Where Does Cash Flow In A Real Estate Syndication Actually Come From?

Are you considering investing in a real estate syndication but are leery that it sounds a little too good to be true? You’re not alone. 

Many investors are shocked when they first learn about the potential cash flow returns they could receive through investing passively in real estate syndications. 

The key, though, to putting your doubts and skepticism to rest, is to understand where that cash flow comes from and how it makes its way from the asset itself to your pocket, and that’s exactly what we’ll cover in this article. 

Cash Flow Distributions 

Typically, within the first year after closing on a value-add property, you can expect to start seeing monthly cash flow distributions – your new stream of passive income! 

But how is it that these investments are so lucrative? Where does the money really come from?  

Where Cash Flow Comes From 

To be clear, you need to earn and save active income so that you can invest to create passive income. Maybe your goal is to work only 4 hours a week, or perhaps that sounds boring. Either way, the goal is to accumulate enough savings to invest and then continue to invest until the passive income earned matches or exceeds your active income.

Every investment property, no matter the size or number of tenants, is an asset that generates income as well as expenses. Let’s talk about how apartment complexes generate income, the expenses they typically incur, and how cash flow is calculated. 

Gross Potential Income 

In the case of an apartment building, the main source of income is the tenants’ rent that’s due each month.  

As an example, let’s say the average rent in a 100-unit building is $800. That means the gross potential income is $80,000 per month, which comes out to $960,000 per year.  

Monthly Gross Potential Income 

100 units x $800 each = $80,000 per month 

Annual Gross Potential Income 

$80,000 per month x 12 months = $960,000 per year 

Now, don’t get too excited. I hate to break it to you, but that $960,000 is the gross POTENTIAL income for the whole complex assuming 0% vacancy and full rent payments with no expenses, deals, or discounts (e.g., “first month’s rent free!”). 

Net Rental Income 

Vacancy costs, loss to lease, and concessions decrease the potential income, and once they are removed, you’re left with something called net rental income 

Assuming only 10% of the units are vacant (i.e., in a 100 apartment complex, only 10 are empty), at $800 a month, the monthly vacancy cost would be $8,000. 

Vacancy Cost 

10 units vacant x $800 in lost rent per unit = $8,000 vacancy cost per month 

If the vacancy rate remains constant throughout the year, the annual vacancy cost would be $96,000. 

$8,000 per month x 12 months = $96,000 per year 

Net Rental Income 

Remember, to get the net rental income, we must take the gross potential income (the total income if all units were filled) and subtract out the vacancy cost. 

$960,000 annual gross potential income – $96,000 annual vacancy cost = $864,000 annual net rental income 

Operating Expenses 

Don’t forget, there are business expenses too.  

Operating expenses like maintenance, repairs, property management, cleaning, landscaping, utilities, legal and bank fees, pest control, etc. have to be paid. No two apartment buildings have the same needs or the same expense structure. 

Let’s presume that total projected monthly operating expenses equal $38,000, which works out to $456,000 per year. The sponsor team would work toward reducing these expenses over time, but we’ll use this figure as a starting point. 

Annual Operating Expenses 

$38,000 monthly operating expenses x 12 months = $456,000 annual operating expenses 

Net Operating Income (NOI) 

NOI or Net Operating Income is what’s left from the net rental income after operating expenses are removed. 

$864,000 net rental income – $456,000 operating expenses = $408,000 NOI 

If you’re a little confused at this point it’s okay! There are a lot of numbers here. The important thing to remember is that you want the NOI to be a positive number and as high as possible, meaning that the asset has the potential to generate a profit and thus create those cash flow distributions that got you into this in the first place. 


Next, let’s talk about the mortgage. As with any property purchase, you’ve got to pay the lender back. Much like in a single-family home purchase, a loan on a commercial property consists of a down payment and a loan amount – usually, around 25% down and 75% leveraged – and the loan would need to be paid back through monthly principal and interest payments. 

In this case, let’s say the group owes $20,000 each month (which is $240,000 per year) in mortgage payments. 

Annual Mortgage Payments 

$20,000 monthly mortgage x 12 months = $240,000 annual mortgage payments 

Cash Flow / Cash on Cash Returns 

Now that we’ve subtracted the expenses from the income, we arrive at our cash flow for the first year.  

Keep in mind that a number of factors can change in subsequent years as the sponsor team optimizes the property and its expenses, so the cash flow figures tend to increase over time, though this is not guaranteed. 

First-Year Total Cash Flow 

$408,000 NOI – $240,000 mortgage = $168,000 first-year total cash flow 

This amount is then split up, according to the agreed-upon structure for the deal. Assuming this deal uses an 70/30 deal structure, 70% of the profits go to the investors (i.e., the limited partners), and 30% goes to the sponsor team (i.e., the general partners). 

First-Year Cash Flow to Investors 

$168,000 first-year cash flow x 70% = $117,600 first-year cash flow to investors 

Depending on your level of investment, you would get a share of that cash flow each quarter, in the form of a distribution check or direct deposit. 

Your Monthly Cash Flow Distribution Checks 

If you’d invested $100,000 into this deal, you might expect a $667 check each month, which works out to $8,004 for the year.  


So there you have it. The cash flow that arrives in your bank account each month originates from the rent that the tenants pay. Then, we deduct the expenses, pay the mortgage, taxes, and insurance, and what’s leftover is then divided and shared with investors.  

Is this passive income guaranteed? Absolutely not.  

Considering all the variables – location, team members, tenants, economy, and MUCH more – it’s important to keep in mind that these are, although useful numbers, just estimates. Projections are fun to track but should never be taken as absolute truth.  

However, now that you have a better understanding of where the cash flow in a real estate syndication comes from, you should be able to more thoroughly understand and vet the figures you see in the pro forma and investment summary, which will lead you to make wiser investing decisions. 

Want to Learn More?

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