Why is Successful Passive Investing in Real Estate So Difficult?

[Don Konipol]

Why is successful passive investing in Real Estate so difficult?  
Well, two reasons

1. The passive investor is attempting to obtain a higher risk reward ROI than the general market allows. This can only be obtained by a superior ability to choose which passive investments to invest in. Almost all investors can do a rudimentary due diligence analysis or have an advisor who can. The few that are able to uncover the real "hidden gems" either have SUPERIOR analytical ability (very difficult) or do a much more thorough and time consuming analysis - which in itself raises the question of whether or not the investment is indeed "passive" .

2. By the nature of the investment structure (what used to be called a limited partnership, but now likely to be a non managing member LLC) the MONEY has no ability to "right the ship" should something go wrong, and has total reliance on the syndication or fund manager, who may or may not have aligned interests, positive incentives, and or the managerial expertise, experience and motivation to protect, secure and enhance the subject investment.

[Bianca Barcelos]

I'm with you!  I think that true "passive" investing in real estate is difficult because it misses the point of the asset itself. Real estate simply isn't a "passive" investment to just plop some money into; it's an active operational business with physical space with appliances, furniture, walls, floors, and people management to think about.

Even if you completely outsource to a property management company, you still can’t completely run this type of investment (to its most successful potential) if you're checked out. RE investing requires a level of asset management and check in's with your active partner (PM or otherwise).  Understanding the financial analysis, operating expenses, rent rolls, etc. is important as well as knowing the physical condition of the property, neighborhood, strategy, and tenant. 

All of these things, coupled with the current environment where cash flow is harder to come by, the margin for error is shrinking and we can't afford underperformance in our investments.  Real Estate is a great investment but a tough one to do passively.  It's important not to completely gamble cash on someone else's management of your asset.