Risks & Red Flags in Real Estate Syndications

September 2025

Every real estate investment carries risk. Syndications are no exception.

The goal of evaluation is not to eliminate risk, but to understand where risk resides, how it is managed, and whether projected returns adequately compensate for it. At a fundamental level, this means recognizing that protecting your money (return of capital) comes before growing it (return on capital). Deals that prioritize upside without adequate downside protection often expose investors to unnecessary risk.

This article highlights common risks and red flags passive investors should be aware of when evaluating real estate syndications.

Red Flags Often Appear in the Assumptions

Many risks are not hidden in the fine print. They show up in the assumptions.

Common red flags include:

• Rent growth that exceeds local income or job growth

• Flat or understated expense assumptions

• Exit pricing that assumes materially better market conditions

• Returns that rely heavily on refinancing rather than operations

When projections depend on optimistic assumptions across multiple variables, risk compounds quickly.

(A deeper discussion of how assumptions affect outcomes is covered in Financing & Underwriting Basics.)

Leverage Can Magnify Both Outcomes and Mistakes

Leverage is a powerful tool, but it increases sensitivity to error.

Red flags related to leverage include:

• Thin debt service coverage

• Heavy reliance on floating-rate debt without adequate protection

• Loan maturities that closely match the planned exit

• Returns that require refinancing to succeed

Strong deals remain viable even when leverage does not behave perfectly.

(For context, see Understanding Leverage in Real Estate Syndications.)

Market and Asset Mismatch

Not all assets perform well in all markets.

Red flags may include:

• High rent growth assumptions in stagnant job markets

• New supply pressure ignored in underwriting

• Asset types that are overly sensitive to economic cycles

• Markets reliant on a single employer or industry

Market quality does not guarantee success, but weak markets can amplify operational risk.

(Market context is addressed in Market & Asset Selection.)

Expense Risk Is Often Underestimated

Revenue projections tend to receive the most attention, but expenses frequently drive downside outcomes.

Red flags include:

• Property tax assumptions that ignore reassessment risk

• Insurance budgets that fail to reflect recent market volatility

• Labor costs that do not reflect local wage pressures

• Capital expenditure budgets based on estimates rather than bids

Underwriting that does not stress-test expenses leaves little margin for error.

Sponsor Behavior Matters as Much as the Deal

Risk is not only about numbers.

Sponsor-related red flags may include:

• Limited transparency around assumptions or risks

• Overemphasis on best-case outcomes

• Inconsistent communication or reporting practices

• Limited experience with similar assets or markets

Strong sponsors are typically clear about tradeoffs, risks, and uncertainties.

(How sponsor experience is evaluated is covered in Evaluating Sponsors & Track Records.)

Complexity Can Mask Risk

More complexity does not necessarily mean more return.

Red flags may include:

• Multiple layers of debt or equity

• Highly complex business plans with narrow execution windows

• Dependence on precise timing or favorable market shifts

Complexity increases execution risk and should be matched by appropriate return potential.

When “Too Good” Is the Biggest Red Flag

Returns that appear meaningfully higher than comparable opportunities often deserve closer scrutiny.

High projected returns may be driven by:

• Aggressive leverage

• Optimistic assumptions

• Understated expenses

• Reliance on favorable exits

Rather than asking “How high can returns go?”, a more useful question is “What has to go right for these returns to materialize?”

A Practical Way to Think About Red Flags

Red flags rarely disqualify a deal on their own. They indicate where to ask deeper questions and where risk is concentrated.

Understanding how risks interact is more important than identifying any single issue in isolation.

A structured set of questions for applying these concepts is included in the Investor Due Diligence Checklist.

Final Perspective

Risk is unavoidable. Poorly understood risk is optional.

By recognizing common red flags and keeping return of capital ahead of return on capital, passive investors can evaluate syndications more thoughtfully and avoid surprises after capital is committed.

Continue Learning

→ Start from the beginning here: Passive Real Estate Investing Learning Guide

→ Next recommended read: Evaluating Sponsors & Track Records