Investing in real estate syndications can be an excellent way for investors to earn passive income while benefiting from professionally managed deals. However, understanding the financial structure of these investments is crucial to making informed decisions. At RealWealth Developments, we prioritize transparency and investor-first structures that help mitigate risk while maximizing returns.
In this article, we’ll cover key concepts such as preferred returns, waterfall structures, and how a well-designed return structure benefits investors.
Quick Answer: Understanding Preferred Returns in Real Estate Syndications
Preferred returns in real estate syndications are a percentage of profits that passive investors receive before sponsors earn any share of the returns. Think of it as investor-first protection: if a deal offers an 8% preferred return, you get paid that 8% on your invested capital before the sponsor takes a cut. This structure aligns everyone’s interests; sponsors profit only when investors profit first.
How Waterfall Structures in Syndications Work
A waterfall structure determines the order in which profits flow to investors and sponsors throughout the investment lifecycle:
- Return of capital: Investors get their initial investment back first
- Preferred return distribution: Investors receive their agreed-upon percentage (typically 6-12%)
- Profit split: Remaining profits are divided between investors and sponsors based on the deal structure
Why This Matters for Your Investment
Many syndications advertise attractive profit splits, such as 70/30 or 80/20, but these ratios often shift at specific return thresholds. For example, a deal might offer 70/30 until you hit an 8% return, then shift to 50/50, and eventually flip to 30/70 in the sponsor’s favor as returns increase. This means your share of profits can shrink significantly when the property is sold or refinanced.
At RealWealth Developments, we keep syndication profit distribution transparent and consistent, no changing splits or hidden hurdles. Our waterfall structures maintain the same profit percentage throughout the entire investment, so you know exactly what you’re getting from day one through exit. A higher preferred return (e.g., 12%) also provides downside protection, ensuring you receive substantial returns before sponsors participate in profit sharing.
View our current syndication offerings or learn more about real estate syndications. Want to understand more? Join RealWealth for free to access complete deal documentation and speak with our investment team.
What Is a Preferred Return?
A preferred return, often referred to as a “pref,” is a set percentage of returns that investors receive before the sponsor or general partner (GP) earns a share of the profits. It ensures that passive investors receive a minimum return on their invested capital before any profit-sharing occurs.
For example, if a syndication deal offers an 12% preferred return, investors will receive distributions up to that 12% before the sponsor earns a share of the profits. This structure aligns the sponsor’s interests with those of the investors, ensuring that the deal generates sufficient returns before the sponsor benefits.
The Benefits of a Higher Preferred Return
A higher preferred return, such as 12%, offers significant advantages to investors. It not only enhances potential earnings but also serves as a risk mitigation tool by ensuring that investors receive a substantial return before sponsors participate in profit sharing.
By structuring our deals with a higher preferred return, RealWealth Developments ensures that investors benefit first, reducing downside risk while maintaining upside potential. Additionally, this structure incentivizes sponsors to maximize performance, as they only share in profits after investors have received their capital and preferred return.
What Is a Waterfall Structure?
A waterfall structure outlines how profits from a real estate syndication are distributed between investors and the sponsor. It typically follows a tiered approach, where investors receive a specific return first, and then any remaining profits are split based on a predetermined deal structure spelled out in the Private Placement Memorandum (PPM).
At RealWealth Developments, our waterfall structure follows this order on many of our deals:
- Return of Adjusted Capital: Investors receive their initial adjusted capital back until it reaches zero.
- Preferred Return Distribution: Investors receive their estimated preferred return before any profits are split.
- Profit Sharing: Once the investor’s capital and preferred return have been distributed, remaining profits are shared between investors and the sponsor.
This structure ensures that investors are prioritized, reducing their risk while maintaining strong returns.
How Waterfall Structures Can Be Misleading
One of the most common misconceptions investors face when evaluating syndication deals is the way profit splits are presented in waterfall structures. Some deals may advertise an attractive split, such as an 80/20 split in favor of investors, but fail to disclose that this ratio only applies up to a certain return threshold. All waterfall structures have certain hurdles in place, so when that hurdle is reached, the split changes in favor of the sponsor.
For example, a deal might promise a 70/30 split up to a 8% return, but once that hurdle is reached, the split may shift to a 50/50 structure, and then, when the last hurdle is reached, it shifts to a less favorable 30/70 split. This means that while investors may see strong returns early on, their share of profits diminishes significantly when the property is sold or refinanced.
At RealWealth Developments, we ensure transparency in our profit distribution structure, so investors fully understand how returns are allocated over the life of the investment. We do not have a waterfall structure that changes the percentage of the profit splits.
To Conclude
Understanding preferred returns and waterfall structures is crucial for any investor considering real estate syndications. A well-structured investment ensures that investors are rewarded first and minimizes unnecessary risk. At RealWealth Developments, we take pride in offering investor-friendly structures that provide clarity, security, and strong return potential.
If you’re interested in learning more about our current syndication opportunities, view our latest deals (Current Offerings).
Frequently Asked Questions
A real estate syndication is a partnership in which multiple investors pool their capital together to purchase a property or project that would be too expensive for them to buy individually. With this investing strategy, you are a passive investor: you contribute funds and receive a share of the returns, while the sponsor (such as RealWealth Developments) handles all operations, including acquisition, management, and eventual sale. Depending on the deal type, investors may receive distributions from cash flow, a lump-sum payment upon sale, or a combination of both. A real estate syndication strategy allows you to invest in institutional-quality real estate without active management responsibilities while benefiting from tax advantages and appreciation potential. Get the full breakdown of how syndications work→
Syndications are typically illiquid investments with a 3–7-year holding period. Some may be shorter or longer depending on the project.
Most syndications require a minimum investment of between $50,000 and $250,000. The amount depends on the sponsor and the size of the deal.
We put together a free webinar that walks you through the whole thing. You’ll see examples of real syndications, learn what makes a good sponsor versus a sketchy one, and understand how the money flows. Watch our free real estate syndication webinar→
For 506(c) offerings, which RealWealth Developments specializes in, you need to be an accredited investor. For a 506(b) deal, you do not have to be an accredited investor. According to the SEC, an accredited investor must have at least $200K in annual income (or $300K if married) or a net worth of at least $1 million, excluding your primary residence. Why? They’re trying to protect people from jumping into investments they don’t understand. Learn exactly what it takes to qualify as an accredited investor→
Passive investors typically receive cash-flow distributions from rental income or property sales in development projects (monthly, quarterly, or annually) and a share of profits when the property is sold or refinanced.
A Private Placement Memorandum (PPM) is a comprehensive legal document that outlines the details of a real estate syndication investment. This includes the business plan, financial projections, fee structure, distribution waterfall, and potential risks. The PPM is required by securities law and must be reviewed before investing, as it contains critical information about how your capital will be used, when you can expect returns, and what risks to consider. While it may seem lengthy and technical, reading the PPM carefully ensures you fully understand what you’re investing in and helps you make an informed decision. Here’s how to read and understand a PPM→
Your preferred return, which varies by deal structure, is typically between 6% and 12% (and has been higher on some RealWealth Development Deals). It is the amount you receive before the sponsor receives any proceeds beyond their fees. A waterfall structure determines how profits are split between the sponsor and investors throughout the life of the deal. Many real estate syndications use tiered waterfalls, where the split might start at 70/30 (investor/sponsor), but once the sponsor hits a particular IRR hurdle, it shifts to 50/50, meaning sponsors take a larger share of profits as performance improves. At RealWealth Developments, we keep the profit split consistent throughout the entire investment without any hurdles, so investors maintain their full percentage of returns from day one through exit, which maximizes your share of the upside. Learn how preferred returns and waterfalls protect your investment→
Underwriting is just fancy talk for “did they do the math right?” Looking at their assumptions is key to underwriting. For example, are they projecting rent increases of 10% a year in a market that’s only been increasing by 3%? That’s a red flag. Conservative sponsors might show you lower returns, but those numbers are way more likely to happen. Ask yourself: if rent growth slows or vacancies rise, does this deal still work? Get our complete guide to evaluating syndication underwriting→
Yes! In fact, storage syndications have become really popular because the business is simpler than apartment syndications: kitchens aren’t breaking, no midnight plumbing emergencies, no tenants trashing units. Someone stops paying? You cut the lock and auction off their stuff. The deals work like apartment syndications. You invest, they improve the facility, you get quarterly checks, and everyone cashes out when it sells. Here’s everything you need to know about self-storage syndications→
Good question, as people often mix these up. When you invest in a real estate syndication, you’re working directly with the company that found the property and will manage it. They’re all-in on that deal. Crowdfunding platforms are more like a middleman. Typically, different sponsors post their deals on a website. The platform takes a fee, but they are not typically involved in the management of the investment. Direct real estate syndications mean better access to the sponsor. Platforms typically offer more options to browse through, and you may not need to be an accredited investor to invest. See our detailed comparison of syndications vs crowdfunding→
REITs are like buying stock in a real estate company. You can buy and sell shares instantly, but you have no idea which specific buildings you own. Syndications are the opposite. You pick a specific property, project, or fund, you know exactly where your money’s going, but you’re typically locked in for 3-7 years. REITs are available to anyone. Most syndications require you to be an accredited investor, which means meeting certain income or net worth requirements.
Depends on what you’re looking for. Want apartments? Self-storage? A specific region or market? Something else? Some companies are great if you’re new and need lots of hand-holding. Others assume you know what you’re doing and just give you the numbers. Learn more about the major players in the real estate syndication space→
When evaluating real estate syndication sponsors, you’ll want to 1) review their past performance, but also 2) ensure you distinguish between deals where they were the lead sponsor and deals where they were a passive partner. At RealWealth Developments, we now serve as the sponsor for our current deals, giving us complete control over operations, underwriting, and asset management. This is a key difference from our earlier investments, where we participated as silent partners. Thirdly, you’ll want to evaluate the sponsor’s experience, deal structure (including investor protections), and alignment of interests with you as an investor.
Fees in real estate syndications vary significantly based on the deal type and structure. Standard fees may include acquisition, asset management, disposition, loan, and construction management or development fees. All these fees should be clearly laid out in the private placement memorandum. If you’re adding up all the fees and they’re eating half your returns, that’s a problem.
Start with the private placement memorandum (PPM), which is the primary document that covers the deal in full, including all risks. Then read the operating agreement, which outlines your rights as an investor and how decisions are made. You’ll also want to review and complete the subscription agreement before signing. That’s your legal commitment to invest, and you can’t just back out once you’ve signed. Request the property’s financial projections and the sponsor’s underwriting to see their assumptions. If you don’t understand something in any of these documents, ask questions or have a lawyer review them.
Common asset types include multifamily apartments, self-storage facilities, industrial warehouses, single-family residential portfolios, land development, and build-to-rent communities.
Your money is typically locked up for 3 to 7 years, so you can’t withdraw it if you need it. The property may not perform as projected. Construction could get delayed. The market could tank. The sponsor might not be as experienced as they claimed. Worst case? You could lose the invested capital. This is why doing your homework on the deal’s underwriting is so important.
No. While sponsors may project certain returns, there are no guarantees. Market conditions, property performance, and operator decisions can impact actual results.
You can with a self-directed IRA or solo 401(k), but not with your regular employer 401(k). You’ll need to work with a special custodian who handles alternative investments, and any money you make has to stay in your retirement account until you’re old enough to withdraw it. Not every syndication company accepts funds from retirement accounts, so ask about this upfront if it matters to you.
Investors receive a K-1 tax form, which reports their share of income, losses, and depreciation. Thanks to depreciation and cost segregation, many investors can show paper losses even while receiving cash flow, thereby reducing their taxable income.
If you want access to larger commercial real estate deals without being a landlord, and you’re comfortable tying up your capital for several years, real estate syndications can be a strong addition to your portfolio.
Join as a free member—takes less than five minutes and costs nothing. You’ll get access to our current deals, all the details on each project, and the actual offering documents so you can do your homework. You can schedule a free call with our investment team to ask questions without any sales pressure. We also offer extensive educational content on syndications, regular webinars that walk through how everything works, and real investors you can talk to about their experience.
