whether you invest actively or passivelyThe same broader risks apply cash flow. Beware of these mistakes that could leave you with no cash flow at all – or worse, your deal sinking completely.
1. Failing to plan for wealth management
Excellent asset managers can keep struggling deals afloat. Weak or mediocre asset managers can make perfectly good deals.
I’ve learned this the hard way many times. In my 20s, I bought a lot of rental properties in low-income neighborhoods in Baltimore. I didn’t realize until years later that good property managers don’t take properties in bad neighborhoods. They earn their money as a percentage of the rent they collect, and rundown properties come with high-maintenance tenants for low wages.
This tainted property managers who were Willing to take me as a customer. every one did a bad thingAnd I eventually sold many of those properties at a loss.
But passive sideI’ve seen it play out both ways, too. I once saw a mobile home park deal that looked great on paper, but they could never find a good property manager.
The co-investment club through which I invest every month reviewed a deal about 18 months ago that involved more than 400 units spread across a dozen cities in three states. The numbers on paper were also unbelievable, but by that time I had learned to check the asset management plan.
Our club frequently quizzed the operator about its plans, and we liked its response: “We think this deal will sink or swim based on property management. Managing these dispersed units will be a challenge, so we’re making all efforts to stick to the different property managers like glue.”
And sure enough, that deal has outperformed its initial estimates and is currently paying off. more than one 9% produce.
2. Accepting risky loan terms
Real estate investments go bust for one of two reasons: the operator runs out of cash or runs out of time.
Debt affects both risks.
Many real estate investors faced trouble with variable-interest loans in 2022 when interest rates skyrocketed. Within a few months, many people left Happen healthy cash flow losing money every month. And from there, it’s a matter of time before you either sell at a loss or default on your loan.
Similarly, if you take out a balloon loan, you are forced to either sell, refinance, or recapitalize when it is due in a few years. Then, over the years the debt of many commercial operators has expired forced to Selling or refinancing in a bad market.
Read: loss.
3. Underestimating renewal risk
Managing contractors is extremely difficult. They constantly blow deadlines and budgets, demand more money midway through projects, cut corners, and otherwise don’t perform as promised.
Before investing in any real estate deal, I ask, “Who will do the renovations, repairs, and maintenance?” Household staff? Teams of contractors and subcontractors?
Equally important: How many projects have you worked on with this team before?
Inexperienced operators are taken for granted contractors. Consider yourself cautious.
4. Underestimating running expenses
Many investors underestimate future expenses – and end up earning less cash flow than expected. because of it.
property taxes increased substantially 25% between 2019 and 2024. Insurance premium increased 12% in 2025 alone And 46% by 2021. labor cost has increased For maintenance and repair.
And beware of rose-colored lenses as you (or the operator) forecast vacancy rates, property management costs, rent default rates, and evictions.
When we examine a deal together in our co-investment club, we try to find out how conservative the operator’s forecasts really are. We would like to see them use “unreasonably” high future expense forecasts, knowing that every real estate investment is subject to ups and downs.
5. Overestimating fare increases
On the other hand, we would like to see operators forecast lower fare increases in the future to keep projections conservative.
For example, we recently invested in an operator with an expected 0% fare increase for the first two years of the deal. We think they’ll definitely do better than this—but we appreciated the conservative underwriting.
of the district rental manager Shows nationwide fares leaving 5% compared to last year. So no, fares are not an elevator that only goes up.
6. Underestimating future competition
fares are below in phoenix By 8% compared to last year. Why? Largely because so many new multifamily properties have come online in the last two years.
And this figure actually hides the real carnage, as apartment operators have had to make huge concessions to attract new tenants. Market get Filled with new supplies, and sent it net operating Income (NOIs) Falter. Many properties have become cash flow negative and are in serious distress.
This is great for buyers and investors like me who love to see fire-sale bargains. This is not great for people who have invested in those assets.
your share Due diligence This includes researching new supply creations in the submarket. Skip it at your own risk.
7. Ignoring legal risk
When I was an active investor, I was sued several times as a landlord. This is completely useless.
People love to sue landlords. Tenants, contractors, neighbors – they all see an opportunity to make a quick buck.
Then there is lender risk. When you borrow money as an investor, you almost always have to sign a personal guarantee. If you default, the lender doesn’t just seize their assets – they seize your personal assets, too.
Today, I only invest passively. i am safe From both of those types of liability risks.
Don’t get me wrong: Someone could still sue the operator, and that could impact my returns as an investor. But they can’t sue me personally. I don’t have to worry about paying out of pocket for a lawyer or attending court.
8. Ignoring opportunities to boost cash flow
Operators often raise rents with “value-added” strategies such as refurbishing units and improving common areas, amenities, and signage. This is great; Nothing against traditional value-added strategies.
But some investors go beyond the obvious to boost NOI Even more.
In a recent deal my co-investment club investigated and invested in, the operator converted unused storage space into a Excessive studio apartment Unit.
Some operators add covered parking spaces and charge extra for them. Others begin billing tenants for utilities. Still others add co-working spaces to the site and charge usage or membership fees.
One of the smartest strategies for boosting cash flow I’ve ever seen is called “”.Section 8 overhang” This includes purchasing Low Income Housing Tax Credit (LIHTC) property, affordable price Based on its current NOI. Then the operator slowly turns all Cash tenants with Section 8 tenants, collecting full-market rent – all the time keeping LIHTC tax benefits, because rules for LIHTC what to ban Tenant Can pay, what not landlord Can collect.
See the flaw?
lifetime income
i like true passive income Now! Hits my bank account without me having to lift a single finger. And since I started investing passively through a co-investment club, every year I have collected more and more real passive income.
Some deals pay low yields in the 4%-6% range, with most Estimated returns from profit on sale. other deals pay high yield In 8%-16% Category.
This type of passive cash flow gives me more options in my life and career. I spent several years living abroad, investing and earning cash flow the entire time. But when my family and I moved back to the US, I knew our cost of living would go up – and that was okay, because my earned income gets complemented by my passive income.
If I ever want to sell my business and Go Write a novel, guess what? My passive income from cash flow investing will help support me.
Cash flow investing can give you freedom. Or if you do it wrong it can give you headaches, nightmares and harm.
When in doubt, join an investment club to check deals and cash flows with other investors. I personally invest like this with small amounts every month dollar-cost averaging.
I will never go back to investing in any other way.
