All About The Money: What The Returns Are Like On A Real Estate Syndication

by | Feb 9, 2022 | Uncategorized | 0 comments

Surprise! You have $50,000 in your bank account right now! 

What would you do with it? 

I dream of funding young women to learn financial literacy along with personal development and education typically out of their reach. 

Funding that dream is why I’d invest my $50K into a real estate syndication.

The question I most often get is, “If I gave you $50,000 to invest in real estate syndications, what kinds of returns should I expect?” I get it. You want to know how your money can make you more money, and you want to know if real estate syndications will make that $50,000 work for you. 

It is important to figure out how passive real estate investing stacks up to the returns you’re getting through other types of investment.

First off, you should know that throughout this article I’m talking about projected returns. I can not give you exact numbers (no one can), because every deal is different. These numbers and projected returns are based on my experience, past performance, and best guesses as to what the future might hold. 

These returns are not guaranteed, and you should never forget that every investment carries risk. These examples are only here to give you some ballpark ideas and help get you started. 

The three main things you should consider in figuring out your projected returns on a potential real estate syndication deal are: 

  1. Projected hold time
  2. Projected cash-on-cash returns
  3. 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 hold time of around five years is beneficial for a few reasons:

  1. 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.
  2. 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.
  3. 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 longer period of time, 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, and 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%).  That would return $1,000 a year and a measly $5,000 over a 5 year period.  

That’s a difference of $35,000 over the span of 5 years!

Projected Profit Upon Sale: ~40-60%

Perhaps the largest 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’ time, 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 overall value of the asset, thus leading to sizable profits upon the sale.

 

Let Investing In Real Estate Syndications Be Easy

It seems simple because it is. You don’t have to manage property or deal with tenants. You can invest in your own town or across the country. But no matter what, each deal carries risk and the potential for returns.

Typically, you want to look for the following in any commercial real estate syndication deal:

  • 5-year hold
  • 7-8% annual cash-on-cash returns
  • 40-60% profits upon sale 

So, if we stick with the example we used earlier and you want to invest $100,000 and hold it for 5 years, you’ll collect $8,000 per year in cash flow distributions that will be paid out monthly or a total of $40,000 over five years. 

You also have the potential to earn $60,000 in profit at the sale of the property (at the end of the hold period) and get your original capital investment returned.  

Altogether, your projected returns plus your original capital adds up to $200,000 at the end of the five years. Your initial $100,000 investment and $100,000 in total returns.

Let me remind you 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. YES MF- let’s begin!

Let’s talk.

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