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, “How can I tell which passive investments come with high risk versus lower risk?”
Risk is only one dimension affecting investment returns. Other dimensions include minimum investment amount, time commitment, tax benefits, personal values, and access for non-accredited investors, among others.
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.
Red Flags
In particular, I watch out for these red flags among passive real estate investments.
Short-term debt
Real estate deals fall apart for one of two reasons: The operator either runs out of money or time.
From 2022 through 2025, it’s been a bad market for either selling or refinancing. High interest rates drove up cap rates, which means lower property values.
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 huge amounts of money. If they refinance, they also need to cough up huge amounts of money, since their properties are now worth 25-30% less on average. Read: capital calls or bailouts from supplemental loans.
Floating rates with no protection
There’s nothing inherently wrong with floating-rate commercial loans—if the operator has protection in place against higher rates.
That could mean a rate cap, or a rate swap, or some…