Syndication explanation for dumby

[Josh Heatherly]

Been a little confused on exactly how syndication works. How are returns decided for a investment? If I had $50k and invested on a syndication deal , how/when do I get my 50k back? How do I know how much I will get monthly/quarterly as a split partnership? If not bought out before the property is sold, does the entire profit made on the sale get split between investors who helped fund the deal? I know I am over thinking it but would love it dumbed down for me. The process seems confusing to me so any help is more than appreciated!

[Arn Cenedella]

@Josh Heatherly

These are not dumb questions.

Education should come before investing your hard earned dollars.

There are no hard and set answers to any of your questions. 
But let me fill in some blanks with some generalities.

1. Returns are not decided, they occur. They are NOT guaranteed they are simply projected by the syndicator. What actually happens may be far different - good or bad - from what is projected. Like any other investment, the returns are "decided" by a whole host of issues - interest rates, cap rates, rental rates, national economy, local economy, and perhaps most importantly the skill of the operator/syndicator. In GENERAL, for a multifamily syndication one might expect to get a 5% to 6% average annual cash on cash return ($625 per quarter for your $50,000j over the length of the hold, a 13% to 14% IRR maybe 18% average annual return and a 1.8x to 2x equity multiple over 5 years. This would mean for a $50,000 investment over 5 years you MIGHT receive $40,000 to $50,000 in cash flow and appreciation profit plus your $50,000 back for a total return of $90,000 to $100,000. I repeat there are NO guarantees - your investment could do better or worse. These are NOT annuities that pay a fixed return. The returns are all based on the market which can go up or down.

2. The hold period might be 3 to 7 years determined solely by the syndicator. Again the hold period depends on a whole host of factors just like returns. The syndicator sells the property when they decide to sell it. An investor has no input on this.

3. Generally syndicators get 20% to 30% of the profit at sale - the remainder 70% to 80% of the profit is distributed to the investors in proportion of their investment to the total investment.

Syndications pool money from lots of people. Syndicators buy the property and operate it. Everyone shares in the profits if they exist.

Hope this helps - lots more info on the web. Podcasts are good too.

Arn