Diving into Projected Returns of an Apartment Syndication

by Christopher Levarek

“Never depend on a single income. Make investment to create a second source.”

- Warren Buffett

As an investor, one of the most common topics of an investment is…you guessed it, the returns. We get this question the most frequent on the many calls with interested real estate investors.

“If I were to invest X amount with an upcoming opportunity, what kind of returns could I expect?”

This of course is perfectly understandable. Making your hard-earned money work for you is crucial and understanding the return on investment is a main focal point.

So let’s dive into an example investment and discuss some projected returns. Let us first start by saying that projected returns can change per opportunity and these are estimations, so not a full guarantee. Like any investment, there will always be an inherent risk associated with an investment and we like to be transparent with all our opportunities.

With that being said let’s take a look at some typical returns for a real estate syndication. We’ll explore three main items to understand the returns for a deal as an investor.

Three Main Points of Focus :

Hold Time - Length money is invested or property is held.

Cash-on-cash return - Return on investment from Cashflow (Rents)

Profit-from-Sale - Return on investment from Sale

Hold Time

This one is straight forward. If you invest your money in a specific year, how long will the property or project take before you get your money back? Or how long will the property be held under the partnership or syndication before it is sold, thus ending the ownership or investment for the investor.

We typically like to keep our hold times for our projects around a 5 year hold. Why 5 years?

5 years is adequate time to execute a business plan for renovations, unit turns and add value to the property increasing income or cashflow.
5 years is short enough that many investors can receive a reliable return and investment but also be able to recoup those investment funds for say a son’s college tuition, daughter’s marriage, etc.
Real estate market cycles ebb and flow. Meaning 5 years can allow our firm to best exit a property at certain times if the market is peaking or hold to move through a low point in the market.

Cash-on-cash return

This one is a more common aspect of investment in real estate also aptly named passive income or cashflow. Basically, it is simply your return on your money invested after all things considered such as expenses, mortgage or vacancy costs.

For example, if you invested $50,000 in an investment and earned 6% per year, the projected cashflow would be $3000 per year or $250 per month. This equates to $15,000 from cashflow over the hold period of say 5 years.

Additionally, this 6% per year on our projects is a preferred return. What is a preferred return? This is simply a return that is paid to investors before any other partner or person on the project.

Let’s assume you instead put that $50000 into a savings account earning 1%, you would instead make $2500 over 5 years.

A whole $12,500 difference over 5 years between the previous return!

Makes you wonder why so many choose the savings account route, no?

Profit-from-Sale

Finally we arrive at the profit from sale or the profit made when the property is sold at it’s newly improved value after 5 years. Typically the profits from sale are matched to the cashflow in many of our opportunities again as a preferred return.

When the property is sold in year 5, we match the amount already paid out in cashflow over the preceding 5 years to investors first.

So let’s continue the example before of someone investing $50,000 in a project and who then received $15,000 over 5 years in quarterly distributions. At the sale of the property, this investor would receive $15,000 in a match of the cashflow bringing a total of $30,000 of return on a $50,000 investment over 5 years.

The profit-from-sale is directly tied to executing the business plan over 5 years, improving the asset-value, appreciation of the market-value and raising income or rents. Most of our projects pay investors first so that even in a down market or a business plan that did fully hit projections, investors receive their estimated return as presented at start of the deal.

Putting it All Together

So let’s put all those three components together :

5-year hold
6% annual cash-on-cash returns (preferred return)
6% match at profit-from-sale (preferred return)

Example :

Investment Amount : $50,000

Cashflow or Cash-on-Cash Return : 6% or $15,000 paid in quarterly distributions over 5 years.

Profit-from-Sale : 6% (match) or $15,000 paid at sale of property

This results in $80,000 at the end of 5 years, or $30,000 returns and $50,000 of your original capital.

This is a 60% return on investment or a 12% annualized return (preferred as well)!

In Final

Investments should be simple and straight forward in our opinion.

Once you understand an investment model or business plan, you can feel much more confident in a decision and that is why our goal is to keep our model or project returns easy to understand.

This allows us to be transparent in our projects and reliable in our delivery on projections.

We are always happy to walkthrough specifics in more detail on a typical project, join our Valkere Investor Club to discuss our investment strategy or see upcoming opportunities.

Invest Smart!