The Tradeoffs Passive Real Estate Investors Overlook

By: Jack Strulowitz

We’ve all been there. You’re at a kiddush or a simcha and someone pulls you aside to tell you about this great real estate deal they’re putting together. A multifamily building, maybe something local, maybe something in the sunbelt. The numbers sound good, the guy running it seems sharp, and he’s been paying distributions like clockwork, so you write the check.

Part of the appeal is the exclusivity. These deals aren’t listed on any exchange. You can’t just open a brokerage account and buy in. You have to know someone, get invited, be part of the inner circle. And as human beings, we’re wired to value things that feel scarce and selective. That’s not a character flaw, it’s just how we’re built. But that same instinct that makes us feel good about being “in” on a deal can also cloud our judgment. Sometimes we say yes because the opportunity feels special, not because the numbers actually make sense.

And sometimes the numbers do make sense. The quarterly checks come in, the property appreciates on paper, and everything seems to confirm what a lot of people have believed for decades: real estate is the smartest investment you can make.

But what happens when the music stops? A lot of people who parked significant money in these passive deals ten or even twenty years ago are finding that out right now. The distributions have slowed down or stopped entirely. And when they call to ask about getting their capital back, they’re learning something that was always true but never felt relevant until now: there’s no exit button. You can’t just log into an app and hit “sell.” Your money is locked up in a building, and buildings don’t care about your timeline.

This is the part that never comes up when someone’s pitching you on a deal. Liquidity. When you’re 45 and earning well, it’s easy to say “I don’t need that money for ten years.” But then you retire, and suddenly you need that money to actually live. Property taxes, medical expenses, helping out your kids and grandkids, everyday life. The paycheck stops but the expenses don’t, and now that money you parked in a building isn’t a nest egg; it’s dead weight.

And here’s what might surprise you. Even when those deals work out, the actual performance of private real estate hasn’t been what most people assume. According to RCLCO’s analysis of the NCREIF Property Index, which tracks institutional-quality commercial real estate returns across the country, trailing 10-year returns came in around 5.3%. Over that same period, the S&P 500 returned roughly 10.6%. That’s double. Your friend’s building isn’t tracked by that index, but if institutional real estate investors with teams of analysts and billions in capital couldn’t keep up with a boring index fund, the idea that a smaller, privately managed deal is going to do better is a tough case to make.

So why does it feel like real estate always wins? For one thing, real estate investing is massively overrepresented in our community. When everyone around you builds, buys, and manages properties, it creates the impression that this is what smart money does. Familiarity is not the same as superiority.

Second, and this is something my mentor Jacob Rosenberg puts so well: the bricks of a building don’t shout their value every second the way stocks do. When the market drops 3% on a Tuesday, it’s breaking news on every screen and every push notification. But when a building’s true market value drops by the same amount, nobody knows. There’s no ticker, no red arrow. The building looks exactly the same. This gives people the impression that real estate is stable and stocks are volatile, when in reality both fluctuate in value. You just only see one of them in real time.

That transparency, the thing that makes people nervous about owning stocks, is actually one of the stock market’s greatest advantages. You know what you own, what it’s worth, and you can access your money whenever you want. You’re not waiting for a syndicator to decide it’s time to sell. You’re not hoping the building gets refinanced so a distribution comes through. You log in, you see your number, and if you need cash tomorrow, you can have it. And unlike a private syndication, which is essentially unregulated, your brokerage account is overseen by multiple government agencies whose entire job is to protect you.

And let’s talk about what you’re actually buying when you invest in the stock market. When you buy a share of Amazon, you’re buying a piece of a company that did nearly $717 billion in sales last year. When you own McDonald’s, you’re an owner of a business that serves nearly 70 million customers every single day across over 100 countries. These are the most powerful money-making machines that have ever existed on this planet, and you can own a piece of all of them, diversified across hundreds of companies, for almost nothing in fees, and sell any of it at 10:00 a.m. on a Tuesday.

Now compare that with a passive stake in a 10-unit apartment building where two tenants are behind on rent and the boiler needs replacing. Both are technically investments, but they are not in the same universe.

I’m not saying real estate is a bad investment. For active operators who know the business inside and out, it can be incredibly lucrative. But there’s a big difference between being the operator and being the passive investor along for the ride. If you’re the passive investor, be honest with yourself about what you’re giving up for the comfort of owning something you can drive by and see with your own eyes.

You’re giving up liquidity. You’re giving up transparency. And if the last decade is any indication, you may also be giving up returns.

For people approaching retirement, that tradeoff deserves a long, hard look. Because retirement doesn’t wait for a building to sell. n

Jack Strulowitz is a Financial Advisor at Bernath & Rosenberg in Cedarhurst, NY, where he helps high–net worth individuals and families manage their investments and build comprehensive strategies for retirement, tax, and estate planning. For questions or to schedule a consultation, please contact [email protected] or 847-962-3352.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing involves risk including loss of principal. No strategy assures success or protects against loss. Investments in real estate may be subject to a higher degree of market risk because of concentration in a specific industry, sector or geographical sector. Other risks can include, but are not limited to, declines in the value of real estate, potential illiquidity, risks related to general and economic conditions, stage of development, and defaults by borrower.

Securities and advisory services offered through LPL Financial, a registered investment advisor, member FINRA/SIPC.