• Aaron Bonne

Risks of Passively Investing in Real Estate Syndications and How we Mitigate Them

Maybe your someone who is considering passively investing in a real estate syndication because you are excited about the passive income potential, attractive tax benefits, and upside on the back end. But, you’re a savvy investor who realizes every investment opportunity has risk, so let’s address those and discuss what we do to mitigate them.

Biggest Risks you face by Passively Investing In Real Estate Syndications:

Risk #1 – You could lose all your money

Risk #2 – Real Estate Syndications are Illiquid

Risk #3 – Sponsor/Operator Risk

Risk #1 - You could lose all your money.

Yes, let me repeat that again, you could lose all your money. As a Limited Partner (LP) you are at risk to lose your entire investment. You do have limited liability as an LP, so in the event of default the lender cannot come after your personal assets, but the money you invest in the deal is certainly at risk.

The greatest chance of losing your money is if the asset doesn’t cash flow enough to pay the debt and we default on the loan. One major point I always like to point out to folks is what happened to the MF space in the Great Recession of 08-09. When the housing bubble popped in 2008, the delinquency rates on Freddie Mac single-family loans soared, hitting 4% in 2010. By contrast, delinquency on multifamily loans peaked at 0.4%. Therefore, you’re about 10x more likely to default if you invested in Single Family Homes vs Multi-Family. This gives us comfort in knowing that during the worst economic downturn of our lifetime, MF loans defaulted at less than a half point.

It’s our job to make you aware of the risks and help you understand how we plan to mitigate them.

With capital preservation being our main goal, let’s discuss what we do to avoid losing money.

How to Mitigate:

1) Invest with experienced and proven operators in growth markets.

  • All of our operating partners have thousands of assets under management with a proven track record and many have taken deals full cycle

2) Asset cash flows from day 1

  • We only buy apartment buildings that are cash flowing from day one. While we have a value-add plan to boost NOI and ultimately our returns, a cash flowing asset from day 1 reduces risk tremendously as we can still pay our debt and ride out any downturns in the economy

3) Conservative underwriting and adequate leverage

  • We’re typically around 70% Loan to Value, which is enough of an equity cushion to weather a market correction. We are conservative in our underwriting in forecasting rent projections, exit cap, and vacancy

Risk #2 – Real Estate Syndications are Illiquid

This is true, and unfortunately there isn’t much we can do to make them any more liquid. If you invest your money into a real estate syndication, you should expect to have it there for at least 5 years. You do get cash flow distributions throughout the hold period, but you shouldn’t plan to receive your initial investment back for approximately 5 years.

What do we tell people who are concerned with the illiquidity of real estate syndications? DO NOT invest. Yes, I’ve told numerous people not to invest until they are comfortable having their money untouchable for about 5 years.

If you are planning to buy a house in the next couple years or pay for your child’s education, these are not good investments for you. However, if you have cash set aside in case of an emergency, or you want to invest and watch it grow, then I think you’ll find these opportunities beneficial.

Risk #3 – Sponsor/Operator Risk

There is certainly a risk when you hand someone else your money. How do we mitigate this risk? We carefully vet our operators, as we’ve discussed in detail here.

You want to know the track record of who you’re investing with and should ask for that before investing. You should ask for references of other investors. What’s their experience been like, do they continue to invest or re-invest? You should ask for examples of prior investor communications.

How often will you be updated on the progress of your investment? If you wanted to go see the asset in person, can the General Partnership team set that up for you (we will!)?

At the end of the day, you want to do business with people you know, like, and trust. Here at BC, we want to be that person for you. We are as transparent as possible in how we operate, what the opportunity is, and certainly making our investors aware of the risks involved.


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No Offer of Securities—Disclosure of Interests

Under no circumstances should any material at this site be used or considered as an offer to sell or a solicitation of any offer to buy an interest in any investment. Any such offer or solicitation will be made only by means of the Confidential Private Offering Memorandum relating to the particular investment. Access to information about the investments are limited to investors who either qualify as accredited investors within the meaning of the Securities Act of 1933, as amended, or those investors who generally are sophisticated in financial matters, such that they are capable of evaluating the merits and risks of prospective investments.