Passive loss strategies such as REPS and the STR loophole are known audit triggers so your friend would want to do this the right way. 

@Josh Lewer really appreciate you taking the time to share such a thorough breakdown and even pulling in excerpts from the IRS Audit Technique Guide — that’s a wealth of information and I’m sure it’s helpful for anyone following along in this thread.Just to clarify the lens of my original question: I was thinking more from the perspective of an investor who is personally handling the day-to-day operations of their rentals (rather than delegating to a property manager).

I have never seen any financial statements or documents or 3rd party audits etc.  

The most valuable thing is having an auditable, automatic record you can point to if you ever end up in court or refinancing.

You’re ahead of the game at 20, so channel that boredom into skill stacking and deal flow: tighten your buy box, underwrite 5 to 10 deals a day, and post your criteria to your network so leads come to you; master one financing path (DSCR, HELOC, or private money) and prep docs now; optimize your current duplex with a simple revenue bump test and expense audit; build your “core four” team in your next target market and do virtual tours weekly; line up a small BRRR-style playbook so when your savings hit your target you can move fast—your job now is reps, relationships, and readiness so next summer you’re executing, not learning.

Im involved personally in other similar syndications and they are doing well with positive monthly returns and real audited financials that show year over year gains.

You'd want to do a return on equity audit to see how much you're generating from the property.

Insist on a year-end tax package, clear classification of reimbursements vs. income, audit-cooperation language in the contract, and guaranteed data-export on termination.

Will they defend my report in an IRS audit?

How do you know if they're doing fine if they did not issue a K-1 or provide audited financials.