Curiosity often leads prospective investors to ask a fundamental question: “If I invest $50,000 today, what kind of returns can I anticipate?” This curiosity stems from a desire to comprehend how real estate syndications can maximize their investment potential, especially in comparison to other investment avenues.
It’s imperative to acknowledge that the returns discussed herein are projected figures, grounded in analyses and informed estimations. They are not infallible guarantees, as every investment bears an inherent degree of risk. The purpose of the examples provided is to furnish a preliminary understanding rather than a definitive forecast.
In this article, we’ll delve into the three key criteria pivotal for evaluating anticipated returns in a potential real estate syndication deal.
Three Crucial Criteria
Every investment summary for a real estate syndication harbors a plethora of data. Let’s narrow our focus to these foundational concepts:
1. Projected Hold Time: ~5 Years
The projected hold time is a straightforward concept, representing the duration the asset is held before divestiture. For investors, this signifies the timeframe their capital remains committed to the investment.
A projected hold time of approximately five years offers several advantages:
- Ample flexibility: A significant transformation can occur in five years, providing investors with room for personal milestones or life changes.
- Strategic market cycles: This duration aligns with market cycles, allowing for investment, enhancements, appreciation, and exit within a reasonable timeframe.
- Loan term compatibility: A five-year hold aligns with the typical seven- to ten-year commercial loan terms, providing a safety net in case market conditions necessitate an extended holding period.
2. Projected Cash-on-Cash Returns: 8% Per Year
Cash-on-cash returns, synonymous with cash flow or passive income, represent the surplus after factoring in vacancy costs, mortgage, and expenses. This residual sum is distributed among investors.
For instance, an investment of $100,000 yielding eight percent per year would translate to a projected cash flow of around $8,000 annually or approximately $667 monthly. Over a five-year hold, this sums up to $40,000.
In comparison, a similar investment in a “high” interest savings account (earning 1%) over five years would generate a mere $5,000. The contrast amounts to $35,000 over the stipulated period.
3. Projected Profit Upon Sale: ~60%
The paramount puzzle piece involves the anticipated profit upon sale, with a target of around 60% in the fifth year.
By this juncture, property upgrades are complete, tenants are stable, and rental rates align with market norms. Enhanced property value, coupled with market appreciation, typically results in a substantial increase in the overall asset value, thereby yielding considerable profits upon sale.
Summarizing the Blueprint
In essence, the ideal blueprint for the deals we pursue encompasses:
- A five-year hold
- 8% annual cash-on-cash returns
- 60% profits upon sale
To illustrate, an investment of $100,000, upheld for five years, would yield $8,000 annually in cash flow distributions (totaling $40,000 over five years) and accrue $60,000 in profit upon sale. This culminates in $200,000 at the end of five years—$100,000 of the initial investment and $100,000 in total returns.
Doubling your investment in just five years—an enticing prospect that eclipses conventional savings account returns.
