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Uncovering Potential Returns in Real Estate Syndication

One of the most frequently asked questions is, "What kinds of returns should I expect if I invest $50,000 with you today?"

We understand. You want to know how hard real estate syndications can make your money work for you, as well as how passive real estate investing compares to other types of investment vehicles.

To help answer that question, you should be aware that we will be discussing projected returns. That is, these returns are projections based on our analyses and best guesses, but they are not guaranteed, and any investment carries risk. The examples provided here are merely suggestions to get you started.

In this article, we'll look at the three main factors to consider when evaluating projected returns on a potential real estate syndication deal.

Three Primary Criteria

Each real estate syndication investment summary includes a slew of useful information. Concentrate on the following key ideas:

  • Hold time estimate

  • Cash-on-cash returns expected

  • Profits expected from the sale

Projected Hold Time: 5 Years

The projected hold time is the number of years we would keep the asset before selling it. This means that your capital will be invested in the deal for this amount of time.

A five-year hold period is advantageous for several reasons:

  1. A lot can happen in five years. You could start and finish a college degree, relocate, get married, or you get the idea. You need enough time to make a profit, but not so much that your children graduate before the sale.

  2. In terms of market cycles, five years is a reasonable time frame for investing, making improvements, allowing appreciation, and exiting before it's time to remodel again.

  3. A projected hold of five years provides a buffer between the estimated sale and the typical commercial loan term of seven to ten years. If the market softens after five years, we can choose to hold the asset for a longer period of time, allowing the market to recover.

Cash-on-Cash Returns Expected: 8% Per Year

Next, think about cash-on-cash returns, also known as cash flow or passive income. After vacancy costs, mortgage, and expenses, cash-on-cash returns are what remain. It is the pool of funds from which investors are distributed.

If you invested $100,000 and earned 8% per year, your projected cash flow would be $8,000 per year, or $667 per month. That's a savings of $40,000 over the course of the five-year term.

For fun, consider that the same amount invested in a "high" interest savings account (earning 1%) over five years would yield only $5,000.

That's a $35,000 difference over the course of five years!

Isn't that amazing?

Profit after sale is expected to be 60%.

The projected profit on sale is perhaps the most important puzzle piece. Typically, we aim for a profit of about 60% at the sale in year 5.

The units have been updated in five years, the tenants are strong, and the rent accurately reflects market rates. Because commercial property values are determined by the amount of income generated, these improvements, combined with market appreciation, typically result in a significant increase in the overall value of the asset, resulting in sizable profits upon sale.

To Sum It All Up

Isn't it obvious? In most of our transactions, we look for the following:

5-year holding period 8% annual cash-on-cash returns 60% profit on sale

Continuing with the previous example, you would invest $100,000, hold for 5 years, receive $8,000 per year in cash flow distributions paid out monthly (a total of $40,000 over 5 years), and profit $60,000 at sale.

This results in a total return of $200,000 after 5 years - $100,000 of your initial investment and $100,000 in total returns.

Before you invest, it is critical to understand your investment objectives.

How about doubling your money in 5 years? I'm sure you can't find such a savings account!

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