One of the most common questions that we get asked is, “If I were to invest $50,000 with you
today, what kinds of returns should I expect?”
We get it. You want to know how hard real estate syndications can make your money work for
you, and how passive real estate investing stacks up to the returns you’re getting through other
types of investment vehicles.
In order 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.
The examples herein are only meant to provide some ballpark ideas to get you started.
In this article, we’ll explore the 3 main criteria you should look into when evaluating projected
returns on a potential real estate syndication deal.
Three Main Criteria
Each real estate syndication investment summary contains a barrage of useful data. Focus on
these core concepts:
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:
Projected Cash-on-Cash Returns: 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.
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%)
over five years would earn a measly $5,000.
That’s a difference of $35,000 over the span of 5 years!
Projected Profit Upon Sale: ~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 sizeable profits upon the sale.
Summing It All Up
Simple enough, right?
Typically, in the deals we do, we are looking for the following:
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.
Double your money in just 5 years? I bet you can’t find a savings account like that!
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