What Needs to “Die” in Passive Investing – According to Guests of The Invest Clearly Podcast

On The Invest Clearly Podcast, Invest Clearly CEO Pat Zingarella sits down with general partners (GPs) and limited partners (LPs) to discuss what’s really happening in the private real estate market. Each conversation explores lessons learned, red flags, and strategies to help investors make better decisions. The question Pat always closes out each episode with his guests is simple but powerful: “What do you think needs to die in passive investing?”

The answers are wide-ranging, from misconceptions about risk, to misleading marketing tactics, to structural issues in how deals are presented. What ties them together is the belief that better education and transparency can help LPs navigate an increasingly complex investment landscape.

In this article, we highlight the perspectives shared by these guests. These are their opinions (not universal truths) but they provide valuable insights for both new and seasoned passive real estate investors.

The Misconception That You Can’t Lose 100% of Your Capital – Brian Davis, Spark Rental

Brian Davis, LP and founder of Spark Rental investing club, emphasizes that many first-time passive investors underestimate the risks involved. In active real estate investing (owning rental properties) investors rarely see their equity drop to zero. The property itself retains value, even in downturns. But passive real estate investing is different.

When you invest as a limited partner, you’re often buying into common equity, which sits at the very top of the capital stack. If a deal fails, senior debt holders, preferred equity holders, and others get paid before you. In a worst-case scenario, LPs can indeed be wiped out completely.

As Davis explained:

“A lot of people…have this notion carry over that your investment’s not going to go to zero…That’s not true. You can absolutely lose 100% of your investment in a passive investment because you’re part of that common equity at the very top of the stack.”

The takeaway: LPs must recognize the full risk spectrum and not assume their capital is inherently protected.

Preferred Equity Deals (and Hidden Risks) – Leyla Kunimoto, Accredited Investor Insights

Leyla Kunimoto, LP and author of Accredited Investor Insights, points to preferred equity deals as an area where investors need more clarity. Preferred equity sits between debt and common equity in the capital stack. LPs in preferred equity positions often expect safer returns because they’re “ahead” of common equity, sometimes marketed with enticing numbers like an 18% preferred return (a contractual priority on profits).

But Leyla warns that many of today’s preferred equity opportunities are being raised as “rescue capital” for deals already in trouble. That risk is not always made clear.

She urges LPs to ask tougher questions, such as:

• What will the funds be used for? Paying down a loan? Covering GP obligations? Buying an interest rate cap?
• What is the debt service coverage ratio (DSCR)? DSCR measures how well cash flow covers debt payments. A DSCR below 1.0 means the property isn’t generating enough income to pay its loan interest, a sign of distress.

Preferred equity can be valuable, but only if investors understand exactly what they’re stepping into.

Funding Distributions With Investor Equity – Will Matheson, Matheson Capital

For Will Matheson, Managing Partner of Matheson Capital, one of the most misleading practices is when sponsors pre-fund distributions using investor equity.

Distributions are meant to reflect actual cash flow from the property. But some sponsors raise extra equity upfront and recycle it back to investors to create the illusion of immediate returns. Matheson describes this practice bluntly:

“There are sponsors who will over-raise equity for a deal so that they can guarantee distributions from Day 1…That’s not even robbing Peter to pay Paul. It’s just robbing Paul to pay Paul.”

These are synthetic returns, not real operating income. They create further problems because the returned money still accrues a preferred return obligation, compounding the drag on performance.

Another version of this tactic involves paying steep fees to buy down loan interest rates, temporarily boosting cash flow but eroding long-term profitability. 

The lesson: if returns look “too smooth” from the start, ask where they’re really coming from.

Overuse of Urgency in Fundraising – TJ Burns, Burns Capital

Marketing language is another area ripe for reform. TJ Burns, Managing Partner of Burns Capital, criticizes the overuse of artificial urgency — messages like “only a few spots left” or “90% subscribed” when they’re not true.

“Using statements like ‘act now’ or ‘only a few spots left’…is just preying on people who don’t have good deal flow.”

This kind of pressure tactic makes it harder for LPs to make thoughtful, well-informed investment decisions. Instead, TJ suggests improving investor access to quality deal flow, so they can compare opportunities rather than be forced into rushed commitments.

Believing There’s a Shortage of Deals – TJ Burns

TJ also dispels the notion that good private real estate deals are rare. In reality, there is no shortage, the challenges are access and visibility.

“Potential LPs and passive investors need to know that there are many, many deals out there. They just need to know where to look…”

Platforms like Invest Clearly are one option, but so is building relationships with sponsors directly. LPs benefit when they recognize abundance rather than scarcity.

GPs Offering Coaching – Justin Colvin

Justin Colvin, experienced LP, takes issue with GPs who split focus between running deals and selling coaching programs. He sees this trend as a red flag:

“If you go look at some of the unscrupulous sponsors…the ones that maybe haven’t done so well…they’re more just monetizing the industry. Like they all have coaching. The top-shelf sponsors don’t really do coaching…They’re busy running all their properties.”

While education has value, Justin warns LPs to question whether a sponsor’s primary business is executing real estate deals, or selling the dream of becoming a GP.

The Belief That One Passive Investment Will Make You Rich – Terra Padgett, Power Pool Fund

For Terra Padgett, LP and founder of Power Pool Fund investing club, the most damaging misconception is the “get rich quick” mentality.

“The belief that passive investing in real estate will make you rich. That you can somehow invest $50,000 and turn it into $1.5 million.”

Real estate investing is a long-term game. Returns compound over time, and wealth is built steadily through patience and disciplined reinvestment. LPs should approach it with realistic expectations rather than lottery-ticket hopes by chasing high returns.

The Myth of Accreditation – Robby Butler, Y Street Capital

Accreditation rules define who can invest in private placements, typically requiring a high income or net worth. Robby Buttler, Managing Director of Y Street Capital, argues this standard creates more problems than it solves.

“I think accreditation is a myth that needs to die…It actually creates a veil that does not allow as much transparency to enter the industry because you’re diminishing the market through an artificial constraint.”

By restricting participation, accreditation reduces the number of eyes on deals and limits accountability. Buttler also highlights that about 10% of all private placements historically involve some type of fraud or securities issue, a sobering statistic that, in his view, stronger transparency (not gatekeeping) could help address.

Negative Leverage – Jeremy Roll

Jeremy Roll, an LP with over 20 years of passive investing experience, calls out negative leverage as a fundamental problem in the market.

“A very easy answer I have is negative leverage needs to die…If I’m getting negative leverage, it’s telling me things are too expensive. And there’s two ways it can go away. Either prices come down or interest rates come down.”

Leverage is the use of debt to amplify returns. In normal times, borrowing at a lower interest rate than the property’s cap rate (net operating income ÷ property value) creates positive leverage, enhancing investor returns.

Negative leverage is the reverse: when the interest rate on the loan is higher than the property’s cap rate, the debt drags down returns.

For Jeremy, negative leverage signals that the market is overpriced, and disciplined investors should avoid those deals.

The Myth That Passive Investing Is Truly Passive – Dylan Robertson & Litan Yahav

Finally, Dylan Robertson and Litan Yahav both stress that “passive” investing isn’t as hands-off as the name suggests.

Dylan notes:

“In order for it to be passive for someone, it has to be active for someone else…There is a lot of activeness to making these decisions and making good informed decisions.”

Litan echoes this with a broader framing:

“Passiveness is a spectrum. It’s not binary.”

LPs may not be involved in day-to-day property operations, but they are responsible for due diligence, evaluating sponsors, and monitoring results. True passivity only begins once capital is deployed, and even then, investors must remain engaged to make smart reinvestment decisions.

Lessons Worth Listening To

The perspectives shared on The Invest Clearly Podcast make one thing clear: passive investing is filled with both opportunities and pitfalls. Misconceptions, marketing tactics, and structural issues can all obscure risk if LPs aren’t careful.

Whether it’s understanding that capital can be fully lost, recognizing the dangers of negative leverage, or rejecting “get rich quick” promises, the common thread is education. Investors who ask better questions, demand transparency, and approach deals with realistic expectations are far more likely to succeed.

At Invest Clearly, our mission is to make that education accessible. By amplifying the voices of experienced GPs and LPs, we aim to give every investor, whether new or seasoned, the clarity they need to navigate private real estate with confidence.