I commend you for acknowledging the things you could have done better.  That is something all of us need to do more often in our investing journey is take ownership of our mistakes, but most importantly to learn from our mistakes to become better investors in the future.  Anyone who is successful has their scars from past investments gone wrong.  I know I most certainly do, and I have also lost all my money in syndications that went belly up, even after years of receiving interest payments as if all was well.

I think the big take away from this is that investors need to actually understand the risk of syndications, which absolutely is the potential to lose all your capital. IMO, the attractive IRR potential is not worth the risk of tying up your money for years with no access and potential to lose some or all of your capital invested. That is why I always recommend buying physical real estate that you 100% own and control. Yes, all forms of real estate can come with their own challenges and you can lose money on houses as well, but at least you have 100% control and it's very difficult to lose all of your money. Generally speaking with a typical rental home, if you hold it long enough, you usually come out okay even if you have some turbulence with tenants or repairs in the short term. As one of my mentors used to say, time heals all wounds when you buy and hold a rental property in a good market.

@James Wise thank you for pointing out how we deal with issues that arise, which is head on and public. This is investing and things don't always go according to plan. It would be foolish to think it does, but whenever an issue arises we do our best to help navigate the situation with the client (as long as they are professional and reasonable). I do think we have a good batting average for success with our investors. Mainly because of what I mentioned earlier, investing in a new construction SFR in a good market. It may not be the sexiest form of investing and it may not be 100% passive, but it's proven way to build wealth for over a century!