Risks & Red Flags in Real Estate Syndications

September 2025

Every investment carries risk. While syndications can offer excellent returns, they are not risk-free. The good news is that most risks can be managed or mitigated with the right sponsor, conservative assumptions, and careful due diligence.

This article will help you — the investor — understand the three major buckets of risk and provide you with a structured checklist of questions to ask before committing capital.

The Three Buckets of Risk

1. Market Risk

The broader market environment plays a major role in property performance:

• Interest Rates & Cap Rates: If interest rates rise, cap rates often increase, which pushes property values down. This can extend the timeline for selling an asset.

• Local Economy: Job losses, declining population, or oversupply of apartments in a market can reduce occupancy and rent growth.

• Regulatory Risks: Rent control measures or unfavorable landlord laws can cap returns.

Mitigation: Focus on growing, landlord-friendly markets with diversified job bases, conservative underwriting, and long-term financing.

2. Sponsor Risk

The sponsor is often the most important factor. You’re not just investing in the property — you’re investing in the people running the deal. Key risks include:

• Inexperience: A sponsor without full-cycle experience may struggle to execute.

• Alignment: If the sponsor doesn’t co-invest meaningful capital, their incentives may not align with yours.

• Transparency: Poor communication or unwillingness to share performance data is a red flag.

• Business Plan: The sponsor’s plan should be realistic, grounded in data, and executable with their team’s skill set.

Mitigation: Verify track record, talk to past investors, and review their detailed business plan.

3. Deal-Level Risk

Every deal carries property-specific risks:

• Aggressive Underwriting: Assuming 5–7% rent growth every year, or exit cap rates below today’s market, can be unrealistic.

• Low Reserves: Without sufficient reserves, properties are vulnerable to repairs, vacancies, and downturns.

• Over-Leverage: High debt service can leave no margin for error if occupancy dips.

• Operational Risk: Poor property management or slow renovations can sink a business plan.

Mitigation: Look for conservative assumptions, strong reserve budgets, and a sponsor with proven property management oversight.

Red Flags to Watch For

• Unrealistic rent growth assumptions.

• Exit cap rates lower than today’s market.

• Low or no reserve funding.

• Sponsor earning high fees regardless of performance.

• Lack of transparency or refusal to share track record.

• Overly complex or opaque waterfall structures.

LP Questions to Ask (Structured Checklist)

When evaluating a sponsor or deal, ask questions in these categories:

Track Record & Team

• How many deals have you taken full cycle, and what were the outcomes?

• Have you ever lost money on a deal or returned a property to the bank? What happened, and how did you handle it?

• How have you adapted your approach during market downturns?

• Who are the key team members (deal finder, underwriter, asset manager, investor relations)? What are their roles and experience?

• Can you provide references from past investors?

Business Plan & Underwriting

• What is your business plan for this asset, and what is the timeline?

• How did you source rent comps and income projections?

• What exit strategy do you plan (sell, refinance, supplemental loan)?

• What reserves are budgeted?

• How conservative is your underwriting? Have you done sensitivity analysis or stress testing?

Financing & Structure

• What type of debt are you using? Is it fixed or floating, and what’s the DSCR?

• What is the preferred return, equity split, and waterfall structure?

• Do you co-invest your own capital, and how much?

• What fees do you charge (acquisition, asset management, property management)?

Communication & Investor Relations

• How often will you provide updates (monthly, quarterly)?

• When do you issue K-1s?

• What is your communication policy if performance is below expectations?

• Who handles investor relations and reporting?

Why This Matters

The goal isn’t to scare investors, but to empower them. Protecting your money (return of capital) always comes before growing it (return on capital).

By understanding risks, spotting red flags, and asking structured questions, you dramatically improve your odds of choosing sponsors who will safeguard your capital and deliver on their promises.

These are the questions more investors should ask before writing a check. The best sponsors welcome tough questions — because they’ve already thought through the answers.