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Exploring Projected Returns In A Real Estate Syndication

10/29/2019

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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:
  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:
  • 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.
  • 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.
  • 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: 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:
  • 5-year hold
  • 8% annual cash-on-cash returns
  • 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.

Double your money in just 5 years? I bet you can’t find a savings account like that!
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    Justin Grimes

    Ally in generational wealth creation & protection.
    Proud husband & father.

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© COPYRIGHT 2020. ALL RIGHTS RESERVED.
Timbermoss Capital does not make investment recommendations, and no communication through this website or in any other medium should be construed as such. Investment opportunities posted on this website are "private placements" of securities that are not publicly traded, are subject to holding period requirements, and are intended for investors who do not need a liquid investment. Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Timbermoss Capital and may lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment. Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. Any investment information contained herein has been secured from sources that Timbermoss Capital believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefor. Offers to sell, or the solicitations of offers to buy, any security can only be made through official offering documents that contain important information about risks, fees and expenses. Investors should conduct their own due diligence, not rely on the financial assumptions or estimates displayed on this website, and are encouraged to consult with a financial advisor, attorney, accountant, and any other professional that can help you to understand and assess the risks associated with any investment opportunity.
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