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Most new investors walk into a passive real estate deal asking one question: how much can I make?<\/span><\/p>\n That\u2019s the wrong starting point.<\/span><\/p>\n After two decades in this industry\u2026 and some expensive lessons along the way\u2026 the question I lead with now is different. How much could I lose? And under what circumstances would that happen?<\/span><\/p>\n That shift changes everything about which deals pass the test. It\u2019s also what separates investors who build durable portfolios from those who chase yield and eventually get burned.<\/span><\/p>\n There are five categories of risk in almost every passive real estate deal. Walk a deal through all five, and the weak ones fail somewhere visible. Here\u2019s how to use them.<\/span><\/p>\n This one comes first because it matters most.<\/span><\/p>\n A strong operator can rescue a struggling deal. A poor one can destroy a perfectly sound investment. The asset, the market, the business plan\u2026 none of it matters much if the person executing it lacks experience, integrity, or alignment with your interests.<\/span><\/p>\n When we evaluate a sponsor, we\u2019re looking at a few things. Track record across full market cycles, not just during the easy years. How they\u2019ve handled deals that went sideways, because every operator eventually faces one. Whether they invest their own capital in the deals they bring to investors. And how they communicate when things aren\u2019t going according to plan.<\/span><\/p>\n That last one matters more than most people realize. A sponsor who only sends good news is a yellow flag. A sponsor who proactively calls you when a market has softened, tells you what they\u2019re doing about it, and gives you a clear-eyed picture of where things stand\u2026 that\u2019s someone worth trusting with your capital.<\/span><\/p>\n We find sponsors primarily through referrals from other operators we already trust. When we meet with a sponsor, one of the last questions we ask is who else in this space they know and respect. People with integrity tend to know each other.<\/span><\/p>\n \u00a0<\/p>\n The debt structure on a deal quietly determines a lot of the outcome. And in the current environment, it\u2019s one of the first things we scrutinize.<\/span><\/p>\n Short-term bridge loans\u2026 the kind that mature in two or three years\u2026 require a refinance or sale at exactly the moment the market may not cooperate. We\u2019ve passed on deals where the exit strategy was essentially \u201chope rates come down by 2026.\u201d That\u2019s not underwriting. That\u2019s guessing.<\/span><\/p>\n What we prefer: longer-term fixed-rate debt, or deals where the sponsor has assumed an existing loan at a rate that pencils even today. We looked at one deal earlier this year where the operator had assumed a fixed loan at 5.1% with nine years remaining. Whatever happens in the next two years, they\u2019re not forced to refinance into a tough market. Over a nine-year horizon, there will almost certainly be a good window to exit. That\u2019s the kind of structure that lets a deal breathe.<\/span><\/p>\n Interest rate caps, loan covenants, prepayment penalties\u2026 these details matter. If a sponsor can\u2019t walk you through their debt structure clearly and simply, that\u2019s worth noting.<\/span><\/p>\n \u00a0<\/p>\n Value-add deals involve renovation. Renovation involves contractors, timelines, and budgets that rarely survive contact with reality without a competent team managing them.<\/span><\/p>\n The question isn\u2019t just whether the business plan makes sense on paper. It\u2019s who\u2019s actually doing the work, and how many times they\u2019ve done it before.<\/span><\/p>\n We want to know if construction is handled in-house or outsourced. In either case, how many deals has this team completed together? First-time in-house construction is a different risk profile than a team that has done it twenty times. Sponsors who can show you a track record of renovations coming in on budget and on schedule are worth paying attention to. Sponsors who hand-wave the construction timeline are worth pressing harder.<\/span><\/p>\n Budget contingency is another signal. Operators who build meaningful contingency reserves into their projections are telling you they\u2019ve been through renovations before. Operators who project everything going perfectly are telling you something else.<\/span><\/p>\n \u00a0<\/p>\n This one tends to be underrated.<\/span><\/p>\n Even a great asset in a good market can underperform with poor property management. Occupancy rates, tenant quality, maintenance response times, turnover costs\u2026 these are all management variables, not market variables. The operator controls them, or fails to.<\/span><\/p>\n We want to know who is managing the property. Whether it\u2019s in-house or third-party. How many doors they currently manage in this specific market. And whether the sponsor has a track record with this particular management company or team.<\/span><\/p>\n A sponsor trying a new management firm for the first time on your deal is a different risk than one who has completed six projects with the same team. The relationship matters. The familiarity with a local market matters. We\u2019ve seen deals get hurt not by the asset or the macro environment, but simply by a property management team that wasn\u2019t equipped for that specific submarket.<\/span><\/p>\n<\/div>\n