October 20, 2025 | 4 Minute Read
Most passive real estate investments advertise returns between 12% and 20%. Some offer higher potential gains but carry significant risk, while others are more moderate and stable. The real challenge for investors is figuring out how to tell the difference.
Risk is only one part of the equation. Other factors—like minimum investment, time commitment, tax benefits, alignment with personal values, and accessibility for non-accredited investors—all influence an investment’s overall appeal.
Once you understand that, the goal becomes finding asymmetric returns—investments that offer strong upside potential with relatively low downside risk.
🚩 Red Flags to Avoid
1. Short-Term Debt
Most real estate deals fail for one of two reasons: the investor runs out of money or time.
From 2022 through 2025, selling or refinancing has been challenging. High interest rates increased cap rates, which lowered property values. Investors with short-term bridge loans that matured during this time often found themselves in trouble:
Selling means taking a loss.
Refinancing means coming up with more capital, since properties are now worth much less.
That often leads to capital calls or emergency loans—bad news for investors.
2. Floating Interest Rates Without Protection
Floating-rate loans aren’t necessarily bad—if the investor is protected against rate spikes which means his cost basis is much lower than the current values. Confirm that:
Projected payments still work even at the highest possible rate.
The underwriting assumed the worst-case interest rate scenario.
3. No Expertise with Rentals or Market
Each investor should specialize in one narrow niche.
Your strategy should include:
Wide and shallow portfolios — small investments across many asset types. This is not only having rental properties but other investments as well so you can absorb any potential corrections in a bear market.
Narrow and deep operators — ben an expert in one property type (SFR or multifamily) or market.
The same rule applies geographically: invest with turnkey operators, property managers, and realtors who know their local market inside and out.
4. First-Time Local Management Teams
When reviewing a deal, one of my first questions is:
“How many properties do you currently own in this submarket managed by the same local team?”
It’s not about being “vertically integrated.” What matters is proven collaboration. I avoid property managers who say, “We’re expanding into a new market with a new management team.” Instead, I want to hear:
“We manage 10 – 50 other properties within three miles, of your property.”
5. Overly Optimistic Projections
Every turnkey operator and realtor claims “conservative underwriting,” but many aren’t. To spot unrealistic assumptions, look at:
Exit cap rates – quoted are higher than current local rates.
Rent growth – claiming more than 3% annually.
Insurance and labor costs – downplaying cost of yearly maintenance and vacancy rates.
You should forecast returns based on worse market conditions, not better ones.
6. High Regulatory Risk
For multifamily or residential deals, stick to landlord-friendly markets. This is why we have so many investors from New York and California buying here in Birmingham, AL.
You should only consider residential investments in these areas if the your local team has exceptional local expertise—like we do here in Birmingham.
✅ Green Flags of Lower-Risk Deals
1. Deep Local Track Record
Look for a local team who live and breathe their market and property type.
For example, we’ve repeatedly bought, renovated and sold fully stabilized turnkey properties here in Birmingham to out of state investors. We line our buyers up with our closing attorney, recommend a solid property management company based on the location of the property, and assist with the transition after closing.
2. Established Management Relationships
Our services handle all construction pulling permits and using our licensed general contract as well as recommend property management. That consistency builds trust and operational efficiency.
3. Long-Term, Protected Debt
No one can predict where the market will be in three years—but over a 10-year horizon, there will likely be good exit opportunities.
Look for long-term loans that give you the flexibility to sell when conditions are right, not when debt expires. Floating-rate loans are fine, as long as they have rate protection.
4. Truly Conservative Projections
A good deal shouldn’t rely on a booming market to succeed. Favor deals where:
Exit cap rates are equal to or higher than today’s.
Rent growth assumptions are modest (beyond any renovation bump).
5. Experience Across Market Cycles
Reading about the 2008 crash isn’t the same as living through it. Investors (like us) who’ve survived real downturns build better safeguards.
You can’t learn the pain of losing hundreds of thousands of dollars from a course—but you can learn from operators who have. I only invest with people who’ve already paid those tuition fees to the market.
The Law of Averages
Even after screening carefully, all investments carry risk. You can reduce it, but never eliminate it. If you want a guarantee, buy Treasury bonds and accept a 4% return.
I stopped trying to “predict” the next hot market years ago. Instead, I keep investing steadily, month after month, in good times and bad. Over time, the law of averages works in my favor—and I sleep just fine.