Alright, let’s talk about the risks of real estate syndications—because, let’s be real, every investment has risks.

You’ve probably heard people say, “Syndications are passive! Just sit back and collect checks!” But like anything in investing, if you go in blind, you could get burned.

So, let’s break down the 30 biggest risks—ranked from most serious to least—and how to avoid them when investing in multifamily syndications.

The Top 5 Worst Risks (The Ones That Can Wreck Your Investment)

1. Sponsor Fraud or Mismanagement (Most Devastating Risk)
A bad operator can destroy a deal faster than a market downturn. If they’re dishonest or just plain incompetent, your capital is toast. 

How to Avoid It:

• Vet the sponsor’s track record (How many deals have they exited successfully?)
• Look for skin in the game (Are they investing their own money?)
• Check references & past investor experiences

Real-World Example: The SEC shut down a fraudulent syndicator in 2021 who raised $58M but never actually bought properties (SEC.gov).

2. Market Downturns & Recessions

If the economy tanks, property values and rents can drop, making it harder to pay investors.

How to Avoid It:

• Invest in recession-resistant markets (Look for job growth, population growth, and diverse industries.)
• Underwrite conservatively (Avoid deals that rely on aggressive rent increases.)
• Look for cash reserves (Does the syndication have a buffer for downturns?)

Data: Multifamily vacancies only rose 0.4% in the 2008 crash, while home prices fell over 25% (Harvard Housing Report).

3. High Loan Risk (Bad Debt Structure)
If a syndicator takes on short-term, high-interest, floating-rate debt, your investment is at risk.

How to Avoid It:

• Look for fixed-rate debt or rate caps on floating loans.
• Ask how long the loan term is (Short-term debt = more risk).

Data: More than $40B in multifamily loans are at risk of default in 2024 due to floating rates (Bloomberg).

4. Unrealistic Projections
Some syndicators promise sky-high returns to lure investors but can’t actually deliver.

How to Avoid It:

• If a deal projects 20%+ annual returns, it’s probably too aggressive.
• Ask for stress test scenarios (What happens if rents don’t rise as expected?)

Example: Many syndicators in 2021 projected 10%+ rent growth per year. Now, some markets are seeing rents decline in 2024 (Apartment List).

5. Poor Property Management
A bad property manager can ruin a deal – high vacancies, late rent collections, and poor maintenance kill cash flow.

How to Avoid It:

• Ask the sponsor who the property manager is and how many units they manage.
• Look for experience with similar properties (If they only manage luxury units, they might struggle with workforce housing).

Data: Poor property management is a leading cause of underperformance in real estate (BiggerPockets).

Mid-Level Risks (Serious, But Can Be Managed)

6. Overpaying for a Property
If the sponsor buys too high, your returns shrink—or worse, the deal fails.

How to Avoid It: Look at cap rates and market comps before investing.

7. No Cash Reserves
A deal without reserves can’t handle unexpected repairs or vacancies.

How to Avoid It: Ask how much is set aside for reserves (At least 6 months of expenses is ideal).

8. Rising Interest Rates
Higher interest rates make debt expensive and cut into returns.

How to Avoid It: Favor fixed-rate loans or deals with interest rate caps.

Data: The Fed raised rates 11 times in 2022-2023, crushing short-term loan deals (Federal Reserve).

9. Over-Leveraging (Too Much Debt)
Too much debt = higher risk of foreclosure.

How to Avoid It: Look for LTV (Loan-to-Value) ratios under 75%.

10. Sponsor Fees Eating Into Returns
Some sponsors charge high acquisition, asset management, and disposition fees, reducing investor payouts.

How to Avoid It: Ask for a fee breakdown before investing.

11. Declining Population in Market
A shrinking population = fewer renters = lower rents.

How to Avoid It: Invest in growth markets (Sunbelt cities like Austin, Phoenix, and Orlando).

Data: States like California, New York, and Illinois lost population in 2023, while Texas and Florida gained (Census.gov).

12. Cap Rate Compression Risk
If cap rates rise, property values fall.

How to Avoid It: Make sure the deal isn’t banking on low cap rates to sell.

Lower Risks (Still Important, But Less Likely to Kill a Deal)

13. Construction Delays (If value-add)

14. Permitting Issues

15. Rent Control Laws Changing

16. Natural Disasters (Floods, Earthquakes, Hurricanes)

17. Insurance Costs Increasing

18. Rising Property Taxes

19. Local Government Restrictions on Rentals

20. Major Employer Leaving the Market

Minor Risks (Annoying, But Won’t Wreck a Deal)

21. Eviction Laws Favoring Tenants

22. Competition from New Apartment Buildings

23. Unexpected Repair Costs

24. HOA or City Code Violations

25. High Vacancy in Winter Months

26. Tenants Not Renewing Leases

27. Maintenance Costs Rising Over Time

28. Weak Property Marketing

29. Sponsor Communication Issues

30. Bank Delays in Distributing Funds

Final Thoughts: How to Invest Without Losing Your Shirt

Look, every investment has risks. But smart investors don’t just chase returns—they manage risk first.

The best way to protect yourself?

Vet the sponsor (track record, fees, experience)

Choose strong markets (job growth, demand, no population decline)

Favor deals with conservative underwriting (no crazy rent growth assumptions)

Look for properties with cash flow from day one

So, what do you think? Do any of these risks make you nervous? 

Or are you feeling more confident about jumping into syndications the right way? Let’s talk!