- #1 – Projected Hold Time: ~5 Years
- #2 – Projected Cash-on-Cash Returns: 7-8% Per Year
- #3 – Projected Profit Upon Sale: ~40-60%
- Evaluating Real Estate Syndication Deals
When considering an investment, most people want to know upfront what kind of return they can expect to make. It’s no different with real estate syndications.
Rightly so. When you’re choosing to put your hard earned money to work for you, you logically want to know how real estate syndications stack up against other types of investments. In particular, how does passively investing in real estate perform and is it too good to be true? Are there better investment options out there?
As you know, there’s always some degree of risk involved with every investment. The projected returns outlined in this article aren’t guaranteed, but are projected, ballpark illustrations to help you get started. In these examples, I based the projected returns on my analyses and best guesses.
This article will help you better understand what three main criteria (projected hold time, projected cash-on-cash returns, projected profits at the sale) you should look into when evaluating projected returns on a potential real estate syndication deal.
#1 – Projected Hold Time: ~5 Years
Projected hold time, as the name suggests, refers to the number of years that the asset is held before selling it. For the passive investor, this is the amount of time that your money would be invested in the deal and unavailable to you.
The most common hold time for a real estate syndication is around five years. Holding the property for this length of time is beneficial for a few reasons.
First, you need to allow enough time to earn healthy returns. We all know plenty of change can happen in just five years. You could get married, move and even start and complete a college degree and much more. Five years allows enough time for returns, but not so much that you’re unable to enjoy them.
In terms of market cycles, five years is a modest time frame for investing. Consider the time it takes to make improvements, allow for appreciation, and sell the asset before it’s time to remodel again.
Another reason for a five-year projected hold is the buffer it provides between the estimated sale of the property and the typical seven to ten year commercial loan term. Say for instance the market takes a downward turn at the 5-year mark, we can opt to hold the asset for a longer period of time, allowing the market time to recover.
#2 – Projected Cash-on-Cash Returns: 7-8% Per Year
Be sure to consider the important component of cash-on-cash returns, also known as cash flow or passive income. The amount of money remaining after vacancy costs, mortgage, and expenses equals the cash-on-cash returns. This collective reserve of money is what gets distributed to the passive investors.
As an example, 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 in cash-on-cash returns over the five-year hold period.
For comparison, say you invested $100,000 in a “high” interest savings account, earning 1%. That would return $1,000 a year and only $5,000 over a 5 year period.
The difference of $35,000 over the span of five years is quite substantial.
#3 – Projected Profit Upon Sale: ~40-60%
The final piece of the process, tying it all together, is the projected profit upon sale of the asset. As your sponsor, I typically aim for about 60% in profit at the sale in year five.
During the five year hold time, the units have been renovated and updated, tenants are strong, and rent accurately reflects market rates. When selling commercial property, the values are based on the amount of income generated, these improvements to the asset, along with market appreciation, typically lead to a significant increase in the overall value of the property. This increase in value leads to sizable profits upon the sale of the asset, benefiting everyone, particularly the passive investors.
Evaluating Real Estate Syndication Deals
When determining which syndication deal is right for you, be sure to consider these three criteria: projected hold times, projected cash-on-cash returns and projected profit upon sale of the property.
When I evaluate investment opportunities, here are the projections I strive for:
- 5-year hold
- 7-8% annual cash-on-cash returns
- 40-60% profits upon sale
Continuing with our 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.
Understand that these results are not guaranteed, as each real estate syndication deal is unique, but this will give you an idea of the exciting possibilities that come with passively investing in real estate syndications.