👋 8% preferred return, doesn't mean you receive 8% any year.

[Justin Goodin]

Truth: An 8% preferred return, doesn't mean you receive 8% any year.

The preferred return in real estate syndications alludes to the precedence of limited partners receiving a specified return, BEFORE the general partners share in the profits.

// A preferred return (Pref) is not a guarantee or claim that you will get X% in any given year.

How much (or how little) the project cash flows, will determine what you receive on a quarterly basis.

🏢Example:
- $100K investment
- 8% pref

Year 1: You receive $2,000 (2%)
6% is accrued

Year 2: You receive $4,000 (4%)
10% is accrued

Year 3: You receive $6,000 (6%)
12% is accrued

Sale: Pref is caught up with sale proceeds. Then General Partners can share in profits.

It’s not unusual for syndications to roll over a balance right into the sale of the property. The profits from the sale are then redistributed with priority given to catching up on any missed preferred distributions.
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✅ Bottom Line: If a sponsor is offering a preferred return, it does not mean you will receive that % every year in distributions. This is NOT a bad thing and pretty common with real estate syndications.

Did you know this before reading this post? Let me know what you think about this in the comments 👇

[Chris Seveney]

@Justin G.

This is assuming also that it is cumulative.

Things to also check are if the preferred is cumulative as well as compounding

If it’s not cumulative it means if a distribution is missed they may not need to make it up. If it’s compounding that means if it’s missed it will also compound interest

Typically you see it cumulative and not compounding but two more important things to understand