Are More Investors Moving from Rentals to Passive LP Opportunities?
Investor · Irvine, CA · Member since 2023 · 27 posts · 4 votes
Are More Investors Moving from Rentals to Passive LP Opportunities?
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Stuart UdisPro Member
Attorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votesAs Chris pointed out it's an extremely difficult capital raising environment. I am not seeing many people move from active to passive investing particularly in the retail LP space. There are still some existing retail LP's who remain active, but most are on the sidelines.
If you want to raise retail LP capital, it's important to understand what they value. They value liquidity. They want cash flow and they want return of capital. Very difficult to provide either at the moment when reliant on the merits of the underlying real estate unless you are selling property. For a while syndicators were getting away luring LP capital with aggressive underwriting while using aggressive debt terms. We all witnessed the end result there. It's been well documented.
Higher end SFH developments that are already entitled in strong markets remain marketable because there's a clear exit and relatively short round trip on the investment. Most importantly the numbers aren't broken. Deals that pencil actually pencil. No underwriting manipulation required. The real estate can absorb today's cost of construction and the buyers, particularly the wealth downsizer market is quite strong. They are making lifestyle driven decisions. I see a lot of success raising capital in this particular space. The challenge of course is the entitlements. Developable SFH land in good locations in strong markets is scarce. That's why there's limited opportunities.
Where else I am seeing success raising capital has me concerned. Some are successfully over raising and using over raised capital as distributions. This is very different than allowing the underlying real estate to do the work. Don't see this ending well. Also seeing a lot of these evergreen "preferred income" or "cash flow" flow syndications being pushed. People like the liquidity they provide but at the end of the day this is just returning the next investors capital. What happens when the new capital starts slowing? Also, bad outcomes ahead if they can't keep bringing money in.
17 Replies
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2mo
Investments in LP's is down over 40% this year from last year - so not sure more are moving in that direction.
7e investments53 Reviews- Investor · Irvine, CA · Member since 2023 · 27 posts · 4 votes2mo
Quote from @Chris Seveney:
Investments in LP's is down over 40% this year from last year - so not sure more are moving in that direction.
That's interesting, Chris. I hadn't seen that statistic. Do you think it's more of a reflection of today's capital markets and higher interest rates, or has investor confidence in operators taken a hit after some of the syndications launched during the 2021–2022 cycle? Curious whether you see it as temporary or a longer-term shift. - Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2mo
@Joshua Patrick - it's a mix of investor confidence in most asset classes, the economy and overall public sentiment.
Whether it's real estate, private credit or potential AI bubble, people are a lot more cautious7e investments53 Reviews - 2moG. Brian DavisPro MemberInvestor · Hatboro, PA · Member since 2016 · 3k+ posts · 866 votes
Quote from @Joshua Patrick:
Quote from @Chris Seveney:
Investments in LP's is down over 40% this year from last year - so not sure more are moving in that direction.
That's interesting, Chris. I hadn't seen that statistic. Do you think it's more of a reflection of today's capital markets and higher interest rates, or has investor confidence in operators taken a hit after some of the syndications launched during the 2021–2022 cycle? Curious whether you see it as temporary or a longer-term shift.We’ve seen the hesitation firsthand in our co investing club. We’ve heard plenty of stories from investors who had painful losses in syndications, losing significants amount of money.
We’ve seen that hesitation start to turn around on our end. I think part of that is because we do things a little differently than traditional syndication investing. Many still want the passive exposure, but they’re being far more selective and cautious, understandably so.
- 1moV.G JasonPro MemberInvestor · Member since 2022 · 3k+ posts · 3k+ votes
Quote from @Chris Seveney:
Investments in LP's is down over 40% this year from last year - so not sure more are moving in that direction.
Right. That's because they're moving to public equities.
- 2moDenise SuppleeBusiness MemberRealtor · Willow Grove, PA · Member since 2017 · 984 posts · 643 votes
From my experience, the operator is just as important as the deal itself. I look for integrity, experience, and good communication, and I want to know they're willing to be transparent throughout the investment. I like both cash flow and long-term appreciation, but I also want to understand the risks before making a decision. That's one of the things I appreciate about our co-investing club: we spend a lot of time asking questions and getting to know the operators before anyone decides to invest. For me, doing that due diligence is always time well spent.
Spark Rental Co-Investing Club580 Reviews - 2moStuart UdisPro MemberAttorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
As Chris pointed out it's an extremely difficult capital raising environment. I am not seeing many people move from active to passive investing particularly in the retail LP space. There are still some existing retail LP's who remain active, but most are on the sidelines.
If you want to raise retail LP capital, it's important to understand what they value. They value liquidity. They want cash flow and they want return of capital. Very difficult to provide either at the moment when reliant on the merits of the underlying real estate unless you are selling property. For a while syndicators were getting away luring LP capital with aggressive underwriting while using aggressive debt terms. We all witnessed the end result there. It's been well documented.
Higher end SFH developments that are already entitled in strong markets remain marketable because there's a clear exit and relatively short round trip on the investment. Most importantly the numbers aren't broken. Deals that pencil actually pencil. No underwriting manipulation required. The real estate can absorb today's cost of construction and the buyers, particularly the wealth downsizer market is quite strong. They are making lifestyle driven decisions. I see a lot of success raising capital in this particular space. The challenge of course is the entitlements. Developable SFH land in good locations in strong markets is scarce. That's why there's limited opportunities.
Where else I am seeing success raising capital has me concerned. Some are successfully over raising and using over raised capital as distributions. This is very different than allowing the underlying real estate to do the work. Don't see this ending well. Also seeing a lot of these evergreen "preferred income" or "cash flow" flow syndications being pushed. People like the liquidity they provide but at the end of the day this is just returning the next investors capital. What happens when the new capital starts slowing? Also, bad outcomes ahead if they can't keep bringing money in.
- 2moMark RobertsonPro MemberInvestor · Salisbury, NC · Member since 2014 · 314 posts · 386 votes
I see interest in passive opportunities, but I would call it increased selectivity rather than a broad migration. Many investors still want passive exposure, yet recent capital calls, delayed exits, and missed projections have made them far more cautious.
The investment structure should match the investor’s objective. Someone seeking current income should not treat ground-up development like a stabilized cash-flow investment. Development returns depend on construction execution, contingencies, draw schedules, market absorption, financing, and a successful exit.
Before investing, I would want clear sources and uses, conservative leverage, sponsor capital invested on the same terms, independent support for costs and exit values, and a waterfall that returns LP capital before a large sponsor promote. I would also examine prior projects from acquisition through exit—not merely current unrealized valuations.
Good operators matter enormously, but liquidity and capital preservation matter too. Investors increasingly want evidence that the proposed return adequately compensates them for illiquidity and execution risk.
- Huntsville, AL · Member since 2018 · 577 posts · 864 votes2mo
Nope - like @Chris Seveney noted, I've seen the exact opposite.
After what I've witnessed over the past 3 years, there is a 0.0% chance I'd buy into any syndication right now unless I personally know or have worked with the GP previously, or it is in a location I know extremely well and have a feel for the economy (for example, if I thought Huntsville was lacking in MF, then I might consider it - ironically, Huntsville is now overbuilt in MF).
- 2moDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Quote from @Joshua Patrick:
I'm curious if anyone else has been seeing this shift.
Over the last several months I've been working with a group of experienced operators focused on ground-up luxury residential development, and one trend has become pretty obvious.
A number of investors who traditionally owned rentals or self-managed flips are starting to move a portion of their capital into passive operator-led projects.
The operator I'm working with is currently raising capital for luxury residential development projects in Georgia and has structured multiple distribution options depending on an investor's income goals.
I'm curious...
For those of you already investing passively:
- What do you look for most in an operator?
- What level of transparency do you expect?
- Are you primarily investing for equity appreciation, cash flow, or a combination of both?
And for those who have never invested as an LP or in an operator-led development, what's been the biggest hesitation?
Always interested in hearing how other investors are thinking in today's market.
>What do you look for most in an operator
Experience in the domain of the syndication ideally including a down turn. Note I broke this rule for who I consider the best operator. This tells you that I prioritize operator over deal.
>What level of transparency do you expect
Is there any answer other than full transparency?
>Are you primarily investing for equity appreciation, cash flow, or a combination of both
Similar to my personnel RE investing, I am about total return without regard to the source. In practice, this implies equity appreciation because that is where the return of most successful syndications is primarily derived from. To give you an idea of this, I am an lp in a syndication that has missed every planned distribution. They recently had an unplanned voluntary capital call and we committed to it. I still expect a return in excess of 20%/year..
I believe Chris’ stat because re syndications that exited between 2012 and 2023 were almost without fail if you chose an experienced operator. Syndications started post 2021 have a much lower success record. As syndications failed to meet projections, it has turned a virtual sure thing to something far from certain. This has resulted in investors being cautious.
But me personally I have done more passive than active recently. This is in large part that in general I am unwilling to compromise my personnel purchase buy criteria. My buy criteria is I want to recover my investment in no more than 4 years. This is challenging in this market. So my personnel purchases have slowed down but my investing as lp is as usual even though one of my current lp investments looks like it will lose investment and possibly the full investment. This is the first time for me.
Good luck
- 2moMark RobertsonPro MemberInvestor · Salisbury, NC · Member since 2014 · 314 posts · 386 votes
I think one of the biggest changes when you move from owning the property yourself to investing as an LP is that you’re really underwriting two separate things: the real estate and the operator.
For me, the operator comes first. I want to see a realized track record, not just deals currently marked at projected values. More importantly, I want to understand what happened on the deals that didn’t go according to plan. How did they handle lenders, capital shortfalls, investor communication and ultimately investor capital?
Then I look at alignment: meaningful GP capital at risk, the entire fee structure and waterfall, debt terms, refinancing assumptions and whether the deal still works without an aggressive exit cap or appreciation assumption.
Ground-up development deserves an especially high bar because you’re adding construction, timing and exit risk on top of the normal real estate risks.
I’m a big believer in passive real estate, but “passive” should describe the investor’s role after investing—not the diligence done before wiring the money.
- Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes2mo
@Joshua Patrick
Like others noted, I would say far fewer are moving from active to passive. But, there are always some. From my limited exposure, I would say the active to passive path is very low. The ones that continue to make passive investments are those that have always been passive, and are the true LP types.
On these forums you have a ton of retail investors. Yes, they are accredited either by net worth or income, but they are not the traditional LPs of yore. Since 2017ish, the biggest growth in real estate LP investing has seemingly been the middle manager who did own a few rentals, makes $200-300ish k per year. They had a good career, their rentals were doing well, but not moving the needle relative to their career prospects and the work needed to manage rentals and/or PMs. Net worth was probably around $2-5mm. They sold their rentals, found their syndicator on a podcast or here, invested once, made some money, invested again, made some more, invested a third time and lost most of it. They are out of syndications forever, especially since SPY would have more than tripled their initial investment since 2017. Many worked in tech and very well may be out of a job now.The LPs I see coming into deals now look like they used to. $500k+ incomes. Net worth north of $5mm. These individuals typically have longer term investment thesis. They are not as susceptible to marketing. They have portfolio allocations they look to make. Private real estate is a percent of their allocation. They invest/reinvest $200k+ per year and with these investments are reallocating accordingly to maintain portfolio balance.
Clearly this is stereotyping a lot of people. There will always be someone who does a flip, makes good money but hates every minute, that allocates into syndications, or someone that puts their bonuses into syndications. - 1moMark RobertsonPro MemberInvestor · Salisbury, NC · Member since 2014 · 314 posts · 386 votes
Recency bias is a well-documented behavioral tendency. Losses can feel particularly painful in the moment. Real estate has always been—and will continue to be—cyclical. For every downturn, a recovery and subsequent boom have followed. Avoid abandoning an asset class simply because it is currently underperforming; diversification remains one of the most reliable safeguards. Partnering with institutional-quality sponsors is consistently the most important factor in long-term success.
- Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes1mo
- What do you look for most in an operator?
- 1. Look for operators with years of experience in the asset class.
- 2. Operators who have gone through cycles is a plus as well.
- 3. Operators that actually operate/manage their deals is a big plus.
- 4. Find operators that have learned from past mistakes and can tell you about what they're doing differently.
- 5. Find operators that have a strong business plan, with the ability to execute, and the right debt structure in place
- What level of transparency do you expect?
- 1. Monthly communication with a detailed narrative
- 2. Financial reports sent monthly
- Are you primarily investing for equity appreciation, cash flow, or a combination of both?
- 1. Cash flow first. Deals need to have fixed debt with a 1.5 dscr or better. If its a value add deal, the DSCR can be less to start, but it needs to get to that level within 24 months. The value add needs to have a large amount of reserves
- 2. Equity is second. Nothing is guaranteed, but equity can be fleeting if the market turns. If the deal cash flows, the sponsor can hold it, and eventually the equity upside will happen.
- 1moDon KonipolBusiness MemberInvestor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
It runs in cycles. Investors have success with experienced syndicators sponsoring good quality, low risk deals. The market prices of real estate increase, cap rates compress, demand increases, and inexperienced, under capitalized, syndicators with little or no management depth raise funds for marginal deals where optimistic hopes are reported as likely forecasts. The market turns, the optimistic forecasts aren’t met, the over leveraged deals sponsored by inexperienced syndicators default, the syndicators lack the knowledge, ability and capital to salvage the deals. Investor inquiries to the syndicators are met with silence or a generic statement prepared by sponsor’s counsel. Next thing they know investors are hit with a “capital call”, told that if the amount of capital isn’t raised their entire investment will be wiped out in foreclosure, and the sponsor blames “market conditions” “nobody” could have foresaw.
‘Investors tell their sad stories on forums like BP, word spreads, and everyone but the experienced, well capitalized, and successful sponsors is out of the syndication game - until the next cycle. - Lender · All 50 States · Member since 2015 · 401 posts · 250 votes1mo
Joshua, I manage a private-credit fund, and one distinction I think gets missed in this conversation is that the word “passive” is being used for two entirely different things.
There’s passive for tax purposes, and there’s passive in terms of how much work the investment creates for you. They aren’t the same.
The IRS classification is about the passive-activity tax rules. It doesn’t mean the investment is work-free, and it doesn’t automatically mean the income gets a lower tax rate. Rental activity is generally treated as passive under those rules, subject to exceptions. A self-managing landlord can still spend nights and weekends dealing with tenants, repairs, turnover, and contractors. The IRS may call the activity passive while the landlord knows it feels anything but passive.
Then there’s operationally passive income: how much ongoing work does the investment require from the investor? Lending can be a good example. The lender does the important work upfront by underwriting the borrower, property, documents, leverage, and exit. After the loan closes, a properly structured and serviced loan can require far less day-to-day work than owning the property. Tenants call the landlord in the middle of the night. They don’t call the lender.
Interestingly, interest from lending is generally portfolio income for the IRS passive-activity rules, even though lending may feel passive from a workload standpoint. That’s a good example of why the labels shouldn’t be mixed. Individual tax treatment is something to confirm with a qualified tax professional.
None of that makes lending risk-free or literally work-free. Draws, monitoring, servicing, defaults, and workouts can create work. A fund or experienced team can move much of that operating responsibility away from the individual investor, but then the investor has to underwrite the manager, strategy, liquidity, concentration, fees, and controls.
So when someone says they want to move from rentals into something passive, my first question is: Which kind of passive do you mean? Are you looking for particular tax treatment, less personal work, or both?
Those can run together in the same investment, but they shouldn’t be confused. And neither one tells you whether the investment is good. You still have to understand how your capital comes back and what happens if the original plan doesn’t work.
- 1moAshish AcharyaBusiness MemberCPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
Joshua, for passive LP deals, I’d put operator quality and downside protection ahead of the projected return.
I’d want to understand the sponsor’s track record through a full cycle, how much of their own capital is in the deal, debt terms, construction or execution risk, reserves, capital-call provisions, fee structure, distribution waterfall, and what happens if the business plan takes longer than expected. With ground-up development especially, I’d pay close attention to contingency, financing risk, and whether the returns still make sense if stabilization or the exit gets pushed out.
Transparency matters too. I’d expect regular reporting, clear financials, and straightforward communication when something goes wrong, not just polished updates when things are going well.
The tax side is another reason LP investing can feel very different from owning rentals directly. A partnership may pass through depreciation or cost-seg losses, but a passive LP may not be able to use those losses against W-2 or active business income right away.
That said, suspended passive losses are not necessarily useless forever. There are planning opportunities that can sometimes help release or use those losses depending on future passive income, dispositions, ownership changes, and the investor’s broader tax situation. The key is planning ahead rather than discovering a large suspended-loss balance years later.
So I would never choose a syndication primarily because the sponsor is advertising a big tax deduction. I’d want to know both how the loss is generated and what the investor’s actual path is for eventually using it.
For me, passive investing makes sense when the operator, structure, and risk-adjusted return are strong enough that I’m comfortable giving up control, not simply because I’m tired of managing rentals.
Happy to connect!
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