One of the most common questions that I get asked about real estate syndications is, “What are the returns like on syndication investments?”
Most people are cautiously curious about what it means to invest in a real estate syndication, if it’s a scam, how to participate in one, and most of all, what kind of money can be made.
Hey, I get it. I tend to be the cautious type as well, which is exactly why I have immersed myself in this business and learned every angle over the past four years. You want to know how 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.
First, you should 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’s always risk associated with any investment. So the examples herein are only meant to provide some ballpark ideas to get you started.
In this article, let’s explore the three main criteria you should explore when evaluating projected returns on a potential real estate syndication deal:
- Projected hold time
- Projected cash-on-cash returns
- Projected profits at the sale
Projected Hold Time: ~5 Years
Perhaps the most straightforward concept is projected hold time, the number of years we would hold the asset before selling it. This means that this is the amount of time that your capital would be invested in the deal.
A hold time of around five years is beneficial for a few reasons:
- Plenty can change in just five 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.
- Considering market cycles, five years is a modest stint in which to invest, make improvements, allow appreciation, and exit before it’s time to remodel again.
- A five-year projected hold provides a buffer between the estimated sale and the typical seven- to ten-year commercial loan term. If the market softens at the 5-year mark, we can opt to hold the asset for a more extended period, allowing the market to rebound.
Projected Cash-on-Cash Returns: 7-8% 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. So that’s $40,000 over the five-year hold.
Just for kicks, notice the same value invested in a “high” interest savings account (earning 1%). That would return $1,000 a year and a measly $5,000 over five years.
That’s a difference of $35,000 over five years!
Projected Profit Upon Sale: ~40-60%
Perhaps the most significant puzzle piece is the projected profit upon sale. Typically, we aim for about 60% in profit at the sale in year 5.
In five years, the units have been updated, tenants are strong, and rent accurately reflects market rates. Since commercial property values are based on the amount of income generated, these improvements, along with market appreciation, typically lead to a substantial increase in the asset’s overall value, thus leading to sizable profits upon the sale.
What Returns Should You Expect From A Real Estate Syndication Investment?
Of course, as I mentioned above, there’s always risk and everything discussed here is according to projected generalities. It’s important to us that we provide opportunities for investors to make money while we simultaneously maintain transparency, mitigate risk wherever possible, and educate our investors so they understand what to expect.
Typically, in the deals we open to our investors, we are looking for the following:
- 5-year hold
- 7-8% annual cash-on-cash returns
- 40-60% profits upon sale
Sticking with the previous example, you’d invest $100,000, hold for five years, 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.
This results in $200,000 at the end of 5 years – $100,000 of your initial investment and $100,000 in total returns.
Again, these results are not guaranteed. Each real estate syndication deal is different, but this should give you a rough idea about the returns you can expect and whether syndications are something you’re interested in pursuing.