What Passive Investing Costs You: A Custom Capital Perspective on Syndications

An investor wires $100,000 into a syndication, signs the subscription agreement, and waits for the first quarterly update. Somewhere else, 99 other people did the same thing.

None of them will ever touch the property.

There’s a solid chance none of them will ever even see a property inspection report, much less call someone up on the phone to do repairs for them.

That’s the whole point.

Investors want an option that gives their portfolio exposure to direct property ownership (and the tax benefits associated with commercial real estate) without having to handle day-to-day responsibilities.

That’s the appeal of investing in a syndication, and Jason Milton, CEO of Custom Capital, thinks it’s not the only way that investors can get involved in real estate without getting their hands dirty.

A Case for Passive

The alternative to investing in a syndication used to look something like this:

You’d buy a 50-unit apartment building yourself. Along with that, you’ve also bought roughly 100 toilets, 50 refrigerators, a roof, a parking lot, and every air-conditioning unit in the complex. You’re responsible for every one of those repairs, on your own, whenever they happen.

Framed that way, handing the keys to a sponsor and collecting a check every quarter sounds great.

That’s why syndications were created in the first place. A sponsor raises the capital, buys the deal, and runs it, while investors collect a K-1 and, ideally, a distribution.

Milton doesn’t dispute that this appeals to busy people staring down 100 toilets they’ll never personally unclog.

But, he argues, there’s a misconception in the real estate world that’s come to be accepted as fact: If you want passive income, you have to accept that you’ll be handing over fees to a sponsor.

Passive Doesn’t Mean Risk-Free

“Passive” in a syndication doesn’t mean risk-free.

It means the investor has handed over control to someone else, a sponsor.

A sponsor with a strong track record can still misjudge a renovation timeline, over-leverage a refinance, or misread the market. When that happens, every investor in the deal absorbs it together. Sometimes, depending on how much individual equity the sponsor had in the deal themselves, the individual investors actually take a bigger hit than the operator.

Vetting a sponsor’s history helps, but it isn’t a guarantee against a future decision going wrong. Track records describe what already happened, not what a sponsor will do under a new set of pressures: a construction cost run-up due to an unexpected war in the Middle East, a pandemic, a lender deciding to shift terms mid-business plan, forcing an early refinance.

The syndication structure asks investors to trust an individual sponsor for years, based almost solely on their resume. Sometimes this works great, but sometimes it doesn’t…

What Happens When Syndications Go Wrong: 2021-2022

The 2021–2022 multifamily syndication vintage has been described as the worst retail real estate investor loss cycle since the 2008 CMBS crisis, and the pattern shows up across multiple operators, not one bad actor.

GVA Real Estate’s founder told investors that by late 2023, roughly 80% of the firm’s portfolio was under some level of distress. The properties hadn’t been mismanaged in any obvious sense, but many operators took on floating rate debt when interest rates were at 0%.

When rates went up much faster than almost everyone anticipated, those operators took a massive hit. Every investor in those deals absorbed the outcome together, whether or not they’d had any say in the financing decisions that caused it.

Rise48 Equity’s Preferred Equity Fund triggered a capital call in 2023 and 2024 that moved investors who couldn’t or wouldn’t contribute additional cash into a subordinate position in the capital stack behind those who did. They weren’t alone in doing this; in fact, it’s a fairly popular way to raise capital even today.

Fee terms can shift too, even after the wire clears. DLP Capital raised a management fee on its housing fund from 1.5% to 2%, a jump of roughly a third, after investors had already committed capital that was no longer easy to pull back.

None of this points to fraud. It points to something more ordinary: once the check is written, the investor’s only real lever is trust, and trust doesn’t always hold up against a hard market.

Milton’s read on this, from years of watching syndications from the outside, is blunt. Sponsors “often failed managing your property,” he said, “and you wouldn’t get the returns back.” Passive, in that structure, means the investor’s outcome depends entirely on someone else’s judgment calls, made without a seat at the table.

The Terms Are in the Lease, Not the Manager

Custom Capital still touts a “mostly” passive model. Direct ownership still comes with its own responsibilities, but when it comes to net lease investing – particularly absolute NNN leases where the tenant takes on insurance, maintenance, and taxes, the lease terms — not a manager’s ongoing judgment — allocate most operating responsibilities to the tenant.

“They pay for everything,” Milton said, describing the structure. “The taxes, the insurance, the roof, the toilets, the whatever.”

That distinction is incredibly important. In a syndication, the investor is betting on a person: does this sponsor manage well under pressure? In an absolute net lease held directly, the investor is relying on a signed contract that already specifies who pays for what, for the length of the term.

None of this means direct ownership removes risk from commercial real estate.

A tenant can still default, a market can still soften, and a lease still has to be underwritten correctly before it’s signed.

A syndication asks an investor to trust a sponsor’s ongoing judgment across the life of the deal. 100% ownership of a net-leased property asks an investor to evaluate the tenant.

Both require some level of trust, but Milton argues that the level of control offered by direct ownership makes net-lease investing the better option.

Both options can be seen as “mostly passive,” even if both options typically require some level of active involvement. Whether you’re deciding to invest more during a capital call or sending an email to a tenant to ask for a tax document, neither options are requiring you to roll up your sleeves and clean any toilets.

The question comes down to: Which can you trust? And Milton argues that answer is clear.

This article is for general informational and educational purposes only and should not be construed as tax, legal, investment, or financial advice. Custom Capital does not act as a fiduciary, broker-dealer, or investment adviser. Commercial real estate investments involve risk, including possible loss of principal, and any outcomes or figures mentioned are illustrative only and not guaranteed. Readers should consult their own financial, tax, and legal advisors before making any investment decision.

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