The Wealth Elevator Syndication eCourse

Numbers in the examples on this page are hypothetical and for illustration only. Return targets are not guarantees, and investors can lose money.

Should You Invest in Preferred Equity or “Rescue” Syndication Deals?

Recently, I spoke with a real estate syndication investor asking if they should invest in a preferred equity opportunity or jump into a “rescued” deal—basically an older real estate deal that ran into a difficult situation and is trying to recover. Let’s break this down so you can understand the real risks, without getting lost in the fancy marketing.

⚠️ What Happened from 2021–2023

1. Between 2021 and 2023, the commercial real estate market corrected hard, with values dropping 20–30% on average.
2. In hotter markets like Phoenix and Atlanta, the drop was even worse—some commercial property down 35–40% from peak pricing.

💡 What Operators Are Doing Now

To save these struggling deals, some operators are creating “rescue funds.”

1. These funds often raise new capital from retail investors like you.
2. They’ll call it “preferred equity” or “member loans,” but the goal is the same: bail out the original real estate deal and avoid foreclosure.
3. But these new capital layers have some cons such as additional risk and limited upside.

🔍 Why These Real Estate Syndication Deals Are Still Risky (Even with “Good Returns”)

Some of these investment opportunites offer a 12–14% preferred return, and that sounds decent. But given the risk, you should set expectations to receiving priority payment with 15–16% preferred return or more, plus points up front if you’re stepping in at this stage with your hard earned cash.

Why they offer lower returns? They’re marketing to retail investors who don’t know better. Sophisticated lenders (like us) wouldn’t touch these deals without high returns and strong terms.

📉 The Importance of the Original Exit Assumptions

Check what the operator assumed the exit cap rate would be when they bought the deal. This matters a lot. Also it would be important to check that the operator has experience and a good track record with success in other deals.

Quick Refresher:

1. Entry cap rate = How much the property was earning at the time of purchase.
2. Exit cap rate (reversion cap) = What they assumed it would sell for later.

Smart operators will increase the exit cap by at least 0.5% to be conservative. In a hot market, that might’ve been going from 3.5% → 4.0%.

But many operators were overly optimistic. Some assumed they’d sell at cap rates similar to or better than what they bought at, assuming the market would keep booming.

To learn this, review the previous Syndication LP eCourse lesson here.

📉 Where Cap Rates Are Today

Let’s say:

1. Class A asset in Dallas traded at 3.5% in 2022.
2. The operator assumed they’d exit at 4.25%—not crazy at the time.
3. But today? The Class A asset might be trading in the 5.5–6.5% range.

That means they’d need the market to get better by 1–2 full points just to break even. That could take 5–10 years, and it’s a big “if”.

So… even if the deal looks attractive on paper today, if it’s based on old pricing assumptions, it’s probably not going to perform well.

🎭 Watch Out for the Marketing Hype

Some funds say they’re “going after new distressed investment opportunities ” but read the fine print. In reality, they’re just raising enough capital and financing their old broken deals. You don’t want to contribute your dollars to that.

🛑 Bottom Line: Stay Out of 2021–2023 Vintage Deals

Most deals bought in those years were purchased at peak pricing. Unless there’s a lot of value added or a clear path to profit and cash flow, you’re taking on too much risk for too little reward.

💬 If you do consider one of these, make sure:

1. The property value is well above the loan.
2. You’re getting high enough returns (15–16%+ pref).
3. You’ve reviewed the original underwriting and exit assumptions.

Beware of 2021-2023 vintage deals in new investments out there!

🧱 Understanding the Capital Stack

Before investing in any deal, you must understand where your money sits in the capital stack:

1. Senior Loan – This is the bank loan, and it gets paid first.
2. Old Equity Investors – These are the original LPs in the deal.
3. New Investors – This is where your money would go as preferred equity or member loans.

Your risk: If the property is worth less than the loan, everyone under the loan loses money first.

❗ Example:

1. Let’s say a property was worth $100M at purchase, with a $75M loan.
2. Now it’s worth $ 70M.
3. If the bank forecloses, there’s nothing left for you as a preferred equity investor. You’re underwater.

🧠 Lesson: Before investing, always ask:

1. What is the property worth today?
2. What is the loan balance?
3. If the property is worth less than or close to the loan balance, stay away.