When you invest a large sum of money, you logically want to know how much you can expect to make in return. One of the most common questions about real estate syndications is, “If I were to invest $100,000 with you today, what kinds of returns should I expect?”
We absolutely get it. You’re investing your hard-earned money and want to know how well real estate syndications can make your money work for you. Furthermore, how passive real estate investing stacks up to the returns you’re getting through other types of investment vehicles. Is it too good to be true?
To find out what real estate syndication returns look like, you should first know that we will be talking about projected returns. The returns referenced here are projections based on our analyses and best guesses. Of course, no returns are guaranteed, and there’s always risk associated with any investment. Therefore, the examples we provide in this article are only meant to give you a ballpark idea of what you can expect when investing in a real estate syndication.
Keep reading as we explore the three main factors to consider 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
As the name suggests, projected hold time refers to the number of years we would hold the asset before selling it, typically around five years. As the passive investor, the hold period is the amount of time that your capital will be committed to the investment. So while your money is invested in a real estate syndication deal, it’s unavailable to you.
There are a few reasons why a hold time of around five years is beneficial. Let’s take a look at them.
- If you’ve been around the block a time or two, you know plenty can change in five years. You could start a family, move to another city, maybe even go back to school and complete a college degree. Five years allows you enough time to earn healthy returns, but not so much time that you cannot reap the rewards of your efforts.
- Considering market cycles, five years is a conservative period in which to invest, make improvements, allow appreciation, and exit before it’s time to remodel again.
- Utilizing a five-year projected hold also provides a buffer between the estimated sale and the typical seven- to ten-year commercial loan term. If the market takes a downward turn at the 5-year mark, we have the option to hold the asset for a more extended period, allowing the market to recover.
Projected Cash-on-Cash Returns: 7-8% Per Year
The following important factor is cash-on-cash returns, otherwise known as cash flow or passive income. Cash-on-cash returns are what’s leftover after vacancy costs, mortgage, and expenses. It’s the money that gets distributed to all the real estate syndication deal investors.
For instance, if you invested $100,000 while earning eight percent per year, the projected cash flow would be about $8,000 per year or $667 per month. So, that’s $40,000 over the five-year hold.
Consider this. If you invested the same amount in a high-interest savings account, earning one percent, you’d only receive a return of $1,000 per year. Over the five years, that’s only a measly $5,000.
That’s a substantial difference of $35,000 over five years. This example illustrates how investing in real estate syndications is such a powerful way to build your wealth.
Projected Profit Upon Sale: ~40-60%
The final and arguably the most significant piece of the real estate syndication puzzle is the projected profit upon sale. Typically, we shoot for about 60% in profit at the sale in year five.
Over five years, the units have been updated, tenants are strong, and rent accurately reflects market rates. Commercial property values are based on the amount of income generated. The improvements made to the asset, along with market appreciation, typically lead to a significant increase in the property’s overall value, which most times leads to sizable profits upon the sale of the asset.
How To Determine Project Returns In A Real Estate Syndication Deal
To recap, here’s what we typically look for in the deals we do. To put it simply, meeting the following criteria is our top priority when putting together a real estate syndication deal for our investors:
- 5-year hold
- 7-8% annual cash-on-cash returns
- 40-60% profits upon sale
To continue with the previous example, if you invest $100,000, hold the property for five years, collect $8,000 per year in cash flow distributions paid out monthly, equaling a grand total of $40,000 over five years, and earn $60,000 in profit upon the sale, you essentially double your initial investment.
This results in $200,000 at the end of five years – $100,000 of your initial investment and $100,000 in total returns.
As we mentioned before, these results are not guaranteed. Each real estate syndication deal is different, but this gives a rough idea of what to expect and demonstrates the power of real estate syndications and how investing in them can help you build today’s cash flow and tomorrow’s legacy.