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 of investment.
One of the most common questions that we get asked about real estate syndications is, “What kinds of returns should I expect if I were to invest $50,000 with you today?”
We 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 means, 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:
- Projected hold time
- Projected cash-on-cash returns
- Projected profits at the sale
Projected Hold Time: ~5 Years
Projected hold time, perhaps the easiest concept, is the number of years a team 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: 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.
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 $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. Most sponsors aim for about 40 – 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 deals Prevail does, 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 either monthly or quarterly (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?
This communication is neither an offer to sell nor a solicitation of an offer to buy any security. An offer may only be made via a written offering document by Prevail Innovative Real Estate Opportunities, LLC (“Prevail”). Prevail will provide such offering documents (“Documents”) only to qualified accredited investors and has prepared this communication solely to enable you to determine whether you are interested in receiving additional information about it or the real estate project summarized above (the “Project”). This communication must be read in conjunction with the Documents prior to making any investment decision. Information about the Project contained herein has not been audited or reviewed by any third party. While projections about the Project’s future performance is based on Prevail’s experience and good faith judgments, the recipient should understand that projections are based on numerous assumptions, including that the current economic environment continues, that existing asset performance trends will continue to track business plans, that historical behavior of the Project’s property type will not change, that perception of market opportunities for disposition will hold true, and that the competitive landscape within which the Project operates will not change. Returns to investors would be contingent upon numerous events occurring and subject to considerable risks. Significant assumptions were made by Prevail to calculate the presented projections, including assumptions on the amount of leverage used by the Project, the Project having sufficient assets and cashflows, debt service and capital expenditures, the continuation of favorable leasing terms, the operating costs for the Project, the costs of taxes and insurance, the absence of claims against the Project, that lease terms (including rental rates) continue, that projected occupancy and rollover rates continue, that management and other expenses remain constant, and that property-level debt will not need to be refinanced at less favorable terms. The Project’s future capitalization will be contingent upon numerous events occurring and subject to considerable risks. The occupancy and rollover rates of the Project will be dependent upon many factors beyond the control of the Project or Prevail. Any expression of targeted rates is merely a statement of a goal. Significant assumptions were made by Prevail to calculate the presented occupancy and rollover rates. Many factors can impact the Project’s after-tax returns, including the risk that tax laws may change. A myriad of factors may impact the Project’s ability to achieve any returns. Any number of factors could contribute to results that are materially different. All investment opportunities presented by Prevail involve substantial risk and may result in the loss of some or all of your investment.