Passive Investing Isn't the Problem. Picking the Wrong Jockey Is A neurosurgeon put $30,000 into a real estate deal and called it "a little bit like gambling." The deal: about 380 investors pooled money to restore a Tadao Ando beach house in Malibu that Kanye West had gutted and abandoned. Buy for $21M, renovate for $8.5M, flip for $50M+. Projected 20% returns. Now it's facing foreclosure. Construction stopped a year ago. The loan costs $10,000 a day in interest, according to the sponsor. An auction is scheduled for next week. One investor said he never considered what would happen if the deal defaulted. "It didn't occur to me." The property was interesting. A Pritzker Prize architect. Malibu beachfront. A celebrity backstory. But the sponsor running the deal had a prison record for assault with a deadly weapon. No institutional track record. No history of executing a project at this scale. When the deal started breaking, investors couldn't do anything except watch. Some people will read this and think the lesson is "don't be a passive investor." Wrong lesson. Billions of dollars flow through passive LP structures in commercial real estate every year. The model works. Institutional investors are passive all the time. They don't pick the paint colors or manage the contractors. But they are ruthless about one thing: who they hand their money to. Sponsor selection is the most important decision any passive investor makes. It's not the property. It's not the market. It's not the architecture. It's the jockey. What has this person done before, and how did it go? Do they have the reserves to survive a surprise? Would their previous investors back them again? One investor in this deal said he wasn't bothered by the sponsor's prison record because "if he can survive all that, real estate can't be too complicated." Really? The best passive investors ask just as many questions about the deal as they do about the person running it. A great sponsor will often find a way through a bad situation or at least handle the failing project with integrity. A bad sponsor will find a way to wreck a great one. These 380 people didn't fail because passive investing is broken. They failed because nobody vetted the jockey. https://lnkd.in/eKPwzh8S