One of the most common questions I am hearing right now, from clients and from our podcast listeners, goes something like this. “We invested in a real estate syndication a few years ago. It has done basically nothing since. The operators are still sending quarterly updates, but the returns are nowhere near what we were told. What should we be asking?”
I want to walk through the framework I use for this conversation. The unfortunate truth is that the questions you ask today will not change the outcome much. But the right questions will tell you how much worse it might still get, which is the information you actually need to make decisions from here.
Why So Many of These Deals Are Struggling Right Now
If you invested in a real estate syndication in 2019, 2020, or 2021, you invested during a very specific window. Interest rates were at historic lows, real estate prices were elevated, and syndications were being pitched everywhere. We were looking at deals at the time where the pitch decks were full of typos. Some of the sponsors had never owned real estate before. That kind of thing usually signals a market that is overheated.
The business model being sold was simple. Buy an apartment complex for ten million dollars on a loan at three or four percent. Renovate it. Double the rent. Grow the value to twenty million. Refinance at those same low rates. Project very attractive investor returns.
Then rates moved. The refinance math stopped working. Rent growth slowed. And all those projected returns quietly evaporated.
Your First Question Is About the Exit, Not the Performance
When a deal is underwater, asking the sponsor “when will we get back to the original projections” is the wrong question. The projections are dead. They are not coming back, at least not in any timeframe that matches what you were sold.
The better question is “what is the liquidation plan, and what is your timeline?” Most private real estate deals are structured around a five to seven year exit. If we are inside that window, you want to understand whether the sponsor is still targeting a sale, or whether they have quietly shifted to a hold-for-cash-flow strategy. Those are very different outcomes for you. In a hold-for-cash-flow situation, you get a slow trickle of distributions while the sponsor continues to charge fees on the asset indefinitely.
The Real Risk Is a Capital Call
Here is what most investors do not see coming. When a syndication is not generating enough cash flow to cover its debt service or planned capital improvements, the sponsor can come back to existing investors and ask for more money. That is called a capital call. If you do not put in the additional capital, your ownership percentage gets diluted, sometimes severely.
This is the real downside scenario. You are already stuck with an illiquid investment that has underperformed. Now you are being asked to put in another fifty or one hundred thousand dollars to maintain your position. If you say no, your ownership shrinks. If you say yes, you are potentially throwing good money after bad in a situation you cannot evaluate objectively anymore.
So the question to ask is direct. “Are you anticipating a capital call, and if so, when and how much.” The answer may not be comforting, but at least you will not be caught off guard.
Real Estate Behaves More Like a Bond Than a Stock
One structural reason these deals are struggling is that real estate does not adjust cleanly to interest rate shocks. Equities can reprice intraday as new information comes in. Real estate is much slower to reflect changes in the rate environment, and illiquid private real estate is slower still. In practice, real estate responds to rate changes the way a long duration bond does. When rates go up, the value goes down, and there is very little the operator can do to change that in the short term.
This is worth knowing because it reframes the conversation about where real estate should sit in your portfolio. If you treat it like a growth equity, you will be disappointed when rates move against you. If you treat it like an illiquid long duration bond with additional operational risk, the behavior starts to make more sense, and the sizing decision looks different.
Position Sizing Is Your Main Line of Defense
The saving grace for most investors who got caught in this cycle is disciplined position sizing. My general rule is to keep any single illiquid alternative investment to one to five percent of the portfolio, and all illiquid alternatives combined to no more than ten percent. If you followed that rule, a syndication that goes sideways is a frustrating line item, not a portfolio level problem. If you did not follow that rule, the lesson is worth carrying into the next cycle.
What to Do If You Are Holding One Right Now
If you are sitting in a syndication that has not performed, here is what I would tell you directly. You cannot fix it by asking better questions of the sponsor. The deal is what it is. What you can do is understand the exit timeline, anticipate whether a capital call is coming, and decide in advance how you will respond if one arrives. Accept that the money is likely to be illiquid for longer than you were told. And do not put additional capital in unless the math, run honestly with current assumptions, actually justifies it.
The next real estate cycle will come with its own pitches and its own projections. The best protection is not avoiding this asset class entirely. It is remembering how this cycle ended, and letting that memory inform how much of your portfolio you are willing to commit the next time around.
This post is adapted from a recent episode of the Scholar Wealth Podcast. For more on evaluating underperforming real estate syndications, listen to the full podcast episode here.