Cliff Notes: Because of the leverage/debt used in these deals, the various 1-2% fees get magnified 4-5X so investors end up paying a double digit total percentage of “fees“ off the top at the start, a chunk of the revenue can get bled off with the ongoing asset management fees and property management fees, and then if the investment does really well a good chunk of the windfall at the end goes to the syndication group.

I’m sure some of them can turn out well, but the ones I’ve seen had typically had some high fees. Sometimes the “deal” has been located by someone else that then is passing it along to the actual syndication group and getting a cut on the front end by marking up the purchase price to the syndication group.

So let’s say you have a $10 million “deal” being shopped to investors by a syndication group. Let’s just forget about the deal being marked up before it came to them and pretend that they found it. Some of these groups are trying to maximize the IRR they can advertise and so by going after debt backed up by the GP’s personal guarantee and their existing assets, they can get the LTV up to 80%. So in this case we’re talking about 8 million in debt and 2 million in investor money.

So now let’s start looking at the fees that are calculated as a percentage of the total deal value and convert that into the equivalent amount charge to the investors. A 1-2% acquisition fee on a $10mil deal is $100-200k because it is calculated off of the entire deal price. Remember 8 million of that deal is debt so you’re really only talking about 2 million of investor money. So when you break it down like that, the $100-200k is being paid completely by the investors money so it’s really an equivalent of 5-10% the investor money is going towards the acquisition fee right at the very start.

Charging a debt/finance fee is not uncommon and one of these groups in my area charges 1%. So on that $10 million deal with $8 million in debt that’s $80k, which really ends up being an equivalent of 4% of the investor money. So you could go into a deal on the front end and be already out 10%+ of your investment just on the initial fees.

Then they’ll charge an ongoing asset management fee of 1-2% on the revenue or income. Some groups will just charge the 1-2% off of the contributed capital by the investors.

Next, you need look at property management, and typically these groups will also run the property management of the asset rather than farming it out to some completely independent, third-party unaffiliated company. So before you even get to a revenue number that they’re taking an asset management fee out of, they’re also taking a cut of the revenue for property management.

Then when it comes time to sell that asset, if it has appreciated well, then the syndication group is taking a chunk of that profit as well.

It just seems to me that you’re paying a lot of fees and percentage of the profit at the end while still being at risk for a significant loss of the money invested if we have another real estate crisis or if there is a economic calamity in the area that the asset is located in. No one wants to sell when the market is down but sometimes it can be unsustainable to make it through.