#78 Why I Believe In Syndications

As most of you know by now, I am a strong advocate for investing in syndications. After 30 years of studying real estate investing and transitioning from active property ownership to passive investing, I credit my syndication investments with allowing me to retire just six years after I began investing in them. However, you may not fully understand why I am such a believer in this investment approach. In this article, I explain my reasoning while also highlighting the limitations of syndications.

Before we begin, it is worth emphasizing that this is not investment advice. This represents my opinion based on personal experience and observation. Always consult with your own professional advisors before making investment decisions. As with any investment vehicle, syndications fill a specific role in your portfolio, and I do not advocate for investing exclusively in any single asset class.

What Are Syndications?

Syndications can take many forms and cover multiple asset classes. For the purposes of this discussion, I define syndications as direct investments in real estate. This could be through a single property syndication, a fund that owns multiple properties, or even a fund of funds—but the underlying assets held are real estate. When you invest as a limited partner (LP) in a syndication, you become a fractional owner of actual property rather than simply buying shares in a company that owns property.

This distinction matters more than you might initially think.

Syndications Grant True Ownership

Unlike stocks in a Real Estate Investment Trust (REIT), when you are an LP in a syndication deal, you are an owner of the underlying asset—not just the company that owns it. This ownership structure provides important benefits that are difficult to find in most other investment vehicles.

Tax Benefits Through Depreciation

The first benefit is your entitlement to claim depreciation on your taxes. Depreciation is a powerful tax benefit because it allows you to offset income from the property with a “paper loss.” While high-income W-2 earners are generally unable to use this loss to offset their employment income due to passive activity loss rules, you can use it to offset the cash flow that the syndication produces. Any losses that are not fully utilized in the current year can be rolled forward into future years and applied whenever you would otherwise recognize a gain.

It is important to understand that depreciation is a paper loss, not an actual economic loss. You will ultimately pay taxes on the gain when the property is sold. However, because this tax event may occur many years in the future, you benefit from the time value of money during that entire period. Essentially, you are getting an interest-free loan from the government that you can invest and compound until the property is eventually sold.

Appreciation of the Underlying Asset

Second, as an owner, you benefit from any appreciation in the underlying real estate asset. The value of real estate typically increases over time. It is certainly possible for values to decrease over a short time horizon, as we have seen recently with office and multifamily properties in certain markets. However, over the span of a decade or more, well-managed properties in desirable locations have historically appreciated. On average, real estate values at least keep pace with the rate of inflation, although there are peaks and valleys along the way.

While the value of a property rarely changes dramatically in short periods, these fluctuations can provide opportunities if the sponsor takes advantage of them. In particular, as long as the properties generate sufficient cash flow to cover all associated costs, there is no compelling reason to sell into a down market. As an owner, you benefit from the eventual appreciation of the property to the extent outlined in your agreement with the sponsor, as documented in the Private Placement Memorandum (PPM).

This ownership-based appreciation differs fundamentally from appreciation in the stock market, which often has more to do with market sentiment and trading multiples than changes in the underlying valuation of the company. Real estate appreciation is typically tied to tangible factors: location desirability, rental income growth, property improvements, and local economic development.

Regular Cash Flow

Third, once stabilized, syndications typically provide regular cash flow distributions to their investors. This cash flow, with taxes offset by depreciation, represents after-tax income that can be reinvested or used to support your lifestyle. As a cash-flow focused investor, I appreciate receiving cash distributions while still holding the underlying asset and benefiting from its potential appreciation.

This can be similar to holding a dividend-generating stock or bond, but with after-tax, cash-on-cash returns of 7 percent or more, the returns can significantly outpace the after-tax distributions from most other investments. For high-income earners in elevated tax brackets, this tax-advantaged cash flow provides a distinct advantage over fully taxable investment income.

Syndications Use Leverage to Accelerate Benefits

One of the well-known, and often discussed, benefits of real estate investing is the ability to obtain loans on generally favorable terms as part of the property purchase. By obtaining loans where the interest rate is below the expected return on the property, real estate investors can generate dramatically increased returns on their invested capital.

For example, consider a property financed with 70 percent debt at 7% interest. If the property generates total returns (including both cash flow and appreciation) of 12% per year, you are earning a positive spread of 5% on the bank’s money. This spread—the difference between what the property earns and what you pay in interest—flows entirely to you as the equity owner.

To illustrate this concept differently, consider your personal home or a single family rental. You may have only put 20% down on your home purchase, but you receive 100% of the increase in value when you sell. The bank receives only its interest as a return. The profit earned on the bank’s money is given to the owners upon the sale or refinance of the property.

This amplification of returns through debt is one of the most powerful wealth-building tools available to real estate investors, and syndications allow you to access this leverage without the hassle of personally qualifying for and managing commercial loans.

Leveraging Expertise and Relationships

Syndications also provide a second, equally important form of leverage: the ability to leverage other people’s time, experience, and relationships. When you become an LP in a syndication, the sponsor team handles all the demanding work. They manage the property, address problems as they arise, ensure that documents are created in a timely manner, perform bookkeeping, manage relationships with lenders and contractors, and communicate regularly with investors.

This operational leverage makes investing in syndication deals dramatically more scalable than investing in real estate directly. You do not need to create the systems, build the teams, or develop the infrastructure required for successful real estate investing yourself. Instead, you benefit from the work that the sponsor has already done, often over many years of building their business.

For high-income professionals with demanding careers, this time leverage is often even more valuable than the financial leverage. Your time is your most precious resource, and syndications allow you to build real estate wealth without sacrificing the career that provides your primary income.

The Double-Edged Nature of Leverage

Of course, leverage can cut both ways. In addition to accelerating the benefits of a successful deal, it will also magnify any negatives. If you have only 20 percent equity in a deal and the property’s value declines by 10 percent, you have lost 50 percent of your invested capital. A 20 percent decline in value would completely wipe out your investment.

This magnification of outcomes—both positive and negative—is why performing thorough due diligence on both the sponsor team and the deal itself is absolutely essential. You need to understand not just the potential upside, but also the downside scenarios and how the deal would perform under stress. The quality of the sponsor team becomes paramount because they will be making the decisions that determine whether leverage works in your favor or against it.

Syndications Are Not For Everyone

Despite my enthusiasm for syndications, they are not appropriate for every investor or every situation. There are three potential, related, drawbacks that must be understood before committing capital to these investments.

Illiquidity

First, the investment is not liquid. Unlike publicly traded stocks, there is no simple way to sell your investment in a syndication deal. Once you have committed your capital, you are invested until the deal concludes completely. There is no secondary market for LP interests, and the legal agreements typically restrict transfers even if you could find a willing buyer.

As a result, you must ensure that you do not invest money that you will need in the short or medium term into a syndication. I recommend being particularly conservative with your time horizons here. While the deal may be targeting an exit in three years, it could take five or more years to actually conclude if there are challenges in the market or with the property. The sponsor has ultimate decision-making authority regarding when to sell the property.

To mitigate this risk, I recommend maintaining a diversified portfolio with adequate liquid reserves and ensuring that no more than a prudent percentage of your net worth is tied up in illiquid investments. Syndications should be a component of your portfolio, not the entirety of it.

Long Investment Horizons

Second, and closely related to liquidity concerns, these investments tend to be long term by design. It is extremely unusual for a syndication to be completed in under three years. Five to seven years is more typical, and ten or more years is not uncommon.

A great deal can change over a five-year period, and there is inherent risk in not being able to adjust your investment portfolio in response to those changes. As an obvious example, five years ago, artificial intelligence was not on most investors’ radar. Today, it is reshaping entire industries, impacting business valuations, and influencing how we view economic trends. Less obviously, five years spans more than an entire election cycle in the United States, meaning there can be significant policy changes affecting tax law, interest rates, and real estate markets during your investment period.

However, this extended time horizon also provides benefits. It forces you to stay invested and avoid panic selling during temporary market downturns. It allows you to capture long-term market trends rather than getting whipsawed by short-term volatility. The key is to enter these investments with eyes wide open, understanding that your capital will be committed for the duration.

Lack of Control

Finally, you do not have control over the deal. You have no meaningful influence over the decisions made during the investment period. You do not decide what improvements are made to the property, who the third-party operators are, what the refinancing terms should be, or when the property is sold. You have delegated the right to make those decisions to the sponsor.

The sponsor operates in a fiduciary capacity and is obligated to act in the best interests of the partnership. However, they also face competing considerations: maintaining relationships with lenders, managing multiple properties simultaneously, responding to market conditions, and balancing the interests of different investor groups. While sponsors generally make thoughtful decisions, they will not always make the same decisions you would have made if you had full information and control.

This loss of control is the price you pay for the time leverage that syndications provide. The mitigation strategy is straightforward but crucial: invest only with sponsors whose judgment you trust, whose track record demonstrates competence, and whose interests are well-aligned with yours through meaningful personal capital investment in the deal.

Making Syndications Work for You

Each of the drawbacks I have outlined has a corresponding advantage. The illiquidity that concerns some investors is what forces you to stay invested and avoid emotional decision-making during market turbulence. The long time horizon that feels uncertain is what allows you to capture the full benefit of real estate appreciation and compounding returns. The lack of control that requires trust in your sponsor is what provides the time leverage that makes these investments feasible for busy professionals.

Similarly, the benefits of ownership and leverage carry inherent risks that must be managed through careful sponsor selection and prudent portfolio construction.

Personally, I find the advantages of syndication investing extremely compelling for my situation and goals. I mitigate most of the drawbacks through extensive evaluation of sponsors and deals before committing capital [1, 2]. I also maintain diversified investments outside of syndications that provide additional liquidity and balance out my overall portfolio.

The question is not whether syndications are objectively good or bad investments. The question is whether they align with your financial goals, risk tolerance, and life circumstances [3]. For high-income professionals seeking to build passive income streams without creating a second career in real estate, syndications can be a powerful tool—but only when approached with clear understanding of both their potential and their limitations.

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This article is my opinion only, it is not legal, tax, or financial advice. Always do your own research and due diligence. Always consult your lawyer for legal advice, CPA for tax advice, and financial advisor for financial advice.