Understanding Potential Returns so You Can Make Strategic Investi

[Jorge Abreu]

Understanding Potential Returns so You Can Make Strategic Investing Decisions

✨Sponsor-syndicated private real estate investments can be structured in many different ways. Some of the more typical structures used to divide the returns between the sponsor and the investors are as followed.

In most private syndications, the sponsor provides a portion of the capital for the investment but also offers the investment opportunity and the time, expertise, and team members to make the investment successful. The investors provide the balance of the money but also get to take a relatively “hands-off” approach to the project.

✍️For example:

The typical project often has the sponsor providing investors with a “preferred return,” often in the 6%-10% range, before the sponsor gets any proceeds outside of returns on his own personal invested capital and a predetermined split, say “70/30”. With this structure, the investors are entitled to 70% of distributable cash, and the sponsor gets 30% following the say “7% preferred” return to the investors. Most syndicators still focus on transactions where the sponsor has some of “its own skin in the game,” and this means that the investor funds will also include whatever money the sponsor contributes. Let’s look at an example of how this might look:

👉Investors contribute $900,000 of equity needed to close the deal

👉Sponsor contributes $100,000 of equity needed to close the deal

👉Sponsor gets 30% of distributable cash as his “carry” incentive

For a $100,000 distribution:

👉Investors (including the sponsors investment) will receive $70,000

👉Sponsor will receive $30,000 for his sponsorship role

👉Of the $70,000 to investors, outside investors will get $63,000, and the sponsor (in his investor capacity) will get $7,000, based pro-rata on everyone’s invested amounts.

This structure is sometimes preferred for its straightforward simplicity and perceived fairness to all the project participants. Syndicated real estate investment opportunities can be structured in many different ways; the above summary merely reflects one of the many possible alternative methods that investors and operators can use to work together. From investors’ point of view, it is important that investments be made under a structure that helps to keep an operator’s and investors’ interests aligned. Keeping the financing and operating interests aligned is important to the success of real estate projects as well as business ventures. 🙌

Your returns depend heavily on the investment strategy. A yield play will return a lower rate because it is already operating well and there is little upside other than inflation of market rents and perhaps some tweaking of expenses like water conservation. On the other hand, a value play is riskier and has the potential to return much higher rates. You may not see cash flow for 3-18 months on a value-play; however, the overall returns will be much higher. Returns also depend on the area and the ability of the sponsor to either manage the property well or hire and manage a property management company that can capitalize on all up-side potential.

Typically, investors expect the average Cash on Cash Return (COC) to be around 6% to 8% and the Internal Rate of Return (IRR) in the 15% to 20% range, depending on the perceived risk of the business plan. Return of capital in a relatively short period (3-5 years) is also a common goal of most investors unless they are more concerned with long term passive cash flow in which they look for a 5-10 hold.

💥It’s important to know what your goals are so that you can look strategically at each investment opportunity placed before you.

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