The 5 Questions Every Passive Investor Should Ask Their Operator

This is the most important question and the one most investors never ask directly. Track record matters — but track record relative to projections matters more. Any operator can show you a deal that performed well in a rising market. The question is whether their underwriting was accurate and whether they delivered on what they promised.

A strong operator will answer this question without hesitation and with specifics. They will tell you which deals came in above projections, which came in below, and why. They will not hide behind general statements about market conditions. If an operator is vague here, that is a signal.

If they have not done a full cycle yet — acquired and sold — ask how their active deals are performing against the pro forma. Ask to see actual distributions versus projected distributions. The numbers do not lie.

GP compensation structures tell you everything about how incentives are aligned. A GP who earns primarily at acquisition — through acquisition fees and loan guaranty fees paid at closing — has already been paid before you see your first dollar. Their incentive is to close deals, not necessarily to maximize your returns.

A GP whose compensation is weighted toward performance — through a carried interest or promote that only pays out after the LP hits their preferred return — has skin in the game alongside you. That is the structure you want.

Ask specifically: What is your acquisition fee? What is your asset management fee? What is your promote, and when does it trigger? Is there a preferred return, and what is it? Is your own capital in this deal? An operator who answers these questions clearly, without making you feel like you are being difficult, is one worth trusting.

Every operator will tell you what happens when the deal works. Ask them what happens when it does not. What are the assumptions in the underwriting, and what does the return look like if values drop 15 or 20 percent? What if rents grow at half the projected rate? What if cap rates expand 50 basis points at exit?

Strong underwriting includes stress-tested scenarios. If the operator cannot walk you through these clearly, or if they become defensive when you ask, that tells you something. A deal that only works under optimistic assumptions is not a deal — it is a bet.

You also want to understand the debt structure. Is the loan fixed or floating? What is the term? Is there a prepayment penalty? Rate cap agreements on floating-rate debt are now standard for good reason — ask whether one is in place.

Once you wire your capital, you are in a relationship with this operator for three to seven years. The question of how they communicate is not a minor one. Ask for examples of investor updates from a current or previous deal. See whether the good news and the bad news are both delivered clearly, or whether updates only arrive when things are going well.

Good operators send quarterly updates with actual numbers — occupancy, cash flow, distributions, capital expenditure progress, and market commentary. They send a real update when something unexpected happens, not a carefully worded press release designed to minimize concern.

Ask the operator directly: If the property is underperforming versus projections, how and when would I hear about it? Their answer — and the comfort with which they give it — tells you a great deal.

This is the question most people are too nervous to ask because it feels like challenging the operator's judgment. Ask it anyway. A strong operator will not be rattled — they will welcome it. They should be able to tell you specifically why this market has the supply-demand dynamics that support their rent growth assumptions, why this asset class and submarket make sense at this moment in the cycle, and why this business plan — value-add, stabilized, development — is appropriate given current conditions.

Vague answers about “strong fundamentals” or “growing metros” are not answers. You are investing in a specific property in a specific submarket with a specific thesis. You deserve a specific case for why that thesis holds.

If the operator cannot give you that case, or seems irritated that you asked, you have your answer.