SO HOW MUCH WILL I MAKE INVESTING IN AN APARTMENT SYNDICATON?

[Rick Martin]

This post has to start with a disclaimer. No one can guarantee returns, and there's a risk associated with any investment. Having said this, it will give those who are curious a rough ballpark of the kinds of returns you might expect.

1) We start with the hold time. Apartment syndication is a non-liquid investment. It can range from 3 to 10 years, but you will find the most common hold time to be 5 or 6 years.

2) The first source of income is the cash-on-cash return or COC%. The cash flow is what's left after you factor in vacancy costs, mortgage, and expenses, and it's the pot of money that gets distributed to investors, usually quarterly. The most common COC percentage I see most deals shoot for is 8%. That is, if you were to invest $100,000, the projected cash-on-cash returns for each of the five years would be about $8,000. Thus, Cash flow comes out to approximately $40,000 throughout a five-year hold.

3) Projected Profit Upon Sale: 40-60%. In a value-add scenario, the units get updated, the tenant base improves, and rents get raised to market rates. Operational efficiencies can also result in lower expenses, so with higher rents and lower costs, we increase the NOI. Higher NOI ÷ the prevailing cap rates result in increased profit at the sale. How much? It is very tough to predict, but you will often see a 60% increase over a 5-yr hold. Divide that 60% by five years, and you have another annual 12% from the profit at the sale to add your 8% COC%

The math comes out to a 20% average-annual-return multiplied by five years for a 100% total return. The ballpark result is doubling your money every five years. Not an exact science, but it does give you an idea.