What Kind Of Returns Can You Expect From Your Real Estate Syndication Investment?

by | Mar 8, 2021

Projected returns vary between and within each type of investment, whether you’re talking stocks, REITs, single family rental homes, or real estate syndication deals. No matter how much investing experience you have, it’s completely normal to have questions about potential returns you might expect in another style investment. 

One of the most common questions that I get asked about real estate syndications is, “What kinds of returns should I expect if I were to invest $50,000 with you today?”

I get it. You want to know how real estate syndications can secure your capital while building your legacy, and how passive real estate returns compare to the earnings you might get through other investment vehicles.

In order to help answer that question, you should first know that we will be talking about projected returns. That mean, 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, let’s explore the 3 main criteria you should look into when evaluating projected returns on a potential real estate syndication deal:

  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.
  1. 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.
  1. 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. Keep in mind, this is money earned without you having to deal directly with tenants, repairs, or any day-to-day property management concerns. ¡Salud!

Cash-on-cash returns are like net profits. They’re what remain after vacancy costs, mortgage, and expenses. It’s the pot of money that gets distributed to investors. For example, 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.

Summing It All Up

Simple enough, right? Typically, in the real estate syndication deals we do, we are looking for the following:

  • 5-year hold
  • 7-8% annual cash-on-cash returns
  • 40-60% 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.

Again, these results are not guaranteed, and each real estate syndication deal is different, but how do these projected returns compare to what you’ve been getting elsewhere?

For access to our past and current deals’ projected and realized returns, plus a vibrant community of investors just like you, join the Fincapital Investor Club as a first step toward exploring how syndications might boost your ability to build and preserve your wealth faster and easier than on your own.

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