What Level Of Returns Can You Expect From A Commercial Real Estate Syndication?
Here’s one of the most common questions I get asked from someone considering investing in a real estate syndication, “If I were to invest $100,000 with you today, what kinds of returns could I earn?”
It’s a smart question. If you’re investing your hard-earned money, it’s logical for you to expect to know how real estate syndications can make your money work for you. It’s also a great way to see how passive real estate investing compares to other types of investment vehicles.
In the article, I’ll do my best to answer that question, just keep in mind I’ll be talking about projected returns. These returns examples are projections and are based on my analyses, experience, and best estimates.
There’s always risk associated with any investment and my projections aren’t guaranteed, they’re only meant to provide some ballpark ideas to get you started. Keep reading as we explore the top criteria you should look into when evaluating projected returns on a potential real estate syndication deal:
Projected hold time
Projected cash-on-cash returns
Projected profits at the sale
Projected Hold Time is Typically ~5 Years
Projected hold time refers to the number of years I would hold the asset before selling it. What this means for you, the passive investor, is that this is the amount of time that your capital would be invested in the deal. Typically, hold times are around five years.
A hold time of five years or so is beneficial for investors for a few reasons. For instance, there’s a great deal that can change in five years. You could get married, move to a new city or even complete a college degree. Five years gives you enough time to earn healthy returns, but not so much that you can’t enjoy the returns in a reasonable amount of time.
In terms of market cycles, five years is a modest time frame in which to invest, make needed improvements, allow for appreciation, and sell the asset before it’s time to remodel again.
The standard five-year projected hold also provides a nice buffer between the estimated sale time and the typical seven- to ten-year commercial loan term. If the market happens to soften at the five-year mark, I can hold the asset for a longer period of time, giving the market additional time to rebound.
Projected Cash-on-Cash Returns are 7-8% Per Year
Cash-on-cash returns, also known as cash flow or passive income, are the net profits after covering vacancy costs, mortgage and expenses. This is the pot of money that gets distributed among the passive investors.
Consider this example, if you invested $100,000, and earned 8% per year, your projected passive income would be about $8,000 per year or about $667 per month. That equals out to be $40,000 over the five-year hold.
For comparison, say you invested the same amount in a so-called high interest savings account, that earned 1% interest. That account would return $1,000 a year, equalling out to $5,000 over a five year period.
A difference of $35,000 over the span of five years is quite substantial.
Projected Profit Upon Sale is ~40-60%
When I put together a real estate syndication deal, I always strive for around 60% in profit at the sale of the asset in year five. Projected profit upon the sale of the property is possibly the biggest piece of the project’s puzzle.
Consider this, in five years’ time, the units have been renovated and updated, tenants are strong, and rent accurately reflects the area market. Commercial property values are based on the amount of income they generate. The improvements to the property, along with market appreciation, typically lead to a significant increase in the overall property. For the passive investor, this means you can most times, expect sizable profits upon the sale of the asset.
Evaluating Deals’ Projected Returns
To recap, when I’m evaluating deals on your behalf, I’m looking for the following (minimum) criteria to be met:
7-8% annual cash-on-cash returns
40-60% profits upon sale
Continuing with the example from above, if you invested $100,000 into a property being held for 5 years, you’d collect $8,000 per year in cash flow distributions paid out monthly, which totals $40,000 over 5 years. You’d also get your original investment capital returned, plus earn $60,000 in profit at the sale of the property.
The end result is $200,000 at the end of 5 years, with $100,000 being your initial investment, and $100,000 being in total returns. Essentially, investing in real estate syndications gives you the opportunity to potentially double your money over the course of five years.
That being said, remember these results are not guaranteed. Each real estate syndication deal is unique, but hopefully this information has given you a rough idea of what you can expect when you put your money to work for you in a commercial real estate syndication.