When Multifamily Syndication Returns Fail: What We Can Learn

Multifamily syndication returns come from three places: a preferred return paid from rental income, a share of the profits when the property sells, and tax benefits like depreciation. Right now, many apartment deals bought in 2021 aren’t hitting their projected returns, and some are losing money. This article walks through how those returns are supposed to work, why so many deals are struggling, and how you can stress test any deal before you invest.

There’s good news buried in all of this, because investors who learn these lessons now will be much better at spotting the next great deal (and avoiding the next bad one).

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I’ve Lost Money in Multifamily Too

I started investing in multifamily syndications back in 2018, first as a passive investor and later as a general partner. My first deal was an apartment syndication with an 8% preferred return, and when that first $50,000 started bringing in $333 each month, it changed how I thought about money.

But not every deal went that way. Over the next few years, I lost a lot of money across several multifamily deals, mostly due to floating-rate debt coupled with several interest rate hikes. That hurt, and if you’ve lost money in one of these deals, I want you to know I understand exactly how that feels.

Those losses are a big part of why my business partner and I built our portfolio with a totally different assets instead. We bought five mobile home parks between the end of 2022 and 2024, when interest rates were around 8% to 8.5%, and those parks are still cash-flowing and still paying our investors today.

How Do Multifamily Syndication Returns Work?

In a multifamily syndication, a group of investors pools money through a limited liability company or limited partnership to buy an apartment complex, and a sponsor team runs the property. Passive investors typically earn returns through monthly or quarterly distributions, a share of the profits at sale, and tax benefits.

I want you to think about it like owning a piece of a big rental property without ever getting a call about a broken toilet. You bring the capital, the syndicator handles the active management, and everyone agrees up front on how the money gets split. (If you’re brand new to this, my real estate syndication guide covers the basics.)

What Is a Preferred Return?

A preferred return is the first slice of profits paid to passive investors before the sponsor earns their share. Many deals offer a pref somewhere in the 6% to 8% range, so on a $100,000 initial investment, an 8% pref would mean $8,000 a year if the property produces enough rental income to pay it.

That last part is important. A preferred return is a priority, not a promise, and if the property can’t cover it, the payments can stop (which is exactly what’s happening in a lot of 2021 deals right now).

How Are Profits Split When the Property Sells?

After the pref is paid, the remaining profits are split between investors and the sponsor. Some deals use a straight split, like 70/30, and others use a waterfall where the sponsor’s share grows once investors reach certain return levels.

When the property sells, you receive your share of the gain, which is usually taxed as capital gains rather than ordinary income. The sale is often where the biggest part of the return shows up, which is why the timing of cash flows matters so much.

What Tax Benefits Come With Multifamily Investments?

One of the biggest reasons high net worth individuals like doctors invest in real estate is depreciation. Depreciation deductions can offset much of the income you receive, and they show up on the K-1 you get each year (I explain this in my article on how a K-1 loss affects your taxes).

For someone in a high tax bracket, after tax returns can matter more than the headline number.

How Do You Measure Returns?

Cash on Cash Return

Cash on cash return is the cash you receive in a year divided by what you invested. If you invested $100,000 and received $7,000 in distributions, your cash on cash return is 7%.

Internal Rate of Return

Internal rate of return, or IRR, measures your total return over the life of the deal and accounts for when you received the money. A dollar today is worth more than a dollar five years from now, so IRR rewards deals that pay you sooner.

Equity Multiple

The equity multiple tells you how many times your money came back. A 2.0x equity multiple means your $100,000 turned into $200,000 in total cash distributions over the hold.

Every one of these numbers is a projection until the deal is done. And that’s the lesson a lot of investors are learning the hard way right now.

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Why Are So Many Multifamily Deals Struggling Right Now?

Most of today’s trouble comes from deals bought in 2021, when property values were at record highs and borrowing costs were at record lows. Many of those deals used floating rate debt, and when rates climbed, the mortgage payments grew much faster than the rents.

A recent Wall Street Journal Heard on the Street column showed just how far some of these deals have fallen. It reported that one pool of apartment loans issued in 2021 is already 53% delinquent, and that distress in this corner of commercial real estate lending jumped from 19% in July to 28% in August, based on CRED iQ data.

What the WSJ Reported	Figure
Distress rate in commercial real estate CLOs, August	28% (up from 19% in July)
Outstanding balance delinquent in one 2021 loan pool	53%
Actual vs. projected average rent in one Georgia and Texas portfolio	$1,423 vs. $1,953 per unit
Share of the mortgage payment that portfolio’s income covers	57%
Multifamily deals that were distressed sales, second quarter	4.7% (up from 1.5% a year earlier)

The Floating Rate Debt Problem

With floating rate debt, the interest rate moves with the market, so the payment goes up when rates go up. Imagine your house payment jumping from $1,500 to $8,000 overnight because of things outside your control, like interest rates, taxes, and insurance, while your paycheck stayed exactly the same.

That’s what happened to a lot of apartment owners. The rent checks didn’t change much, but the cost of the debt did.

Rent Growth That Never Showed Up

The typical 2021 business plan was to renovate the units, raise the rents, and sell the building for a profit. But in many Sunbelt cities, new apartment complexes flooded the market, and landlords ended up competing for tenants instead of raising rents.

In one Texas example from the WSJ, a building was only 65% occupied and its income covered just 15% of the mortgage payment. When the rent projections miss that badly, there’s simply no money left for investor distributions.

Loans Coming Due

Many of these loans started with a three year term plus two one year extensions, which means loans made in 2021 are reaching their final deadlines now. Owners have to refinance at today’s higher rates, sell at a loss, or hand the keys back to the lender.

And the Fed just raised rates again this month for the first time in three years, which puts even more pressure on those borrowers.

Why Didn’t a Great Track Record Protect Investors?

Most due diligence checklists tell you to check the sponsor’s track record, look at past performance, and talk to other investors. But many of the sponsors struggling today had great track records, because those records were built during years when rates kept falling.

Then the Fed raised rates 11 times between March 2022 and July 2023, taking the federal funds rate from near zero to about 5.25% to 5.5%. That’s the fastest run of rate increases in roughly 40 years, and almost nobody’s business plan was built to handle it.

So if you lost money in one of these deals, it doesn’t mean you were careless. It means the checklist was missing something, and the fix is to keep your list and add a stress test on the debt.

Why Is the Multifamily Shakeout Good News for Investors?

The WSJ framed the distress as an opportunity because buyers can finally pick up properties at better prices after years of lenders extending loans instead of foreclosing. For passive investors, the good news goes deeper than cheaper buildings.

Expectations are resetting to realistic levels, conservative underwriting is coming back, and investors are asking better questions about the debt, the fees, and the business plan. The sponsors who make it through this period will be sharper too, and you’ll be much better prepared to judge any investment opportunity that comes your way, whatever the asset class.

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How Can You Stress Test a Deal Before You Invest?

Let’s say someone had offered you a 2021 apartment deal with a 3.5% interest rate. These questions would have raised red flags then, and they work for nearly any real estate investment you look at today.

Is the Debt Fixed or Floating?

Fixed rate debt keeps your payment the same, while floating rate debt changes with the market. If the debt is floating, ask whether there’s a rate cap, when it expires, and what it would cost to replace.

Does the Deal Still Cash Flow if Rates Rise?

Ask the sponsor to show you the numbers with rates 2 to 3 points higher than today. The key measure is the debt service coverage ratio, which is the property’s net operating income divided by its loan payments.

Here’s a simple hypothetical. Let’s say a property earns $1.5 million a year after expenses and has a $30 million interest only loan. At 3.5%, the interest is $1.05 million, so the property covers its payment about 1.4 times. At 7.5%, the interest jumps to $2.25 million, and now the property covers only two thirds of its payment. Same building, same tenants, and a completely different outcome.

When Does the Loan Come Due?

Compare the loan maturity to the planned hold period. If the loan comes due before the sponsor plans to sell, you may be forced to refinance at a bad time.

What Occupancy Does the Deal Need to Break Even?

Breakeven occupancy tells you how much cushion the deal has before it starts losing money. The closer current occupancy is to breakeven, the less room there is for things to go wrong.

Are the Rent Growth Assumptions Realistic?

Compare the projected rent increases with what the local market has actually done, and watch market trends and economic indicators like new construction and job growth. If the returns only work when rents rise faster than they ever have, that’s a warning sign.

Does the Business Plan Depend on a Big Renovation?

Renovations take capital expenditure, time, and tenants willing to pay more. As one industry expert told the WSJ, upgrading workforce apartments doesn’t always produce higher rents.

What Are the Fees?

Acquisition fees and asset management fees can pay the sponsor even when investors aren’t getting distributions. It’s also worth asking how much of the sponsor team’s own money is in the deal, and having a securities attorney or your financial advisor review the offering documents against your risk tolerance and investment goals.

Stress Test Question	Why It Matters	Red Flag
Is the debt fixed or floating?	Floating payments rise with rates	Floating debt with no rate cap, or a cap that expires soon
Does it cash flow if rates rise 2 to 3 points?	Shows whether distributions can survive	Debt coverage falls below 1.0 at higher rates
When does the loan come due?	You may have to refinance at a bad time	Loan matures before the planned sale
What’s the breakeven occupancy?	Shows the cushion before losses	Very little room between breakeven and current occupancy
Are rent projections realistic?	Projections drive the returns	Rents projected to rise faster than the local market has
Does the plan need a big renovation?	Renovations can stall or cost more	Returns only work if every unit gets upgraded
What are the fees?	Fees can pay the sponsor regardless of results	Large fees with little sponsor money in the deal

If you’d like more lessons like these from someone who’s sat on both sides of the table, join the Passive Investors Circle, where I share what I’m learning as a passive investor and an operator.

How Did Mobile Home Parks Hold Up by Comparison?

In our experience, mobile home parks have held up well through this rate cycle. The biggest reason is that we bought our five most recent parks when rates were already around 8% to 8.5%, so the deals had to work at high rates from day one, and there was no rate shock waiting down the road.

The structure of the asset helps too. In most parks, residents own their homes and rent the land underneath, and because moving a home is expensive, people tend to stay for years. (I go deeper on how these deals work in my mobile home park syndication guide.)

Factor	Multifamily	Mobile Home Parks
Who owns the home	Owner owns every unit	Residents usually own their homes; the owner owns the land
Tenant turnover	Higher, since moving is easy	Lower, since moving a home is expensive
Maintenance	Roofs, appliances, HVAC, and interiors	Mostly roads, water, sewer, and common areas
New supply	New complexes keep getting built	New parks are rarely approved because of zoning
Common business plan	Renovate units and raise rents	Bring lot rents toward market and improve management

That doesn’t make mobile home parks risk-free, and they still face interest rates, local regulations, and management challenges. The real lesson is that any asset class looks better when the deal is underwritten for today’s rates instead of hoping for tomorrow’s.

Why Does Having a Strong Why Matter?

When I was around 40, I sprained my wrist on a ski trip, and it was my wake up call. I realized I only had one source of income, and if I couldn’t treat patients, I couldn’t provide for my family.

That sent me down the rabbit hole of studying how wealthy people think, starting with Robert Kiyosaki. I learned that I’d been taught about money the wrong way, and that wealthy people build multiple income streams, very often through real estate.

That’s what kept me going when my multifamily deals started going bad. Without it, I would have walked away from real estate for good, and I think many people who lost money in these 2021 deals will never invest in real estate again. I don’t blame them one bit. But if your why is strong enough, a loss becomes tuition instead of the end of the road.

The Bottom Line

Multifamily syndication returns depend on the preferred return, the profits at sale, and the tax benefits, but every one of those is only as strong as the debt and the assumptions underneath it.

A lot of 2021 deals are struggling because floating rate debt collided with the fastest rate increases in 40 years. If you lost money in one of them, you’re not alone, and it doesn’t mean you did anything foolish.

Keep your due diligence checklist, add the debt stress test, and stay connected to your why. The investors who learn from this period will be the ones best positioned for the opportunities that come next.

This article is for educational purposes only and is not financial, tax, or legal advice. Past performance doesn’t guarantee future results, and all investments carry risk, including the possible loss of principal. Always consult your own financial advisor, CPA, or securities attorney before making any investment decisions.

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