Syndication numbers over 5 years

[Timothy Lin]

Reading Vanessa Peters book “the busy professionals guide to passive real estate investing” and in it she has a chart showing initial investment of 100k, 8% preferred return, 20% cash on cash return including sale of property, and 5 year hold.

Each year she shows $8k return (years 1-4) then a $168k return in year 5 including the return of equity. Total exit is $200k (168+4x8). I am unable to see where the 168 comes from. 100k from the initial investment, 8k from annual return, 20k from cash on cash?

Or is it standard for a syndication for the annual returns to be added with the 20% cash on cash applied to the 100k initial investment plus 5 years of 8k returns?

[Evan Polaski]

@Timothy Lin

You will see two main ways of calculating cash on cash returns:

First, is what I call "annual cash on cash":  Annual distributions divided by amount invested.  In this case, Vanessa is talking about paying 8%, or $8k, in a given year on a 100k investment, so 8%.

Second, "avg cash on cash, excluding sale": in her example she assumes a flat 8% paid each year, so avg would be 8%.  But if year 1 was 4%, yr 2 5%, yr 3 6%, yr 4 7%, yr 5 8%, the average would be 6%.  But each given year is the projected actual cash flow the GP projects you will receive from the investment in that given year.  Add them up, divide by 5, and you get 6%.

Third, and most marketed, "average annual cash on cash, including sale": back to Vanessa's example, 32k distributed over first 4 yrs.  $168k disributed in yr 5, presumably, 8k of which is coming from operations of asset, and 160k is coming from sale.  Either way, you got back $200k over 5 yrs on a 100k investment.  So 100k profit over that 5 yrs, and the key part: DIVIDED by 5 yrs, gets you 20%.  

The biggest issue is, she does not seem to state that the 20% is an ANNUAL number, not an overall number.  The overall number is typically presented as a multiple, i.e. 2x equity multiple over 5 yrs.  In theory they are all the same inputs, so you could say, 200% cash on cash return over 5 yrs, but that is not the norm.