As you probably know, no two real estate syndication deals are exactly the same. There are a million ways to structure a real investment deal, and just as many potential outcomes.
Some real estate syndication deals offer a huge potential appreciation upside but also come with hugerisks. Others offer steady cash flow but without the potential for appreciation.
And, depending on how each offering is structured, you may have the opportunity to choose which class(es) to invest in within the deal, to customize the risk/return balance based on your unique situation.
At Goodegg Investments, we’re real estate investors first. What that means is that we look for real estate syndications that we would invest in ourselves and perform our due diligence to ensure we feel comfortable investing our own money in the deal. Only then do we offer those real estate syndications to our community of like-minded investors.
We sort through piles of real estate investment opportunities every month. And just like snowflakes, no two are the same. Based on our many years of experience as real estate investors and operators/syndicators, we’ve established a stack of benchmarks that we look for whenevaluating potential real estate syndication deals.
Before we ever share an opportunity to invest in a real estate syndication with our limited partners/passive investors, the underwriting criteria and business plan must check all the boxes. In this article, we’ll look at some of the typical expected returns we aim to offer passive investors within each of our real estate syndications.
Big Fat Disclaimer About Real Estate Investing
You probably saw this coming from a mile away, but I gotta do it anyway. Before we get into the numbers, I have to insert a big fat disclaimer here for the one percent of you who will, at some point, get all up in arms because we didn’t deliver these exact returns.
Yes, I see you, don’t try to hide!
As the title of this post suggests, these are onlyPROJECTEDreturns. As with any real estate investment, we cannot guarantee any returns, and there’s risk associated with any investment. This is true for any and every real estate syndication company.
Real estate syndications are often referred to as speculative investments, but we believe that with our experience, we know the metrics to watch for and the property management team in place, to provide excellent investment opportunities for our investors.
This article is only meant to give you a rough ballpark of the kinds of returns we aim to provide, whether they be through preferred return, appreciation, cash flow throughout the hold period, or on the sale.
For the specific details of available real estate syndication investment opportunities, be sure to thoroughly review the private placement memorandum and business plan.
We know that no one wants to read legal jargon all day, but it’s crucial to the security of your financial and intellectual resources that you fully understand the passive investment process. Investing in a real estate syndication deal is much different than purchasing single-family properties.
Related: Should You Invest In Real Estate Or Stocks?
Returns on Real Estate Syndications
People will always need somewhere to live, so multifamily apartment communities are some of our most popular real estate syndication offerings. This real estate market is attractive to passive investors because of its generally stable cash flow profile and opportunity for appreciation.
There’s even more opportunity for cash returns (and some added risk) when the real estate syndicator focuses on properties that can be valued and appreciated – in other words, value-add real estate syndications – like we do!
In any case, real estate syndications’ equity splits are pre-calculated and outlined in the PPM and Operating Agreement before you ever send your investment capital in. So, you always have an opportunity to review (and perform due diligence on) any returns projections.
With that, let’s get to talking about your favorite thing, cash flow!
Three Main Criteria of Our Overall Real Estate Investment Strategy
If you’ve ever seen an investment summary for areal estate syndication,you know that there are a TON of facts and figures in there. #chartloversunite
Each metric has its merits and tells you a certain something about the real estate asset and the deal at hand. When doing our quick synopsis of real estate syndication investment opportunities, we look at three main criteria:
Projected hold time
Projected cash-on-cash returns
Projected profits at the sale of the asset
Projected Hold Time: ~5 Years
This is perhaps the easiest of the three real estate syndication criteria to understand. As the name would suggest, projected hold time is the amount of time we plan to hold the real estate property before selling it. Typically, we lean toward projects that have a hold time of around five years.
Why five years? Well, here are a few reasons:
First, five years is a relatively long time if you think about it. Technically, you could have six children during that time (yes, I did the math). You could start and complete a college degree. You could binge-watch umpteen seasons of your favorite Netflix show. You get the point. Five years is a decent chunk of time.
There are certainly some passive investors who are at a point in their lives where they want to invest for a longer period of time. Of course, your personal investment decisions should be based on your individual goals.
We find that five years is a good length of time for most investors. Long enough to see some healthy returns, but not too long that you feel like your kids will have graduated from high school before you get access to that money again.
In addition, given real estate market cycles, five years is a modest timeline for us to get in, update the real estate property, give the asset and market a little time to appreciate, and get out before lingering for too long (when it’ll be time to update those apartment building units all over again).
Plus, commercial real estate loans are often on a seven- or ten-year fixed term, so with a five-year projected hold time, that gives us a bit of buffer to hold the asset a little longer if needed, in case the real estate market is soft at the time we’d originally projected a sale.
Projected Cash-on-Cash Returns
The next core metric we look at is the cash-on-cash returns, also known as the cash flow, which makes up thepassive incomereal estate investors get during the course of the real estate syndication investment.
Cash flow returns are what’s left afteryou factor in vacancy costs, mortgage, and expenses, and it’s the pot of rental income money that gets distributed to investors. Sponsor fees, the acquisition fee, and other property and asset management fees are removed first. The remaining cash flow is usually distributed to passive investors on a monthly or quarterly basis.
For the real estate syndications we like to pursue, we prefer to see cash-on-cash returns of aboutsix to eight percenton average.
Note: This is an average across the lifecycle of the hold; this does not mean that you will see 6-8% right off the bat in year 1, especially if the plan is to stabilize the asset and add significant value. In fact, often, you might see much more modest returns in the first year or two (as little as 1-2%), followed by stronger returns in the latter years.
As an example, based on the 6-8% range above, if your initial investment in a real estate syndication were$100,000, the average projected cash flow returns across the five years during the hold period would be about$6,000 to $8,000, or roughly$1,500 to $2,000 per quarter.
This comes out to roughly $30,000 to $40,000 over the course of a five-year hold. And again, not all returns will be equal; you’ll likely see smaller amounts early on, followed by higher amounts in the latter years.
Preferred Returns
Often, you may see syndication offerings that are structured with something called a preferred return (aka, “pref”). What is a preferred return, you ask? Excellent question.
A preferred return is a way for the GPs (general partners) to align their interests with the LPs (limited partners) and, while there are no guaranteed returns in real estate investing, a preferred return is about as close as you can get.
Let’s say that a deal offered a 7% preferred return. This means that, for the first 7% of any returns, those go 100% to the limited partner passive investors. The general partners don’t get any of that initial 7%.
Only after that 7% hurdle is met does the GP start to get a share of the returns. On top of that, in those early years when the cash flow may be less than the full pref, while you may not get the full pref distributed to you, in most cases the full amount of the pref will accrue on your behalf.
What that means is that, even though your distribution amount may be lower than the full pref, we as the syndicator are keeping track of the full pref amount that you are owed. And, as soon as the cash is available in the deal, that full pref will be paid out to you.
If that full amount isn’t available until the sale, the sale proceeds will first go to cover the full pref across the length of the hold period (7% for each of the 5 years, for example) before the rest of the sale proceeds get divvied up according to the waterfall.
