Commercial Real Estate Syndication Returns, Explained
by | Mar 30, 2021
The number one question I get about real estate syndication deals is, “What are the returns like?” First and foremost, potential investors want to know how much money they could stand to make if they invested.
I get it. You want to know how real estate syndications can make your money work for you and how passive real estate investing compares to the returns you might get from other investment vehicles.
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, experience, and expectations, but they aren’t guaranteed, and there’s always risk associated with any investment.
The examples herein are only meant to provide some ballpark numbers to get your wheels turning.
When evaluating projected returns on a potential real estate syndication deal, three main criteria you should look into:
- Projected hold time
- Projected cash-on-cash returns
- Projected profits at the sale
Projected Hold Time: ~5 Years
Projected hold time, perhaps the most straightforward concept, is the number of years we would hold the asset before selling it. This means 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 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 an extended period, allowing the market to rebound.
Projected Cash-on-Cash Returns: 6-8% 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%). That would return $1,000 a year and a measly $5,000 over five years.
That’s a difference of $35,000 over five years!
Projected Profit Upon Sale: ~40-60%
Perhaps the most significant 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, some or all of 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.
In Summary
Three is an easy number, and I like to keep things simple. So, when selecting deals to be presented inside the Kind Equity Partners Group, I’m looking for these three simple criteria:
- 5-year hold
- 6-8% annual cash-on-cash returns
- 40-60% profits upon sale
Sticking with the previous example, you’d invest $100,000, hold for five years, collect $8,000 per year in cash flow distributions paid out monthly (a total of $40,000 over five 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 this should give you a rough idea of what to expect.
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