Real Estate Syndication Returns

by Christopher Levarek

“Don’t judge each day by the harvest you reap, but by the seeds that you plant.”

- Robert Louis Stevenson

Every day, I drive my kid to school in the morning for around 15 minutes. Often I do what I usually do whenever I drive and start a podcast of some kind. He is quick to let me know this is not ok as he yells “Boring!” if I ever put them on. Four year olds are so opinionated aren’t they?

So what do we do?

Switch over to the good ol radio and country music usually takes the cake. A good one came on the other day where the singer was singing about “Buying Dirt” and investing in things that matter real estate, family and happiness. Not only is it a great song, my kid was happy and I was happy! Bingo, nailed it Dad!

I had to of course bring this into a blog as this singer got it right. The best things to invest include dirt or real estate.

So why is that so many don’t?

In my opinion, it’s simply that many people don’t understand real estate or how investments into syndications provide returns, see this article for more on “What is a Syndication?”.

Many people invest in the 401k simply because they have a better understanding of it even if the returns are less and not as consistent.

Today, I’ll show how real estate syndication returns work on a typical investment with Valkere, our company and the many benefits that come along with it.

Come along for the ride!

Real Estate Syndication Returns - Cashflow

So if you are choosing to invest into real estate or a syndication as a passive investor, your return is typically broken into three types of returns. The first type of return is called cashflow or what is sometimes called a cash-on-cash return.

This is often the easiest one to understand. Cashflow is the positive income coming from the property after expenses and the mortgage(debt) are paid. You receive this cashflow or positive distributions which are your return.

Example :

You invest $50k into a investment and receive $3000 for the year from the investment in cashflow.

$3000 / $50,000 = 6% cash-on-cash return

Fairly easy right? This is usually a fundamental piece of every syndication and one of the easier ones.

So what other returns are there?

Real Estate Syndication Returns - Preferred Return

I’ll follow up cashflow with preferred return as they go hand-in-hand. In almost every syndication we do there is what’s called a preferred return. This simply is a type of return from cashflow paid to investors before any other distribution of that cashflow.

To explain further, often in syndications the investors and management team form a split in the partnership. This split means that investors get a portion of returns and the management team get a portion. A preferred return ensures that investors get some of their portion paid first before the management team.

Example :

You invest $50k into a investment which is set to return 10% in cashflow for the first year. This investment has a preferred return of 6% as well.

Additionally, the investment is split between the investors and management 70/30.

Let’s imagine the investment only returns 7% in the first year.

In this case, investors would receive 6% first and then 70% of the 1% remaining.

The management team would then receive 30% of the 1% remaining.

The main takeaway is that preferred return ensures investors receive cashflow as a priority.

Real Estate Syndication Returns - Average Annual Return

Finally we come to the Average Annual Return when looking at real estate syndications. This is the one which is often called the return on investment. The AAR is your return over the life of the hold or time of ownership.

It simply takes your yearly returns you received, the final distribution or return after the property sold and calculates the return over X number of years. It is often what most people look at when evaluating if an investment is good or bad as it is a overall picture of the investment.

Example :

You invest $50k into a investment or syndication to which you receive $3000 in year 1, $4000 in year 2, $5000 in year 3 and $10000 at the end of year 4 when the property sells.

In this case, if you added all your returns together : $3000 + $4000 +$5000+$10000 and divided by your initial investment($50,000) and then divided by the 4 year hold time, you would have an 11% AAR or return on investment.

($22000 / $50000 ) / 4 = 11% AAR

The Average Annual Return is a great metric to look at to gauge the end result for you as a passive investor.

*One last return worth mentioning is the IRR or Internal Rate of Return.

The IRR is often used like the AAR to justify if the deal is a good one. This return however uses a complicated formula for calculation and attempts to include the value of money over time in the calculation.

You can read more on the IRR in the next article as I’ll dive deeper on this one!

IN FINAL

The above basic returns are fundamental to almost every deal or real estate syndication. Hopefully now you have an understanding on what to look for and how real estate syndication returns are structured.

Simply knowing these terms and where they come from will only help your investment strategy and confidence. Happy Investing!