Evaluating The Projected Returns On A Commercial Real Estate Syndication

by | Jul 9, 2022 | Investing Advice | 0 comments

If you’re like most would-be investors, you’re likely wondering how much money could you make if you invest in a real estate syndication. In fact, one of the most common questions we get asked about real estate syndications is, “If I were to invest $100,000 with you today, what kinds of returns can I expect?”

That’s a valid question. Before moving full steam ahead, you want to know how real estate syndications can make your money work for you. More particularly, how does passive real estate investing stack up to the returns you’re getting through other types of investment vehicles.

In this article, we help answer that question. Before you get started, you should first know that we’ll be talking about projected returns. That is, these returns are projections, that are based on our experience, analyses, and best guesses. They aren’t guaranteed, and as you know, there’s always some degree of risk associated with any investment. The examples we provide here are for educational purposes and are only meant to provide you with some ballpark ideas to get started.

Keep reading as we explore the following three main criteria you should check into when evaluating the 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
 
#1 – Projected Hold Time: ~5 Years

The projected hold time is a straightforward concept. Just as the name suggests, it’s the number of years we 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 and unavailable to you.

A hold time of around five years is beneficial for a few reasons. First, there’s plenty of life that can happen in five years. Any number of things could happen. You could get married, start a family or move to a new city. 

A five-year hold period allows you enough time to earn healthy returns, but not so much time that you can’t enjoy them. 

Taking market cycles into consideration, five years is a relatively modest stint to have your money invested. During that time, you’re able to make improvements, allow for appreciation, and exit before it’s time to remodel again.

A five-year projected hold also provides a nice buffer between the estimated sale and the typical seven to ten-year commercial loan term. That way, if the market softens at the five-year mark, we have the option of holding the asset for a longer period of time, allowing the market extra time to rebound.

 
#2 – Projected Cash-on-Cash Returns: 4-6% Per Year

Be sure to also consider the projected cash-on-cash returns. Cash-on-cash returns are also known as cash flow or passive income. Cash-on-cash returns is the money that remains after vacancy costs, mortgage, and expenses. What’s left in this pot is what gets distributed to investors. 

For example, if you invested $100,000, and earned five percent per year, the projected cash flow would be about $5,000 per year or about $500 per month. That’s $25,000 over the five-year hold period.

If you invested the same amount in a savings account, with so-called high interest, earning 1% you’d receive a return of $1,000 a year. That’s only $5,000 over a five-year period.  

That’s a substantial difference of $20,000 over the span of five years. 

 

#3 – Projected Profit Upon Sale: ~60-80%

The remaining, and arguably the largest, piece of the puzzle piece is the projected profit upon the sale of the asset. We typically shoot for about 75% in profit at the sale of the property in year five.

During that five years, the units have been updated, the tenant base is strong, and rent accurately reflects market rates. 

Keep in mind that commercial property values are based on the amount of income generated, not comps as with residential real estate. The improvements made to the property, along with market appreciation, typically lead to a substantial increase in the overall value of the asset. This appreciation most times leads to sizable profits upon the sale.

 

What You Can Expect as a Passive Investor

To sum it all up, here are the top criteria we typically look for in all our deals. 

  • 5-year hold
  • 4-6% annual cash-on-cash returns
  • 60-80% profits upon sale 

 

That sounds simple enough, right? 

To break it down further, using our previous example, say you invest $100,000, hold the property for 5 years, and collect $5,000 per year in cash flow distributions paid each month. That’s a total of $25,000 over five years. Then you’d also earn $75,000 in profit at the sale of the property. 

This gives you $200,000 at the end of five years, with $100,000 being from your initial investment, and $100,000 in total returns.

While each real estate syndication deal is different and these results are not guaranteed, this example should not only give you a rough idea of what to expect, but also a clear illustration of how powerful real estate syndications can be in building your wealth.

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