Exploring Projected Returns in a Real Estate Syndication

One of the most common questions that we get asked is, “If I were to invest $100,000 with you today, what kinds of returns should I expect?”

We get it. You want to know how hard real estate syndications can make your money work for you and how passive real estate investing stacks up to the returns you’re getting through other types of investment vehicles.

To help answer that question, you should first know that we will be talking about projected returns. That is, these returns are projections based on our analyses and best guesses, but they aren’t guaranteed, and there are always risks associated with any investment. The examples herein are only meant to provide some ballpark ideas to get you started.

In this article, we’ll explore the three main criteria you should look into when evaluating projected returns on a potential real estate syndication deal.


Three Main Criteria

Each real estate syndication investment summary contains a barrage of useful data. Focus on these core concepts:

    1. Projected hold time
    2. Projected cash-on-cash returns
    3. Projected profits at the sale


Projected Hold Time: ~5-7 Years

Projected hold time, perhaps the most straightforward concept, is the number of years we would hold the asset before selling it. You should expect this to be a long-term investment and that your capital will be put to work in this investment for the hold time duration.

A hold time of around five to seven years is beneficial for a few reasons:

    1. Plenty can change in just five to seven years. You could start and complete a college degree, move, get married, or…you get the point. You need enough time to earn healthy returns, but not so much that your kids graduate before the sale.
    2. If you were to considering market cycles, five to seven years is a modest stint in which to invest, make improvements, allow appreciation and exit before it’s time to remodel again.
    3. A five to seven-year projected hold provides a buffer between the estimated sale and the typical ten-to-twelve-year commercial loan term. If the market softens at the five to seven-year mark, we can opt to hold the asset for a more extended period, allowing the market to rebound.


Projected Cash-on-Cash Returns: 8% Per Year

Next, consider cash-on-cash returns, otherwise known as cash flow or passive income. Cash-on-cash returns are what remain after vacancy costs, mortgage, and expenses. It’s the pot of money that gets distributed to investors.

If you invested $100,000 and earned eight percent per year, the projected cash flow would be about $8,000 per year or about $667 per month. That’s $40,000-$56,000 over the five to seven-year hold.

Just for kicks, notice the same value invested in a “high” interest savings account (earning 1%) over five to seven-years would make a measly $5,000-$7,000 during this same time frame.

That’s a difference of $35,000- $37,000 over five years!


Projected Profit Upon Sale: ~44%-60%

Perhaps the largest puzzle piece is the projected profit upon sale. Typically, we aim for about 44%-60% in profit at sale in five to seven years.

In five to seven-years, the operators would have had enough time to update the units, improve the tenant base, and bump up the rent to reflect market rates. Since commercial property valuations are based on the amount of income generated, these improvements, along with market appreciation, would typically lead to a substantial increase in the asset’s overall value, thus leading to sizeable profits upon the sale.


Summing It All Up

Simple enough, right? Typically, in the deals we do, we are looking for the following:

    1. 5 to 7-year hold
    2. 8% annual cash-on-cash returns
    3. 44%-60% profits upon sale

Sticking with the previous example, assuming you invested $100,000 in an investment with a five-year hold period. During this time, you could collect $8,000 per year in cash flow distributions paid out monthly (a total of $40,000 over five years) and earn $60,000 in profit at the sale.

The result is $200,000 at the end of 5 years – $100,000 of your initial investment and $100,000 in total returns.

Investing in real estate syndications could double your money in just 5-7 years. I bet you can’t find a savings account like that!


Want to Learn More?

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