2 Major Red Flags For Passive Opportunities
By Amanda Cruise
You work hard for your money and you want to invest it wisely. While no investments are 100% risk-free, there are definitely some red flags to watch out for. When it comes to passive real estate investments, here are the two biggest red flags I see right now.
1. Super High Returns
We all want to hit home runs with our investments and achieve massive returns of 30% or even higher. Sounds great, right? And is truly IS possible to see returns that high. We’ve done it. But the truth is, returns that high usually have more to do with an extremely favorable economic environment than the specific operator or the deal itself.
What return makes me pause?
When I see projected returns in real estate syndications above 18%, that’s a flag. Maybe it’s a unicorn deal. On the other hand, the operator might be too optimistic in their projections, the operator could be depending on interest rates to go down to achieve these returns, or the investment is very risky such as a development play. Most value-add real estate syndications I’m seeing right now are projecting somewhere between 14-16% returns over the life of the project, not returns higher than 18%. And for debt investments, 8%-10% is typical right now. Having conservative projections means the project might hit higher returns if things go great. But having such aggressive assumptions going in are a red flag for me.
2. Recent Track Record
Commercial real estate investors have had a rocky few years since interest rates started to rise in early 2022. Many operators, particularly in the multifamily asset class, may have had amazing track records for deals they exited leading up to 2022. However, many of those same operators have deals that are not performing well today. Some are even doing capital calls or having to bring on more investors which is wiping out initial investor equity.
Run If You See This On A Website
Do not be lured by website saying the operator’s average historical returns are 30%+. Please RUN if you see that – these were most certainly deals exited prior to 2022 when times were crazy good, and they shouldn’t be used as indicators of current deals.
When I’m evaluating a potential passive syndication today, I make sure to understand how the operator’s CURRENT deals are performing. I’m not saying 100% don’t invest with an operator who has a deal that’s gone sideways. I myself passively invested with a multifamily operator recently who is doing a cash call on a different deal right now. Why did I invest? He was 100% upfront about the current situation with one of his funds, he has a very long track record of transparency, honesty, and strong performance. And I really believe in this next opportunity.
If you’re looking for ways to put your money to work passively, make sure you join our Investor Circle.