Free Guide to Fulfill Alignment of Interests in Real Estate Investing: Seize Returns Now with More Shared Goals

Why Alignment of Interests Matters in Real Estate Investing

Real estate investing presents a powerful opportunity to generate passive income and build long-term wealth. However, to maximize returns and minimize risks, investors must ensure that all stakeholders—investors, sponsors and property managers—are aligned.

To achieve alignment of interests in real estate investing, sponsors can invest meaningful capital alongside LPs, reduce or eliminate fees that create conflicts, and structure the waterfall and promote to align their incentives with the long-term goals of their investors.

Alignment of interests refers to structuring real estate investments so that everyone benefits from the same outcome. This reduces conflicts and incentivizes long-term success rather than short-term gains. In this guide, we’ll explore the key factors that determine alignment, how to assess investment structures, and what red flags to watch for.

Understanding Real Estate Investing and Alignment of Interests

The Basics of Real Estate Investing

Real estate investing involves buying, managing, and selling properties for profit. Investors can choose from different asset classes, including:

  • Residential (Single-family rentals, multifamily properties)
  • Commercial (Office buildings, retail spaces)
  • Industrial (Warehouses, logistics hubs)
  • Self-Storage and Raw Land

They can also invest in real estate through different methods, such as direct ownership, real estate investment trusts (REITs), real estate mutual funds, and crowdfunding platforms.

Each type of investment demands specific risk management strategies, and investors must ensure their interests align with the sponsor’s to achieve long-term success.

What is Alignment of Interests?

Alignment of interests means structuring deals so that investors, sponsors, and property managers share the same financial incentives. This means that everyone is working towards the same outcome and has a vested interest in the partnership’s success.

Proper alignment ensures that:

  • The structure incentivizes the sponsor to focus on long-term success—not just closing the deal.
  • Investors receive fair returns with risk-sharing mechanisms in place.
  • Fee structures and profit-sharing mechanisms are transparent and reasonable.

Real estate investors must recognize just how crucial alignment of interests is to long-term success. When everyone has the same goals, it will lead to better decision-making, improved communication, and a higher likelihood of success.

At Piping Rock, our focus on multifamily investing extends alignment beyond investors—we align with our residents by improving each asset through better living experiences, higher-quality apartments, and prompt maintenance.

Key Factors That Ensure Alignment of Interests

  1. Examining the Fee Structure

Real estate syndications often come with a wide range of fees—some justified, some less so.

If you have negotiating power, you might be able to reduce or eliminate them—but for most limited partners (LPs), the key is knowing how to shop around for better-aligned fee structures. Start by asking whether the fees seem reasonable given the sponsor’s track record and the projected returns.

Do the fees align the sponsor’s incentives with your long-term success? Or is the bulk of their profit coming from upfront fees that remove their skin from the game as soon as the deal closes?

Take, for example, a 3% acquisition fee on a $50 million property. The sponsor collects $1.5 million at closing—whether or not the investment performs. In some cases, a fee of that size might push a sponsor to move forward with the deal even if red flags (like physical issues or capex risks) emerge during due diligence.

Aligned Investment structures should minimize conflicts of interest by ensuring fees are reasonable and not front-loaded. Common fees to analyze are:

  • Acquisition Fees (Compensates the sponsor for sourcing the deal)
  • Debt & Equity Placement Fees (Charges for securing financing or investors)
  • Marketing Fees & Allowances (Costs tied to investor materials, pitch decks, or promotional activities)
  • Asset Management Fees (Ongoing operational fees for managing the property)
  • Expense Allowances & Allocations (General operating costs passed through to LPs, often loosely defined) 
  • Construction Management Fees (Fees for overseeing capital improvements)
  • Guarantee Fees (Compensation for taking on loan guarantees or financial liabilities)
  • Disposition Fees (Fees charged upon property sale)

Red Flag: When a sponsor earns most of their profit from upfront fees instead of performance, they lose the incentive to maximize long-term returns.

  1. Assessing the Sponsor’s Co-Investment

Sponsors demonstrate strong alignment of interests when they invest their own capital alongside Limited Partners (LPs).

  • Institutional investors often require a 10% co-investment, but this varies based on sponsor size.

  • When sponsors make a meaningful co-investment relative to their net worth, they show personal commitment to the deal’s success.

When you see a deal packed with fees and minimal sponsor co-investment, it likely signals that the sponsor profits more from closing the deal than from making it succeed. In those cases, the sponsor stands to win just by closing—regardless of how the investment performs over time.

Sponsors deserve fair compensation for their work, but they shouldn’t get paid upfront and disappear. Make sure their incentives align with yours—focused on creating long-term value, not just collecting fees at closing.

The key is to make sure your sponsor has skin in the game that is meaningful to them in the context of their balance sheet. Piping Rock will usually invest at least 10% of the equity in each property, but we have often invested much more.

Red Flag: If a sponsor contributes little to no equity, they may be more focused on deal volume than long-term performance.

  1. Understanding the Waterfall and Promote Structure

Investment waterfalls outline how profits are distributed between the General Partner (GP) and LPs.

The waterfall structure should de-risk the investment for the LPs by giving them a first priority claim on early cash flows that is legally senior to the GP. In addition, the sponsor profit (known as the promote) should not be an enormous sponsor windfall regardless of how the investment performs. On the other hand, 100% of the profits going to the LPs is also suboptimal because this is a sign that the GP has no long-term vested interest in the success of the asset.

All waterfalls should include a Preferred Return for LPs. This is part of the de-risking mechanism of the waterfall, and it helps align the sponsors interests with the LPs, because the sponsor needs to pay the full Preferred Return to investors before the sponsor can make any money. Preferred Returns often range from 6-10%, and the current “market” Preferred Return is 8%. After the Preferred Return has been met and all LP capital returned in full, any remaining profits are split between the LPs and the GPs.

One of the more common LP/GP splits is 70% of profits to the LPs, and the remaining 30% to the GP. This is referred to as a “70/30 split”. Sometimes, there are additional profit hurdles over which the split for the GP can increase from 70/30 to 60/40 and even 50/50.

In summary, a well-structured waterfall should:

  • Prioritize investor returns through a Preferred Return (often 6-10%) before the sponsor profits.
  • Provide a fair split of profits (e.g., 70% LP / 30% GP) to incentivize sponsor performance.
  • Avoid excessive sponsor promotes that grant the GP large payouts regardless of deal success.

You can read more about how waterfalls work and their importance here, but you should know that a properly structured waterfall is an important tool for aligning interests between sponsors and their LPs. 

Red Flag: A sponsor that earns a significant profit before meeting LP return thresholds is likely misaligned with long-term investor goals.

Best Practices for Investors to Ensure Proper Alignment

  1. Compare Investment Structures: Evaluate multiple offerings to understand how fees and profit-sharing vary across sponsors.
  2. Ask Direct Questions: Inquire about co-investment levels, profit-sharing mechanisms, and the sponsor’s track record.
  3. Read Between the Lines: Some deals may appear well-structured but contain hidden fees or incentives that favor the sponsor.

Tip: Look for sponsors with a proven track record, a meaningful personal stake in the investment, and transparent financial terms.

Alignment of Interests is Essential for Successful Real Estate Investing

Ensuring strong alignment between investors, sponsors, and property managers is crucial to mitigating risk and maximizing returns.

When interests are aligned:

  • Investment decisions prioritize long-term success.
  • LPs receive fair compensation before sponsors profit.
  • Sponsor incentives are structured around performance, not upfront fees.

Before investing in private real estate deals, do your due diligence and verify that the sponsor’s incentives match your own financial goals. This ensures a more successful and profitable investment partnership.

Most reputable sponsors and operators with a proven track record will work hard to align their interests with their LPs. However, not all sponsors are as focused on the success of their LPs as others, and we hope that this guide will help you distinguish between the two. You can read more about how Piping Rock aligns its interests with our investors here.