The last two years have felt like a slow-motion car crash in commercial real estate.
That goes for office space, of course, but it also goes for multifamily and other commercial property classes. Look no further than this piece by BiggerPockets if you need a refresher. Two regional banks went under because of the industry’s woes in 2023.
But even in one of the worst stretches for commercial real estate on record, many operators and passive investors have continued earning solid returns. Since 2022, I’ve invested in nearly 30 passive real estate deals as one more member of SparkRental’s Co-Investing Club. Of those, only one has imploded and resulted in a loss—and it was one of the first deals we invested in as a club.
One advantage to getting together with a group of other passive investors every month to vet deals is that you get better at doing it and quickly. This year, I’ve shifted how I think about risk.
As you continue (or start) investing passively in real estate, consider this framework for looking at risk.
Why Standard Vetting Isn’t Enough
I used to approach vetting from a classic sponsor- and deal analysis perspective: Get references, look at track records, look at competitive advantages and expertise, run the numbers on the specific deal, etc.
We still do all that, of course. Check out this article on the nine passive investing risks that we check first when we look at sponsors and their deals.
Those will help you immediately eliminate most bad operators and deals. That one deal I mentioned that completely fell apart? We would have dodged it with a closer look at the risks outlined in that article. Of course, that was 20-some deals ago, and we’ve all learned a lot since then.
Even so, two of the sponsors behind that deal were big-name sponsors—one enormously so. Both enjoyed sterling reputations at the time. Everyone we talked to about them gushed about how great they were. They had sparkling track…