One of the most common questions that I get asked about real estate syndications is, “If I were to invest $50,000 with you today, what kinds of returns should I expect?”
I get it! With so many investing options, you want to know how syndications might better serve your goals. You also want to know how real estate syndications can make your money work as hard as possible for you and how passive real estate investing might meet or beat the returns you’re getting through other types of investment vehicles.
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. 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 look into 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. The projected hold time is the amount of time that your capital would be invested in the deal.
A projected 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, retire, get married, or . . . you get the point. You need enough time to earn healthy returns, but not so much that you’re already living off retirement savings before the sale.
- Consider 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. Cash-on-cash is what they call “mail-box money.”
If you invested $100,000 and earned eight percent per year, the projected cash flow would be $8,000 per year or $667 per month. That’s $40,000 just in cashflow distributions over the five-year hold, not to mention any potential earnings from the sale (more on that in a sec.).
Just for fun, 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 for five years! So what would $35K do for you?
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 syndication’s asset manager will have updated several units, improved the occupancy rate, and raised rents to reflect market rates accurately. Since the amount of income generated is the basis for commercial property values, 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.
Depending on how the PPM and business plan read, it’s likely you’ll get back the capital you initially invested, plus profits. Plus, remember that mailbox money you will have earned each year!
All in all, this could amount to doubling your money in just a short five-year period.
Summing It All Up
Simple enough, right? Typically, in the deals we do, we are looking for the following:
- 5-year hold
- 7-8% annual cash-on-cash returns
- 40-60% profits upon sale
Want to know how this adds up?
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 investment would result in $200,000 at the end of five years – $100,000 of your initial investment and $100,000 in total returns.
Again, these results are not guaranteed, and each real estate syndication deal is different, but this should give you a rough idea of what to expect.
To some, the allure of doubling your money in such a short period seems too good to be true. Well, I invite you to join us in the Starboard Equity Club to ask questions, do your own due diligence on potential investment markets and properties, where you’ll get to see for yourself the actual numbers and details on our real estate syndications.
Inside, you’ll enjoy being in a community of investors with similar goals, interests, questions, and experiences. I will also invite you to have a direct conversation with me to help you find the syndication opportunity that best aligns with your personal financial and investment goals.