For several years, our passive real estate investment group has been gathering monthly to explore and evaluate hands-off investment opportunities. Every month, we collectively invest in a new passive deal, allowing each of us to contribute smaller amounts without taking on the responsibilities of being a landlord.
While we initially concentrated on syndications, we've shifted our focus more toward private partnerships. We now collaborate on deals with smaller investment firms that don’t seek public capital.
These firms don’t have podcasts or YouTube channels, nor are they interested in building a public brand, selling courses, or becoming “gurus.” Instead, they prioritize achieving consistently high returns through real estate investments. Additionally, private partnerships offer the advantage of including non-accredited investors, as they are not classified as securities.
Here's what our Co-Investing Club looks for when considering private partnerships for passive real estate investments.
Asymmetric Returns
Our ultimate goal is to achieve high returns with low risk, a concept known as “asymmetric returns” in the finance world.
On the return side, we typically seek 10% to 12% or more for secured debt investments and 15% or higher for equity investments. Anything less wouldn’t justify the effort. If I wanted to earn 7% to 10% on equities, I'd just invest in the stock market. For 4% to 7% returns on debt, I’d turn to bonds.
I invest in real estate for substantial returns, stable income, tax benefits, diversification, and—importantly—low risk.
Experienced real estate investors know that asymmetric returns are attainable. The first real estate deal often carries significant risk, but by the 100th deal, investors have usually learned how to minimize risk while maximizing returns.
Many passive real estate investments aim for high returns, but some come with considerable risk, while others offer relatively low risk.
Increasingly, we focus on mitigating downside risk and protecting against losses.
Why We Emphasize Risk
Warren Buffett famously said, “Rule No. 1 is never lose money. Rule No. 2 is never forget Rule No. 1.” The longer I passively invest in real estate, the more I realize how accurate this is.
As our Co-Investing Club engages in more deals, we notice that real estate investment returns follow a bell curve. Some investments will underperform, some will overperform, and most will land somewhere in the middle.
We aim to eliminate those deals that perform so poorly they result in a loss, which would fall on the far-left side of the bell curve.
If a deal underperforms and yields only 5% instead of 15%, I can shrug it off and say, “I’ll make it up on the next one.” But if I were to lose 100% of my capital, that’s a different story.
In real estate investing, downside risk is crucial. There are countless opportunities that target 15% or higher returns. The challenge is identifying those with very low downside risk.
So, how do you spot low-risk real estate investments?
Risks We Examine and Mitigate
When evaluating deals, we consider risk from multiple perspectives. Here are the main ones we prioritize:
Partner Trustworthiness
Every experienced investor has encountered losses. We love hearing from investors about deals that didn’t go as planned. What went wrong? How did they manage it? Did their partners or financial investors lose money?
The best answers focus on the lessons learned and how the investor absorbed the loss to make their investors or partners whole.
Trustworthiness is the most challenging aspect to assess in a partner or sponsor. There’s no formula or numbers to analyze. You need to have multiple conversations until you’re completely confident in them. If you’re not, it’s better to pass on their investments.
The bottom line: No matter how skilled or experienced an investor is, it means nothing if they take your money and disappear.
Partner Experience
If someone claims, “I’ve never lost money on a deal,” my first question is how many deals they’ve done. If the number is low, I won’t feel confident in their experience.
Take, for example, an investor we’ve partnered with several times. He’s a private individual, not a public figure, so I’ll refer to him as Casey.
Casey flips 60 to 90 houses annually—some are quick flips, others are long-term flips with lease-buyback arrangements. He also owns long-term rental properties. Casey runs a team of 10 people, a mix of in-person staff and virtual assistants.
With around 300 properties under his belt, Casey clearly knows what he’s doing. As his volume has grown, he’s cautiously expanded beyond his home city, but only within a few hours’ drive. He doesn’t chase hot housing markets across the U.S. He sticks to what he knows and expands cautiously.
Debt
Leverage increases risk—there’s no debating that.
While leverage can boost return on capital, we prefer to keep it modest and manageable.
Casey’s company owns around 110 properties valued at approximately $15.1 million, with a leverage ratio of 62.2%.
At one point, our Co-Investing Club signed a private note with Casey at a 10% interest rate. He provided us with three protections, starting with a first-position lien on one of his free-and-clear properties, which was under 50% of the property’s value (less than 50% LTV).
Personal and Corporate Guarantees
We don’t always require a personal guarantee from the principal, but it certainly reduces our risk when we do.
The other two protections Casey offered on that note were a personal guarantee and a corporate guarantee from his company, which owns all the properties. If he defaulted, we could pursue not only the 110 properties and their millions in equity but also his personal assets.
As you might expect, Casey has consistently paid our monthly interest on time.
Property Management Risk
I particularly appreciate investments that don’t require property management. For instance, our latest investment with Casey was a partnership for several flips—classic short-term flips where his team renovates and sells properties within a few months, with no tenants or lease-related risks.
Similarly, we’re investing with a land flipper who buys large lots at 25 to 40 cents on the dollar, subdivides them, and sells the smaller lots at a significant premium. He further mitigates risk by securing approval to subdivide before purchasing.
However, we do invest in properties requiring management. When we do, we assess how many properties the sponsor or partner has previously managed with the property manager. We prefer partnerships that have lasted years and involved many properties.
Construction Risk
I love working with the land flipper because there’s no construction risk involved.
But with Casey, there’s always the risk associated with rehabs. So when renovation or construction is part of the deal, we ask how many properties the contractor team has worked on together.
“None” is a red flag. “Three dozen” is much more reassuring. Casey has been working with his team for years, flipping hundreds of houses.
Regulatory Risk
Tenant-friendly states and cities continue to introduce more stringent regulations on residential rentals, and this risk is now spreading to the federal level, with discussions of nationwide rent control.
These risks apply to residential rental properties but not to flipping houses, short-term vacation rentals, storage facilities, retail, industrial properties, or raw land. That’s one reason I’m excited about partnering with the land investor.
Key Principal Risk
The biggest risk in partnering with a small real estate investment firm is if something happens to the key principal.
If Casey were to get injured or worse, it would take time for his estate and company to sort things out. I’m confident we’d eventually get our money back, but it would be a complicated process.
A larger real estate syndication firm with 150 employees doesn’t carry the same risk. If one managing partner is unable to continue, others are ready to step in.
To mitigate key principal risk, we ask about the contingency plan in case something happens. Who will take over? Are they qualified? Will the assets go directly to probate, or will they be managed by a partner?
While the risk of a healthy 40-year-old like Casey suddenly passing away is low, it’s still something we consider.
Final Thoughts
Some months, our Co-Investing Club invests in real estate syndications, which have generally been successful, offering the benefits of ownership—passive income, appreciation, and tax advantages—without the challenges of being a landlord. But increasingly, I find private partnerships to have lower risks and equally strong returns.
We continue to learn about new passive real estate investment opportunities every day, evaluating them through the lens of the risks mentioned above and more. As I move closer to financial independence, I’m increasingly focused on minimizing downside risk without sacrificing returns.
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