Your Three-Point Checklist to Determine a Real Estate Syndication’s Projected Returns

by | Jul 14, 2022 | Investing Advice

We have helped many Dr.’s, including Physicians, Dentists and PhD’s invest in real estate, and I appreciate their approach to work goals and life goals.

Each group expects quality work, encourages direct answers, and understands long-term thinking along with the value of short-term goals. 

One of the first questions they’ll ask, and the question you’re probably wondering, is, “If I were to invest $50,000 with you today, what kinds of returns should I expect?”

You’re probably wondering the same thing!  While you understand that a real estate syndication is different from a real estate investment trust, you also want to know how the syndication makes money, how long it takes, and what kind of money you’ll make in the end. 

To help answer that question, you should first know that we will be talking about projected returns. These returns are projections based on our analyses and best guesses, but they aren’t guaranteed, and there is always risk associated with any investment. So the examples herein are only meant to provide some ballpark ranges to get you started.

In this article, let’s explore the three main criteria you should look into when evaluating projected returns on a potential real estate syndication deal:

  1. Projected hold time
  2. Projected cash-on-cash returns
  3. 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:

  1. Changes – Plenty can change in just 5 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.
  2. Market cycles – considering market cycles, a five year period is a modest stint in which to invest, make improvements, allow appreciation, and exit before it’s time to remodel again.
  3. Buffer –  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 a more 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 $667 per month. So 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 only $5,000 over five years.  

That’s a difference of $35,000 in just five years!

 

Projected Profit Upon Sale: ~40-60%

One of the biggest pieces of the returns are from the projected profit upon sale. Typically, we aim for about a 40% to a 60% return in profit at the sale in year 5.

In five years, 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 asset’s overall value, thus leading to sizable profits upon the sale.

 

In Pursuit Of A Strong Return On Investment

 

Simple enough, right? Typically, in the deals we do, we are looking for the following:

  • 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 capital 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.

With an understanding of how these numbers are calculated, you’re likely to feel more sure about real estate syndications being your next investment choice. Luckily, you’re in the right place! With Village Capital Partners, you can invest with the confidence that you will create long-term stability for yourself and your family through real estate syndication deals. 

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