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Instead of buying and managing a property yourself, you invest alongside other investors in a property or portfolio that a professional sponsor selects and operates. You provide capital and make the decision to invest. The sponsor handles the work.

“Passive” describes your workload, not your risk. You can still lose money, and you typically cannot get it back early. Read the full article.

In many private real estate investments, investors are limited partners (LPs) and the sponsor is the general partner (GP). LPs put in money and receive a share of income and profits according to the agreement. They generally do not make operating decisions.

“Limited” also refers to liability: an LP's potential loss is generally limited to what they invested, though that depends on the legal documents and your attorney can confirm how it applies. See how a syndication works.

Equity means ownership. Equity investors share in the upside when a property does well, and they absorb losses first when it does not.

Debt means lending. Debt investors are generally entitled to stated interest and the return of principal, and they are usually paid ahead of equity. That priority can reduce risk compared with equity, but it does not remove it. Borrowers can default and collateral can lose value.

Some investments blend the two. Always check where you sit in the order of payment.

• Risk. Property values, rents, expenses, interest rates and the sponsor's execution can all move against you. You can lose some or all of your investment.
• Liquidity. Private investments are generally hard to sell. Plan on the money being unavailable for the entire holding period.
• Fees. Sponsors are paid in several ways. Add them up, and look at whether the sponsor earns more when investors do.
• Holding period. Business plans often run several years, and exits can be delayed. Ask what happens if the sale takes longer than planned.

In passive investing, the operator matters as much as the property. Look at experience across different market conditions, a full track record including difficult deals, how the sponsor is paid, how much of their own money they invest and how clearly they communicate when results fall short.

Read our questions to ask a sponsor. Apply them to every sponsor, including Headway, with which this site is affiliated.

Before you commit money, be able to answer these for yourself.

• Can I afford to have this money locked up for the full period?
• What share of my net worth would this represent?
• Do I understand how the investment makes money, and how it can lose it?
• Do I understand every fee and who receives it?
• Have I read the offering documents, or had an attorney review them?
• Have I spoken with my CPA about the tax implications?
• Do I qualify to invest, and is it suitable for my situation?
• Would I be comfortable if the result were worse than projected?