WHAT RETURNS CAN WE EXPECT TO EARN BY INVESTING IN A REAL ESTATE SYNDICATION?

As investors, it usually takes a considerable amount of time to accumulate a million dollars through working, saving, and investing. While some individuals may take the risk of investing everything in cryptocurrency, which may result in significant losses. However, once we reach the milestone of having a million dollars, we can research and invest wisely to increase the velocity of our money. This leads to a faster accumulation of wealth, and we can achieve our financial goals sooner. Interestingly, even a six-year-old child understands the concept of investing and earning returns. For instance, by borrowing money from his piggy bank at a lower interest rate and repaying it with higher interest, he learns how to make his money work hard for him. It is a valuable lesson that will help him to achieve financial success in the future.

To increase the velocity of our money, we need to find ways to make our money work harder for us without taking unnecessary risks. One effective way to achieve this is by investing in real estate. However, it’s important to note that not all real estate investments are the same, and there are countless ways to structure a deal with varying potential outcomes.

While some real estate deals offer significant potential for high returns, they may also come with substantial risks. On the other hand, some deals may provide a stable and consistent cash flow, but with limited potential for appreciation in the long term. Therefore, it’s crucial to thoroughly analyze each real estate investment opportunity and understand the potential risks and rewards before investing a large sum of money.

Before offering real estate investment opportunities to our investors, we conduct extensive due diligence and evaluate the deals to ensure that we are comfortable investing our own money in them. We review numerous deals, and each one is unique, just like snowflakes. However, we have established specific criteria that we use to assess these deals, and these benchmarks are what we typically aim for in the investment opportunities that we present to our investors.

This article will outline the typical returns that we strive to provide our investors and how we aim to meet these standards in the investment opportunities that we offer.

It is important to note that, as with any investment, there is a level of risk involved, and we cannot guarantee any returns. Therefore, it is essential to conduct your due diligence and carefully consider the potential risks before investing. With that said, we aim to provide a rough estimate of the types of returns that we typically consider for the investment opportunities that we offer. However, please keep in mind that these returns are not guaranteed, and there is always a risk associated with investing in real estate.

The returns outlined in this post are projections, and it’s essential to understand that they are not guaranteed. As with any investment, there is always a level of risk involved, and we cannot provide a guarantee of returns. The figures presented in this post serve as a rough estimate of the potential returns that we typically consider for the investment opportunities we offer. Before making any investment decisions, it is crucial to conduct thorough due diligence and carefully consider the potential risks associated with investing in real estate.

Now that we’ve covered the necessary disclaimers, let’s dive into the topic at hand.

Three Main Criteria

Real estate syndication investment summaries typically contain a vast amount of information, including various facts and figures about the asset and the investment opportunity. While each metric provides valuable insights into the deal, when evaluating a potential investment opportunity, we focus on three primary criteria to provide a quick overview of the deal.

1. Projected hold time

2. Projected cash-on-cash returns

3. Projected profits at the sale of the asset

Projected Hold Time: ~5 Years

One of the main criteria that we consider when evaluating investment opportunities is the projected hold time, which refers to the amount of time we plan to hold the asset before selling it. Typically, we look for projects with a hold time of around five years.

There are several reasons why five years is a reasonable length of time. For one, it’s a relatively long period, during which you could have six children or start and complete a college degree. It’s also long enough to see healthy returns, but not so long that you feel like you won’t have access to your money for a long time.

Furthermore, given real estate market cycles, five years is a modest timeline for us to get in, update the property, give the asset and market a little time to appreciate, and get out before lingering for too long. This is important because if we wait too long to sell, we may need to update the units all over again, which can be costly and time-consuming.

Another reason why five years is a good timeframe is that commercial real estate loans are often on a seven- or ten-year fixed term. Therefore, a five-year projected hold time gives us a bit of buffer to hold the asset a little longer if needed, especially if the market is soft at the time we initially projected a sale.

It’s worth noting that the market has tightened over the last several years, and for some deals to work, typical hold times now can be six years. Additionally, if cap rates compress quickly, value increases can justify a sale after only three years. Therefore, it’s crucial to have multiple exit strategies for your deal, whether it’s three, five, six, or even ten years’ time. However, it’s most common to see deals underwritten based on a five-year hold.

Projected Cash-on-Cash Returns: 8% Per year

Another key factor we consider is the cash-on-cash returns, which is the passive income generated during the investment. It’s the amount left after accounting for vacancy costs, mortgage, and expenses and is usually distributed quarterly to investors.

For the projects we evaluate, we prefer to see an annual cash-on-cash return of about eight percent. However, the specific return depends on the property’s class, whether C, B, or A.

To give an example, if you invested $100,000, you could expect a projected cash-on-cash return of about $8,000 per year, or $2,000 per quarter, for each of the five years. Thus, the total cash flow over the five-year hold would be approximately $40,000.

However, we don’t stop at just analyzing cash-on-cash returns.

Projected Profit Upon Sale: 40-60%

The third important criterion is the projected profit that investors can earn when the asset is sold after five years. At this point, the units have been updated, the tenants are stable, and rental rates are at market levels, resulting in increased revenue and property value. As commercial properties are valued based on income, these enhancements can significantly increase the property’s value at the time of sale.

For the projects under consideration, the expected profit upon sale is between forty to sixty percent. For instance, if an investor puts in $100,000, they can expect to earn $40-60,000 in profits upon the sale of the asset in year five. This profit is in addition to the cash-on-cash returns that investors receive during the holding period.

However, the estimated profit on sale only takes into account the improvements and efficiencies that the sponsor team plans to implement. It does not account for the appreciation of the specific market.

This is an important distinction.

Market selection is a critical aspect of our investment strategy. We focus on areas where there is robust job growth leading to an increase in the population and consequently higher demand for housing, resulting in increased rents. Nonetheless, while creating projected returns, we remain cautious and do not rely on market appreciation as a source of profit. We take into account baseline inflation but do not count on anything beyond that. Even if the market experiences a downturn, we ensure that the investment remains sustainable, and the capital of investors is safeguarded.

Summing It All Up

So there it is. Projected returns for our typical middle-of-the-road investment looks like this:

• 5-year hold

• 8-10% annual cash-on-cash returns

• 40-60% profits upon sale of the asset in year five

Assuming you invest $100,000 in a real estate syndication deal with the projected returns discussed earlier, you can expect to have around $200,000 at the end of five years. This amount includes your initial principal of $100,000, along with $40,000 in cash-on-cash returns and $60,000 in profits upon sale. This translates to a doubling of your investment in just five years, which is a great way to increase the velocity of your money. As a piece of advice, it’s always better to make your money work hard for you, so you don’t have to work hard for your money, as I often tell my son.

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