The most popular inquiries I receive regarding commercial real estate syndication investments pertain to the level of potential return. Basically, people want to know how much money they could possibly make if they invested their hard-earned capital into our next deal.
Hey, I’m no different. Before investing, you want some assurance as to how real estate syndications work and how your money works for you inside a real estate syndication deal as a limited partner.
Actually, that’s what led me to real estate syndications too! My wife and I dabbled in duplexes, rented out our condo, and have experienced both entrepreneurship and full-time employment along our journey toward financial freedom. You know, as an investor, that figuring out how to generate passive income is the key to reaching your long-term financial and lifestyle goals.
To answer your questions about the potential returns in an investment opportunity, in this article, we’ll walk through some general characteristics of a real estate syndication. First and foremost, the returns stated here are not definitive, they are projected; meaning, they are varied and uncertain considering all investments always carry risk.
There are 3 primary categories that need to be researched when assessing your return potential:
- Potential hold period
- Potential cash flow
- Potential gains
Potential Hold Period: Roughly 5 years
The potential hold period in a real estate syndication, typically the simplest of all concepts, is the amount of time the investment asset (the property) would be held before it is resold. For you as an investor, this is how long your initial capital investment cash would be tied up and unavailable.
Having a hold time of roughly 5 years is helpful in many ways:
- You could start and finish a college education in five years, move across the country, get married, or have children. In five years’ time, you’ll probably have different investing goals, expectations, and needs than you do now.
- Five years is the average time required for a general partner team to complete value-add improvements, allow appreciation, and exit the syndication deal before it’s time to renovate again, according to real estate market cycles.
- A five-year projected hold provides for a cushion between the Potential sale and the industry-standard seven-to-ten-year commercial loan term.
Potential Cash Flow: 7-8% Per Year
Next, we get to cash-on-cash returns. This is also referred to as cash flow or passive income. The pot of money that limited partners receive after expenditures is known as cash flow or passive income.
Let’s pretend you invested $100,000 as a limited partner (passive investor) and earned eight percent per year, generating about $8,000 in cash flow each year. Over the course of five years, that’s $40,000 in passive income from your syndication investment.
To put it another way, compare those returns to a “high” interest savings account (returning $1,000 per year and only $5,000 over five years).
That’s a difference of $35,000 in passive income over five years!
Potential Profit At The Sale: Around 40-60%
The potential profits from the sale of the asset are typically the most important part of the commercial real estate syndication puzzle. In year five, we expect to produce 60% profit upon the sale of the property.
A ten percent annual increase in value is considered reasonable in real estate syndication investments, but some deals produce more than that.
In five years, the units have been renovated, target occupancy rates have been achieved, and rental prices have risen to market rates. The value of commercial real estate properties is based on the amount of money produced; as a result of these improvements, as well as market appreciation, the asset’s overall value frequently rises considerably, with large profit margins when it is sold.
The projected profit from the sale allows real estate investors to brag about high returns (more than 10% per year) on their investment.
What Kind Of Returns Can You Expect When Investing Together With Us In A Commercial Real Estate Syndication?
It’s simple enough, right? We’re typically seeking the following in our deals:
- 5-year hold
- 7-8% annual cash-on-cash returns
- 40-60% profits upon sale
Take the example from above: You’d invest $100,000 in a commercial real estate syndication, stick it out for 5 years while the business plan is put into action, earn $8,000 per year in cash flow distributions paid out monthly (a total of $40,000 over 5 years), and make $60,000 at the sale.
You’ve doubled your money in five years. According to the magic formula, that equates to $200,000 at the end of five years – $100,000 from your original investment and $100,000 in total returns.
Once again, these figures are not guaranteed, and each real estate syndication transaction is unique.
Before investing in a commercial real estate syndication, I advise you to conduct your own research, speak with sponsors and other prior passive syndication investors, and carefully think about your goals. I’m happy to talk with you about the ins and outs of investing in syndications, connect you with other investors, and even share numbers from our ongoing deals. Real estate syndications can be a fantastic addition to your diversified investment portfolio.