One of the most common questions that I get asked about real estate syndications is, “If I were to invest $50,000 with you today, what returns should I expect?”
I get it. You want to know how real estate syndications can make your money work for you, and how passive real estate investing stacks up to the returns you’re getting through other types of investment vehicles.
In order to help answer that question, you should first know that we will be talking about projected returns. That is, these returns are projections, based on our analyses and best guesses, but they aren’t guaranteed, and there’s always risk associated with any investment. These examples are only meant to provide some ballpark ideas to get you started.
Every investment opportunity should outline the business plan, the projected returns by year, and any other details around cash flow projections. For instance, if the business plan calls for heavy renovations to increase the value of the property in the first few years of ownership, returns may be lower, and will accrue to be distributed at a later date.
Always look at these numbers for each deal you consider and think about comparing multiple offerings against your investment goals.
In this article, let’s explore the 3 main criteria you should look into when evaluating projected returns on a potential real estate syndication deal:
Projected hold time, perhaps the easiest concept, is the number of years we would hold the asset before selling it. What this means for you is that this is the amount of time that your capital would be invested in the deal.
A hold time of around five years makes sense for a few reasons:
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.
Blue Elm’s real estate syndications are “investor friendly” through the use of Preferred Returns. This term is used to describe the amount of money paid out first, to the investors. However, that can sometimes accrue (or be paid out at a later date) if the property is undergoing renovations or other capital improvements. These projections are outlined in each business plan. Luckily, these returns are paid out by the end of the hold period at the latest, leaving the investors with the same total returns.
If you invested $100,000, and earned eight percent per year, the projected cash flow would be about $8,000 per year or about $667 per month. That’s $40,000 over the five-year hold. Again, this return could be accruing, and therefore not distributed until there is enough cash flow to distribute. But it is paid out to investors first – hence the term “preferred” return.
Often the largest part of the overall investment return is the projected profit upon sale. Typically, we aim for about 60% in profit at the sale in year 5.
It can take between 3-5 five years to make sure the units have been renovated, 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 overall value of the asset, thus leading to sizable profits upon the sale.
Simple enough, right? Typically, in the deals we do, we are looking for the following:
Sticking with the previous example, you’d invest $100,000, hold for 5 years, collect $8,000 per year in cash flow distributions paid out monthly (a total of $40,000 over 5 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 investment, 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.
Here at Blue Elm Investments, we provide multiple ways to leverage the power of real estate syndications in your investment portfolio so you can take advantage of real estate’s cash flow, equity, appreciation, and tax benefits.
If you’re accredited and looking to deploy capital, we invite you to sign up for our Investor Club to get access to our current or upcoming opportunities.