What Most Passive Investors Get Wrong (And How to Fix It)

On Accredited Investors Only, host Peter Neill sits down with Lance Pederson to unpack a blunt truth: passive investing in private real estate is less about finding a sexy IRR and more about backing the right team and process. This article synthesizes the practical frameworks and hard-won lessons that separate check-writers from thoughtful capital allocators.

Why most passive investors miss the mark

Too many limited partners evaluate deals, not sponsors. They focus on headline returns—IRR, projected equity multiple—without validating whether the sponsor can actually execute the plan. That creates two major blind spots:

Operational risk: Complexity kills execution. Renovations, leasing, subcontractors, permitting—these aren’t theoretical risks; they are the reasons a projected return never materializes.
Alignment risk: Fee schedules and splits communicate priorities. If a sponsor is paid upfront regardless of results, incentives are misaligned.

“You’re not just buying into an asset, you’re buying into a team.”

Underwrite the sponsor, not just the deal

Evaluating an operator requires a different checklist than evaluating a property. Treat sponsor diligence like underwriting a company’s management team.

Key sponsor diligence questions

What is the team’s operational track record? Look for progression: single-family to small multifamily to larger assets.
Have they navigated a full market cycle? Experience matters, but compensates for lack of cycles through team depth and conservative economics.
Do they have documented processes for hiring, asset management, and communication?
Can they explain their risk mitigations clearly and specifically?
Are they transparent—do they “show their work” on underwriting assumptions and comps?

Practical screening framework for deals

Start with high-level screening that reveals whether a deeper look is warranted.

Market fundamentals: Is the market growing? Are rents and demand trending in the right direction?
Purchase price vs. comps: Are you buying at a discount to comparable renovated sales, or is the upside entirely execution-driven?
Conservative underwriting: Does the pro forma favor a prudent base case? Watch cap rate spread assumptions—buying at an 8 cap and exiting at a 6 cap needs clear justification.
Alignment metrics: How are fees, promotions, and splits structured? Who loses when the deal fails?
Transparency: Has the sponsor provided line-item assumptions and supporting evidence for revenue and expense changes?

“Show your work. This is what professionals do.”

What new LPs should learn first

For passive investors starting out, overwhelm is normal. Break the learning curve into practical steps:

Learn the fundamentals of underwriting: NOI, cap rates, vacancy assumptions, and basic sensitivity analysis.
Prioritize sponsor quality over specific asset class. A good operator in a tough market will often outperform a weak operator in a hot market.
Use alignment as a quick filter: one-sided economics are a red flag.
Ask operators for layered marketing materials—one-pagers, pitch decks, and a detailed underwriting. Read the detailed materials to learn.
Be patient. If you are not ready to understand or commit, it is usually better to wait and learn than to speculatively chase returns.

What operators must do to attract capital

Raising capital is a different discipline from sourcing deals. Successful sponsors treat fundraising as a business function, not a series of one-off asks.

Fundamental priorities for operators

Differentiate: Be specific about your strategy. Narrow geography and a focused playbook make your pitch credible and repeatable.
Document processes: Quarterly planning, weekly leadership meetings, hiring systems, and standardized asset management procedures show you run a real business.
Create educational assets: Master classes, webinars, and underwriting walkthroughs help potential LPs learn and build trust.
Share assumptions: Don’t hide the math. Transparently communicating assumptions builds investor confidence and helps them learn.
Recruit partners: Treat LPs as partners. Engage them, educate them, and create a community that believes in your mission.

“If you’re going to recruit partners, show them you know how to run a business.”

Alignment beats shiny metrics

IRR and headline returns are seductive, but they can mask the asymmetric economics and misaligned incentives that doom deals. Look for structures that reward long-term performance and punish failure.

Avoid large acquisition and disposition fees that pay sponsors regardless of outcomes.
Prefer to promote structures that vest on realized performance and return-of-cap hurdles.
Ask how capital is co-invested. Sponsor skin in the game indicates alignment.

Operational honesty is an advantage

Good sponsors openly discuss risks. Renovation timelines, tenant turnover, material cost volatility—these are part of the deal story and explain why returns exist. Framing risk thoughtfully builds credibility.

“Talk about the risks of the deal. Point out the issues and explain how you’ll mitigate them.”

Concrete next steps for LPs and operators

Start small, be systematic, and prioritize learning.

For passive investors

Develop a personal investment thesis: preferred markets, asset types, and sponsor profiles.
Use a checklist for sponsor diligence and deal screening before committing capital.
Demand transparency. If a sponsor won’t show their underwriting, proceed cautiously.

For operators

Clarify your three uniques and your narrow focus market. Be able to explain why you will win there.
Standardize governance and reporting so LPs feel comfortable you run a disciplined business.
Invest in educational content to pre-qualify prospective LPs and build a loyal investor base.

Closing thought

Private real estate investing rewards patience, discipline, and thoughtful alignment. Whether you are an LP or an operator, the highest-return activity is building and backing organizations with repeatable processes, transparent underwriting, and genuine conviction. Focus less on flamboyant returns and more on the team and the method. That is how capital endures, and how partnerships thrive.