A Peek Into The Projected Returns In A Real Estate Syndication
As you probably know, no two real estate syndication deals are exactly the same. There are a million ways to structure a real investment deal, and just as many potential outcomes.
Some real estate syndication deals offer a huge potential appreciation upside but also come with huge risks. Others offer steady cash flow but without the potential for appreciation.
At Starting Point Capital, we’re real estate investors first.
We look for real estate syndications that we would invest in ourselves and perform our due diligence to ensure we feel comfortable investing our own money in the deal. Only then do we offer those real estate syndications to our community of like-minded investors.
We sort through piles of real estate investment opportunities every month. And just like snowflakes, no two are the same. Based on our many years of experience as real estate investors and operators/syndicators, we’ve established a stack of benchmarks that we look for when evaluating potential real estate syndication deals.
Before we ever share an opportunity to invest in a real estate syndication with our limited partners/passive investors, the underwriting criteria and business plan must check all the boxes. In this post, we’ll look at some of the typical expected returns we aim to offer passive investors within each of our real estate syndications.
Big Fat Disclaimer About Real Estate Investing
You probably saw this coming from a mile away, but I gotta do it anyway. Before we get into the numbers, I have to insert a big fat disclaimer here for the one percent of you who will, at some point, get all up in arms because we didn’t deliver these exact returns.
Yes, I see you, don’t try to hide!
As the title of this post suggests, these are only PROJECTED returns. As with any real estate investment, we cannot guarantee any returns, and there’s risk associated with any investment. This is true for any and every real estate syndication company.
Real estate syndications are often referred to as speculative investments, but we believe that with our experience, we know the metrics to watch for and the property management team in place, to provide excellent investment opportunities for our investors.
This article is only meant to give you a rough ballpark of the kinds of returns we aim to provide, whether they be through preferred return, appreciation, cash flow throughout the hold period, or on the sale.
For the specific details of available real estate syndication investment opportunities, be sure to thoroughly review the private placement memorandum and business plan. We know that no one wants to read legal jargon all day, but it’s crucial to the security of your financial and intellectual resources that you fully understand the passive investment process. Investing in a real estate syndication deal is much different than purchasing single-family properties.
Returns on Real Estate Syndications
People will always need somewhere to live, so multifamily apartment buildings are some of our most popular real estate syndication offerings. This real estate market is attractive to passive investors because of its generally stable cashflow profile and opportunity for appreciation.
There’s even more opportunity for cash returns (and some added risk) when the real estate syndicator focuses on properties that can be valued and appreciated – in other words, value-add real estate syndications – like we do!
In any case, real estate syndications’ equity splits are pre-calculated and outlined in the PPM and Operating Agreement before you ever send your investment capital in. So, you always have an opportunity to review (and perform due diligence on) any returns projections.
With that, let’s get to talking about your favorite thing, cash flow!
Three Main Criteria of Our Overall Real Estate Investment Strategy
If you’ve ever seen an investment summary for a real estate syndication, you know that there are a TON of facts and figures in there.
Each metric has its merits and tells you a certain something about the real estate asset and the deal at hand. When doing our quick synopsis of real estate syndication investment opportunities, we look at three main criteria:
Projected hold time
Projected cash-on-cash returns
Projected profits at the sale of the asset
Projected Hold Time: ~5 Years
This is perhaps the easiest of the three real estate syndication criteria to understand. As the name would suggest, projected hold time is the amount of time we plan to hold the real estate property before selling it. Typically, we lean toward projects that have a hold time of around five years.
Why five years? Well, here are a few reasons:
First, five years is a relatively long time if you think about it. Technically, you could have six children during that time (yes, I did the math). You could start and complete a college degree. You could binge-watch five seasons of your favorite Netflix show. You get the point. Five years is a decent chunk of time.
There are certainly some passive investors who are at a point in their lives where they want to invest for a longer period of time. Of course, your personal investment decisions should be based on your individual goals. We find that five years is a good length of time for most investors. Long enough to see some healthy returns, but not too long that you feel like your kids will have graduated from high school before you get access to that money again.
In addition, given real estate market cycles, five years is a modest timeline for us to get in, update the real estate property, give the asset and market a little time to appreciate, and get out before lingering for too long (when it’ll be time to update those apartment building units all over again).
Plus, commercial real estate loans are often on a seven- or ten-year fixed term, so with a five-year projected hold time, that gives us a bit of buffer to hold the asset a little longer if needed, in case the real estate market is soft at the time we’d originally projected a sale.
Projected Cash-on-Cash Returns: 6-8% Per Year
The next core metric we look at is the cash-on-cash returns, also known as the cash flow, which makes up the passive income real estate investors get during the course of the real estate syndication investment.
Cash flow returns are what’s left after you factor in vacancy costs, mortgage, and expenses, and it’s the pot of rental income money that gets distributed to investors. Sponsor fees, the acquisition fee, and other property and asset management fees are removed first. The remaining cash flow is usually distributed to passive investors on a monthly or quarterly basis.
For the real estate syndications we like to pursue, we prefer to see cash-on-cash returns of about six to eight percent per year.
As an example, if your initial investment in a real estate syndication were $100,000, the projected cash flow returns for each of the five years during the hold period would be about $7,000 to 8,000, or roughly $1,750 to 2,000 per quarter.
This comes out to roughly $35,000 to 40,000 over the course of a five-year hold.
Just for kicks, let’s compare that to what you would get from a savings account during that same amount of time. Average interest rates on savings accounts sit south of one percent, but let’s just stick with one percent for simplicity’s sake.
If you were to put $100,000 into a savings account over five years, you would make about $5,000 in interest over the course of five years ($1,000 per year for 5 years).
That means that, at the end of 5 years, you’d have a grand total of $105,000. When you compare that to the $140,000 of passive income with the real estate syndication, it’s a total no-brainer!
Projected Profit Upon Sale: 40-60%
But of course, that’s not all. Perhaps the biggest piece of the puzzle in real estate syndication deals is the projected profit upon the sale of the real estate asset in year five.
At this point, the units have been updated, the tenant base is strong, and rents are at market rates. Each of these improvements contributes to the overall revenue that the real estate asset is able to generate, thereby increasing the property value. (Remember that commercial real estate is valued based on the amount of income the asset generates, so these improvements typically add significant value to the property by the time of the sale.)
For the real estate investment projects we’re looking at, the projected profit at the sale of the rental property is around forty to sixty percent.
Sticking with the previous example, if your original investment in a real estate syndication were $100,000, you would receive $40-60,000 in profits upon the sale of the real estate asset in year five.
This is on top of the cash flow you’re receiving from this real estate syndication throughout the hold time.
I should also point out that the projected profit on the sale of our real estate syndications takes into account the sponsor team’s plans for the improvements and efficiencies to the real estate property, but it does NOT factor in the appreciation of the investment property in that particular market.
This is an important distinction.
When we choose real estate markets in which to invest, we’re always looking for areas where job growth is strong, and as a by-product of that, the population is increasing as well. This leads to increased demand for housing, which, in turn, leads to increased rents. What that means for you as a passive investor is more money in your pocket!
While we always focus on forcing appreciation on our real estate assets, we never bank on it. When putting together these projected returns for any real estate syndication offering, we always make conservative underwriting part of our overall investment strategy. We include several options for a predetermined exit strategy for each unique real estate syndication, and we never count on that market appreciation.
We factor in baseline inflation, but anything on top of that is a bonus. This is so that even if the commercial real estate market tanks during the course of the hold, we can make sure that the real estate syndication can still stay afloat and that investor capital and our passive investors’ financial future remains protected.
Preserving passive investor capital is always our number one priority, above and beyond any shiny projected returns.
A Summary of the Returns You Can Expect From Real Estate Syndications
So there you have it. Projected returns for our middle-of-the-road typical real estate syndications look like this:
5-year hold on real estate assets
7-8% annual cash-on-cash returns, or cash flow distributions
40-60% profits upon sale of the asset in year five
If you were to invest $100,000 in a real estate syndication deal with these projected returns, you would end up with roughly $175,000 to 200,000 at the end of five years.
$100,000 of your original principal + $40,000 in cash-on-cash returns + $60,000 in profits upon sale = $200,000 at the end of five years
With this example, you can easily see how a real estate syndication investment can put your money to work for you in a powerful way. With our multifamily investment opportunities, you have the potential to double your money passively in just five years! Try asking for that from a savings account, and let us know how that goes.
At Starting Point Capital, we help you scale and diversify your real estate portfolio through investing passively in real estate syndications (group investments).
You get all the benefits of real estate investing with none of the hassles of being a landlord or hiring a property management team. When you decide to join the community of passive investors and dive into real estate syndications alongside us, we’ll take over the heavy lifting while you relax and enjoy the ongoing cash flow.
