23 Mar How to Evaluate a Real Estate Syndication Fast
How To Evaluate a Real Estate Syndication Investment Fast
The First Glance
New deal alerts in your email box can be exciting and fun to see what these real estate investment opportunities can possibly offer you in terms of returns. It’s sort of like a little gift that you can’t wait to open and see what’s inside.
You receive a real estate syndicate opportunity and see the following details:
- Asset Type: B-class multifamily
- Market: Atlanta, GA
- Hold term: 5 years
- Minimum investment: $50,000
- Funding Deadline: 4 weeks from today’s date
You look over the details and maybe see that this particular real estate project may not fit your exact criteria. It’s a good deal but maybe the apartment complex is located in a real estate market that is not emerging as fast as you would like. Maybe the initial investment or minimum amount is more than you would like to invest at this time. Perhaps you realize that the funding deadline doesn’t allow you much time to obtain your real estate funds or conduct your due diligence for this particular multifamily syndication opportunity. So, on this particular deal, you’re going to take a PASS.
No worries, because another multifamily acquisition opportunity will come up that will be perfect for your investment portfolio and everything can be conducted in the time period you need to obtain your funds and review the deal sponsor team and their track record. Then you can dig into the details and find out more to see if this is the passive income opportunity you have been seeking.
So, you’ve decided that passive real estate investing in multifamily syndications is the right investment vehicle for you have spotted a potential deal. Now what?
Let’s take an example of the numbers you may see presented on realistic deal:
- 8% preferred return
- 2.0x equity multiple
- 9% average cash-on-cash return
- 17% IRR
- 20% average annual return including sale
But what is a good way to be able to drill down on what those numbers mean for you and your investment?
In time, this will become super easy to decipher through these real estate deals quickly, but for right now, let’s say this is your first time reviewing these numbers.
Preferred Return & Cash-on-Cash Return
Preferred return, a common structure presented to individual investors, means that the first percentage of the returns (in this scenario is 8%) goes 100% to the group of investors who are the limited partners / passive investors. That would be you. The general partners do not receive any returns until the asset earns more than that amount.
So what does this mean for you? If you had invested $50,000 and everything went according to the business plan set out by the property management team and the deal sponsor, then you would receive $4,000 of annual income or $333 a month in passive income.
Since cash-on-cash returns are projected at 9%, that tells you that this deal is projected to pay out above the 8% preferred return at some point.
The next number that’s super important to review on the list is the equity multiple. This number quickly tells you how much your investment is expected to grow during the length of time that is projected for holding the property.
Continuing on the example above, your $50,000 investment with a 2x equity multiple should work out to $100,000 once the asset is sold. This accounts for the cash flow distributions plus the profits from the sale.
In our investments at PCRP Group, we try to shoot for an equity multiple of between 1.7x – 2x, so that is a good gauge for you to perhaps use as well depending on your investment strategy.
We don’t go into cap rate in this article, because it really doesn’t help you understand your returns. But if you’re interested in what cap rates are and the things you should know about cap rates, we have a great article on that.
Average Annual Return & IRR
Let’s review the next set of numbers – the average annual return (AAR) and internal rate of return (IRR). These are numbers that all real estate investors should have a thorough understanding of to help them better decide the real estate investments for their portfolio.
The average annual return tells you what the average earnings are, averaged over the entire projected hold term of the asset.
In the example above, we discovered that your $50,000 is expected to double to $100,000 over the next 5 years. That total return is 100% of your original investment, and when divided over the 5 year hold period, we see that your average annual return is 20%.
Plus you would expect to receive the return of your capital – your $50,000, of course, which now allows you to have $150,000 to invest after the course of the 5 year hold period when the deal closes.
The IRR (internal rate of return) is the average annual return (in this example 20%) and adjusts for the time delay. Since the majority of your earnings are expected at a later date, when the commercial real estate is sold, and there is a cost associated with the time that your investment capital is unavailable, the IRR takes that into account. An IRR of 14% can be a good benchmark for you to shoot for in your investments.
After a quick review of these numbers and what they mean for you, this should help you get a much better idea of what to look for when reviewing your next real estate syndication opportunity.
This doesn’t mean that you will be jumping into the deal tomorrow, it just means that you will want to explore the full investment summary more in-depth, perhaps put in a soft reserve to hold your spot in the deal while you investigate further.
Sometimes a new investment strategy such as investing in multifamily syndications can be an exciting proposition, but it also can be overwhelming if you don’t know how to analyze the details to some degree.
You may have had your investment funds ready to be deployed for weeks or you may still be in the process of rolling your funds into a self-directed IRA to make your investment. Either way, it is important that you know what you’re looking for so you can take advantage of a great deal when it comes along.
In this article, we discussed the different ways you can analyze numbers to identify if the real estate deal is worth more time and energy. The other criteria you will want to review at first glance when you have a deal alert in your inbox are the asset type, the asset class, the real estate market data, the hold time, the required minimum investment, and of course the funding deadline.
The bottom line is rather than getting inundated and overwhelmed with a lot of information – and there will be a lot of information – you just want to review the highlights very quickly to see if the data points are aligned with your investing goals. Because who wants to review an investment summary of 60 pages if all you have to do is pick out a few key data points that matter to you.
Ready to Learn More?
The best way for you to learn more about 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!