#251 Hidden Risks in Real Estate Syndications (and How to Avoid Them) ft. Peter Kim, MD

What is a Real Estate Syndication?

Peter Kim starts by explaining real estate syndications in a simple way. A syndication is when a group of investors pool their money to buy a property, like an apartment building or a warehouse. A sponsor (also called an operator or general partner) manages the deal, making all the big decisions.

Syndications are often promoted as an easy way to invest in real estate without doing much work. While they can be great, they also come with risks that many people don’t think about. Peter has made mistakes in syndications before, and he wants to help others avoid the same problems.

One big issue is that people often assume syndications are low-risk. But just like any investment, they have ups and downs. The key is knowing what to look for before putting your money in.

Peter emphasizes that doing research is important. Just because a deal looks good on paper doesn’t mean it’s a smart investment. Investors need to dig deeper before jumping in.

“Even though they’re marketed as simple and sometimes low risk, there are definitely some hidden risks that could impact your return and could lead to losses if you’re not careful.” — Peter Kim, MD

The Most Important Factor – The Sponsor

The sponsor, or the person running the deal, is the most important part of any syndication. Peter warns that not all sponsors are equally skilled, even if they have a good track record. Some sponsors just got lucky in a good market, while others have proven they can handle tough times.

It’s easy to assume that a big-name sponsor with billions in assets is a safe choice. But Peter says that’s not always true. Investors should ask key questions: Have they handled difficult situations well? How do they communicate with investors? Are they honest about risks?

Peter admits that in the past, he skipped some of this research and trusted a sponsor just because they looked successful. Now, he takes his time to fully vet them. He advises others to do the same and not feel rushed into a deal.

The bottom line: If a sponsor doesn’t inspire confidence, it’s better to walk away. There are always other opportunities.

“Even if they all seem to have a great track record, they’re not all the same. Some may have benefited from just being in a good market. Some have shown how great they are over the test of time.” — Peter Kim, MD

Market Risk – Location Matters

A great property in a bad location can still be a bad investment. Peter talks about how market conditions play a huge role in a syndication’s success. If the local economy is struggling, the investment could lose money.

Some cities rely too much on one industry. For example, Detroit has been hit hard when the auto industry struggled. Investors should check if a market has steady job growth, a strong economy, and a growing population.

Many people make the mistake of trusting the sponsor’s research without doing their own. Peter urges investors to dig deeper, use online tools, and ask others in the investing community.

The goal is to invest in places where the “wind is at your back” – meaning the market is naturally growing and making it easier to succeed.

“You want to research the market fundamentals. You want to look for areas with strong job growth, a diversified economy, and an increasing population.” — Peter Kim, MD

Deal Terms – Read the Fine Print

Every syndication has rules about how money is handled, and Peter warns that some deals favor the sponsor more than the investors. If the terms aren’t fair, sponsors can make money even if investors lose.

Before investing, people should carefully read the Private Placement Memorandum (PPM), which explains the deal’s terms. They should look at how profits are split and how the sponsor gets paid. A good deal ensures that the sponsor only makes big money if investors also make money.

One tricky part is the “waterfall” structure, which decides how profits are shared. Peter says it takes time to understand this, but the more deals investors review, the easier it gets.

His advice: Compare multiple deals and talk to experienced investors. That way, it becomes clear what’s fair and what isn’t.

“You want to review this thing called the PPM or the private placement memorandum. You want to understand the fees, the structure, how they get paid, how the profits are split, and where the leverage is” — Peter Kim, MD

Timing, Liquidity, and Exit Plans

Two risks that many investors overlook are liquidity and exit strategy. Liquidity means how easy it is to get your money back. In syndications, money is locked in for years—sometimes 5, 7, or even 10 years.

Unlike stocks, investors can’t sell their shares whenever they want. That’s why Peter says to never invest money that might be needed soon.

The exit strategy is just as important. A deal needs a clear plan for how and when the property will be sold. If a sponsor doesn’t have a solid exit plan, investors might wait much longer than expected to get their returns.

Peter advises investors to ask sponsors about their backup plans. If they can’t explain how they’ll handle changes in the market, that’s a red flag.

“A syndication or a company or a business that you invest in that doesn’t have a clear or realistic exit plan can really delay your returns or result in lower profits.” — Peter Kim, MD

Final Thoughts: Be Smart and Take Your Time

Syndications can be a great way to build wealth, but they are not risk-free. Peter stresses that investors should do their homework before investing. The sponsor, the market, the deal structure, and the exit plan all matter.

Many people make mistakes because they rush into deals or trust sponsors too quickly. Peter advises listeners to slow down, ask tough questions, and never feel pressured to invest.

The good news is that investors don’t have to do this alone. There are communities and resources, like Passive Real Estate Academy, that can help them learn how to properly evaluate deals.

Peter’s final message: Take your time, do the research, and invest with confidence.