Exploring Projected Returns in a Real Estate Syndication
A commonly asked question we frequently hear is, “What kind of returns could I expect, roughly, if I were to invest $50,000 in one of your commercial real estate syndications?
We totally get it. You want to know how your capital will work for you in a real estate syndication, and how the passive income you could earn from such an investment will stack up against returns from various other investment opportunities.
First, we should point out that what we will highlight in this article is projected returns. Projected returns are just that – a projected estimate of returns – based on extensive underwriting, historical data, analyses, and various metrics and data points. Projected returns are never a guarantee of the returns. We’ll go over some examples here that are meant to be educational in nature only, and are not to be construed as a guarantee of returns.
We’re going to explore 3 main criteria that you will want to understand that help us to calculate a projected return when we are analyzing a real estate syndication opportunity.
Three Main Criteria
When you are reviewing an investment summary, there is an enormous amount of information and data, but you will want to concentrate on these 3 main criteria when you are evaluating whether or not to invest in a real estate syndication:
- Projected hold time of the asset
- Projected cash-on-cash returns
- Projected profits at the sale of the asset
Projected Hold Time Of The Asset: ~5 Years – 7 Years
The projected hold time is pretty straightforward. This is just the estimated time that we are planning to hold the asset before we sell it, which means that this is the estimated time that your capital will be invested in the syndication.
A hold-term of approximately five years is helpful for a variety of reasons:
1) A lot can happen in 5 years. Every good, sound investment needs time to earn the returns that are being projected. Syndications, like most solid investments, are not a “get-rich-quick” opportunity. There needs to be ample time to see the project through so that investors can benefit from the work put in by the sponsor team to generate the returns.
2) When you evaluate market cycles, five years is a minimal amount of time to invest when you consider all of the improvements that are made to the property over time to be able to justify an increase in the asset’s value.
3) A projected hold-term of 5 years can allow for contingencies if there are market or economic factors. If, for example, we have a 7 or 10-year loan, and a 5 year projected hold-term, the loan terms will allow for us to continue to hold the property so that we are not selling during a market downturn.
Projected Cash-on-Cash Returns ~ 7% Per Year
The next item you want to review is the cash-on-cash returns when reviewing an investment summary. Cash-on-cash is also called the “cash flow” or the “passive income distributions”. How cash-on-cash is calculated is by taking the total revenue and deducting out vacancy costs, debt service, and all of the operating expenses. This is what gets distributed out to the investors.
So, let’s take an example if you invested $100,000, and had a 7% preferred return per year, then the cash flow that would be projected would be $7,000 for that year – or $35,000 over the projected hold-term of 5 years.
Although we can never guarantee that a cash-on-cash return will be a certain percentage, we always try to make sure the projections make sense and the business plan will afford the best returns possible.
Projected Profit At The Sale Of The Asset: ~60%
One of the toughest projections to make is the estimated profit when we sell the asset. We try to obtain at least a 60% profit at the end of the hold-term of 5 years. But again, that can never be guaranteed.
So what happens with the asset in that 5-year timeframe? The units will have been remodeled, updates will have been made, the resident base may be improved upon, vacancies reduced, efficiencies improved and the rents will adjust to being consistent with market rates.
Commercial properties are valued based on the net income, so with all of the improvements that we will have done along with the streamlining of efficiencies that will have been implemented during those 5 years, it is very likely the valuation of the asset will have improved considerably, which can lead to a sizeable amount of profit when the asset is sold.
Pretty simple, right? In the opportunities we look for, we typically want the following:
● A 5-year hold period
● A cash-on-cash return of 7% annually
● ~60% profits upon the sale of the asset
So, let’s take the earlier example. Let’s say you were to invest $100,000 and we were to hold the property for 5 years at a 7% preferred return or $7,000 cash flow distributions for the year ($35,000 over 5 years) plus the possibility to earn $60,000 at the time of sale.
This would result in a payout of $95,000 at the end of 5 years, plus you will have received your initial investment of $100,00, so at the end of 5 years, you will have received $195,000 on your $100,000 investment.
You will have almost doubled your money in 5 years, plus we didn’t even mention all of the extraordinary tax benefits that come with real estate syndications…but we’ll save that for another day.
In the meantime, we hope this helps you to understand more about how to Earn Passively & Live Abundantly!
Ready to Learn More?
The best way for you to learn more about passive investment opportunities in commercial real estate syndications is to join the PCRP Passive Investor Club.
Through the PCRP Passive Investor Club, you’ll get a priority review of all the deals we offer. We’ll work with you to determine your investing goals and then present you with the best deals to meet those goals. We’ll then guide you every step of the way as you invest in those deals.
So if you’re ready to start investing passively in institutional-grade, commercial real estate in fast-growing, climate-resilient markets in the U.S., join the PCRP Passive Investor Club – IT’S FREE! – and get started on your path to EARN PASSIVELY and LIVE ABUNDANTLY!
If you would like to know more about what we do and how it may be of value to you, please reach out to us anytime. We’re always happy to help!