Exploring Projected Returns in A Real Estate Syndication
Projected Returns to Expect in A Real Estate Syndication
One of the most common questions that we get asked is, “If I were to invest $50,000 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.
In order 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’s always risk 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 3 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:
- Projected hold time
- Projected cash-on-cash returns
- Projected profits at the sale
Projected Hold Time: ~5 Years
Projected hold time, perhaps the easiest concept, is the number of years we would hold the asset before selling it. What this means for you is that this is the amount of time that your capital would be invested in the deal.
A five-year hold period is advantageous for several reasons:
1) In just five years, a lot can happen. You may begin and finish a college degree, relocate, marry, or…you get the idea. You’ll need enough time to make a profitable return, but not so much that your children will graduate before the sale.
2) When market cycles are taken into account, five years is a reasonable amount of time to invest, make changes, enjoy appreciation, and exit before it’s time to renovate again.
3) A anticipated hold period of five years provides a cushion between the estimated sale and the normal commercial credit duration of seven to ten years. We can choose to hold the asset for a longer amount of time if the market softens at the 5-year mark, allowing the market to recover.
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 over the five-year hold.
Just for kicks, notice the same value invested in a “high” interest savings account (earning 1%) over five years would earn a measly $5,000.
That’s a difference of $35,000 over the span of 5 years!
Projected Profit Upon Sale: ~60%
The estimated profit upon sale is maybe the most important puzzle piece. In year 5, we typically aim for a profit of roughly 60% at the sale.
Over five years’ time, the units have been upgraded, the renters are stable, and the rent appropriately reflects market rates. Because commercial property prices are determined by the amount of income generated, these upgrades, together with market appreciation, often result in a significant increase in the asset’s overall value, resulting in significant gains upon sale.
Summing It All Up
Simple enough, right? Typically, in the deals we do, we are looking for the following:
- 5-year hold
- 8% annual cash-on-cash returns
- 60% profits upon sale
Sticking with the previous example, you’d invest $100,000, hold for 5 years, collect $8,000 per year in cash flow distributions paid out monthly (a total of $40,000 over 5 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.
Double your money in just 5 years? I bet you can’t find a savings account like that!
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