Top 10 LP misconceptions about syndications

Welcome back and happy Wednesday!

Investing as a Limited Partner (LP) in a real estate syndication can be a great way to allocate capital. The issue is that many LPs discover what they invested in after sending their wire.

After advising on a ton of these cases and hearing from LPs, I’d like to dissect the most common misconceptions held by LPs prior to investing so that you don’t have to learn them the hard way yourself.

pretty proud of this one :P

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My most popular article (by a fairly wide margin) is Top 15 Syndication Mistakes, and many of you might (rightfully) ask… isn’t Top 10 LP Misconceptions the same?

I think it’s not and here’s why:

• Top 15 Syndication Mistakes was written as a result of advising many LPs AFTER THEY LOST CAPITAL.

• In other words, the question I tried to answer there was “what are the common denominators among deals that lose LPs money”

• **Top 10 LP misconceptions about syndications **is answering another question - “what are the most common things LPs wish they knew prior to getting into LP investments”

• You’ll notice that this article isn’t conditioned on losing capital, I am simply looking to distill the most common “I wish I knew this before” statements in a single place

Alright, let’s get into top 10 misconceptions:

1. The GP's Track Record Is More Important Than the Deal Itself

Many new LPs focus heavily on the deal metrics: projected returns, IRR , and cash-on-cash yield… and I’ve written at length on why that’s a bad idea.

While these are important, the General Partner's (GP's) track record often has a far greater impact on the outcome of your deal.

This is precisely why I put the “property itself” 3rd (in terms of importance too!) on the Three Pillar framework that I put together:

• Execution - track record and counterparty risk

• Alignment of Interests - coinvest, waterfall, and fees

• Property - valuation and business plan

For more on how to vet a track record visit Track Record Audit.

2. Preferred Returns Don’t Guarantee Security

Many LPs mistakenly believe that a "preferred return" ensures their capital is protected - even worse, they assume that preferred returns are equivalent to cash flow.

In reality, a preferred return is simply a payment priority, but the priority is only helpful if there’s cash to pay it! In other words, being 1st in line is not helpful if the doors to the store are closed.

The preferred return is a critical component of alignment of interests pillar of LP investments, but they should never be mistaken for a benchmark of cash flow. I’d also recommend reading does the pref even matter on this topic.

While we’re on this topic, I should also mention two more things:

• It’s not uncommon to raise additional equity for a NON cash flowing project in order to pay you dividends … I suppose if this is explicit, that’s one thing. It’s another when it’s not explicitly mentioned, and I would say it’s typically not. Regardless of disclosure, you have to realize that you’re giving the GP money (in this scenario) to simply give it back to you rather than investing that cash into the property itself.

• Cash flow can be uneven, and sometimes (see more on capital calls below) it can stop abruptly. Many LPs didn’t realize how often this can happen and were relying on cash flow from their investments to live on… please diversify carefully - don’t invest what you can’t lose, but also don’t depend on cash flow that could stop.

3. Fees Erode Returns More Than You Think

This is one of those items that every single LP needs to understand in depth, yet most don’t.

Fees have a very material impact on your returns, as I discuss in the articles below .. and many LPs don’t realize to which extent this is true after investing.

• Why fees matter

• Fees erode more equity than you think

You also have to keep in mind that transaction costs & fees are a part of this industry, but there are (unofficial) market levels for them.

Ensuring you understand these levels (best way to do this is deal flow in my opinion) helps with the second pillar on alignment (hint: pay special attention to the relationship between coinvest and front-end fees such as the acquisition fee - more in the article). Conversely, investing into a deal where the alignment is out of balance day 1 means you have a higher likelihood of reaching misaligned incentives.

4. Refinances & Tax Benefits Can Be a Double-Edged Sword

Refinances and accelerated deprecation are usually a time to celebrate, but you also have to remember that both are a liability (with the latter lender being the IRS, so to speak).

For deeper explanations on both, visit:

• Hidden risk of tax benefits in syndications

• Losing it all in foreclosure (where tax recapture occurs)

• Refinance Assumption Trap

By the way, while we’re on this topic, I would be remiss if I didn't mention that many LPs understate how annoying (and commonly late) K1s are - this (among other reasons) is why I don’t recommend investing less than $100,000 in the vast majority of cases.

5. Exit Strategies Are Rarely as Simple as They Seem

There’s likely no other more common theme across LP misconceptions that this one.

I’ve heard everything, up to and including “if things don’t work out I can just get my money back once we sell and pay the debt off.”

Once you get to the third pillar of the investment (the property) the first thing you should be looking for is exit assumptions - more on why that’s extremely important here.

6. Capital Calls Are More Common Than You Think

Capital calls happen, are a normal part of this industry, and (sometimes) they’re even good for all parties involved. They’re not created equal, but many LPs didn’t understand the existence of these until getting their first surprising email.

I’ve written 8 articles on this topic already, and (believe it or not) there’s still several drafts that I’m hoping to push out soon:

• Two part series:

• Is my investment distressed?

• My deal is distressed, now what?

• 6 steps to a successful capital call decision

• Do sunk costs matter in capital calls?

• Will a rate cut(s) save distressed investments?

• Minimum Viable Capital Call

• Criss cross rescue sauce

• Capital calls to pay off a GP loan

7. Rent Growth Assumptions Are Often Overly Optimistic

Rent growth is arguably the second hardest metric to predict aside for the exit cap rate. Most decks I see show you some graphs from CoStar and a population chart, and then assume 5% rent growth as a result. It’s rare to see a detailed thesis on rents. Furthermore, as I detailed in my 2025 predictions, gain to lease is important phrase to familiarize yourself as soon as possible.

The best way to cut through the noise on both cap rates and rent growth is (1) understand what assumptions are being made, (2) understand why those assumptions made sense for the GP, and (3) figure out what will happen to your returns if the assumption(s) is wrong.

• #3 is most easily visualized through a two variable data table / sensitivity table similar to the one I created in why most LP syndications won’t 2x your money and don’t lose your money, seriously

As far as rent growth assumptions on value-add multifamily projects, I’d recommend reading we renovated but will they come.

8. Both Reporting and Investment Decks Can Be Misleading

Many LPs trust the glossy investment decks and reporting documents provided by GPs without questioning them. First of all, I always try to remind people to accustom themselves to verify and only then trust eventually (as opposed to the standard trust but verify) - I wrote more on this topic at length in going in assumptions for an LP and the dangers of trust but verify.

Don’t mistake nice pictures for progress, and take some time to read Minimum Viable Reporting Package. I think GPs are often trying their best in terms of providing you with the information in front of them, but that doesn’t mean that this information signals progress (or good news) in terms of the valuation of your investment itself (or if you should invest with them again!).

9. Losing Money Is More Probable Than You Think

I speak to a ton of LPs that think real estate investments are nearly risk free and that’s just not true, on so many levels. I think the confusion is coming from comparing these investments to single family homes, and I’ll take some time to compare & contrast the two soon.

There are many ways to lose money in syndications and I wrote at length on this topic in 5 ways in which real estate can lose you money.

In the meantime, I just want to remind you that you should:

• never invest money that you can’t hypothetically live without

• always diversify across property types and different GPs

• don’t invest into a syndication and depend on its cashflow for your living expenses

Real estate investments aren’t investments with “crazy” returns, so you need to be extremely careful when analyzing your downside. I wrote more on this in don’t lose your money, seriously and is real estate better than treasuries.

10. Deal Flow is Crucial to Finding the Best Opportunities

Many LPs assume they’ll stumble upon deals here and there from a random podcast, ad, or a newsletter. This might be true, but you’re likely missing out on a ton of opportunities by not looking at more transactions.

People like to say that passive investments are passive, and I tend to disagree - they’re quite active in the beginning (it should take a long time to find something good and do proper due diligence) and even once you invest they require some active monitoring.

Building relationships with multiple GPs and taking the time to expose yourself to reviewing consistent (and different!) deal flow can dramatically improve your ability to identify the best investments. I wrote at length on the benefits of deal flow here.

As always, I hope this was helpful and I look forward to your feedback!

I advise LPs on existing and potential positions and write articles here weekly on what I see in the marketplace that could help you invest better. You can find me on LinkedIn or Twitter.

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