One of the most common questions that we get asked is, “If I were to invest $50,000 with you today, what kinds of returns should I expect?”
We understand. You want to know how hard real estate syndications can make your money work for you, and how passive real estate investing stacks up to the returns you’re getting through other types of investment vehicles.
In order to help answer that question, you should first know that we will be talking about projected returns. That is, these returns are projections, based on our analyses and best guesses, they aren’t guaranteed, and there’s always risk associated with any investment.
These examples are only meant to provide some ballpark ideas to get you started.
In this article, we’ll explore the three main criteria you should look into when evaluating projected returns on a potential real estate syndication deal.
Three Main Criteria
Each apartment syndication investment summary contains a lot of useful data. Focus on these core concepts:
1. Projected hold time
2. Projected cash-on-cash returns
3. Preservation of capital
Projected Hold Time: ~6 Years
Projected hold time, perhaps the easiest concept, is the number of years we would hold the asset before selling it. What this means for you is that this is the amount of time that your money would be invested in the deal.
A hold time of about six years is beneficial for a couple of reasons. Considering market cycles, six years is a modest stint in which to invest, make improvements, allow appreciation, and exit before it’s time to remodel again.
In addition, a six-year projected hold provides a buffer between the estimated sale and the typical seven to ten year commercial loan term. If the market softens at the 6-year mark, we can opt to hold the asset for a longer period of time, allowing the market to rebound.
Projected Cash-on-Cash Returns: 7%-10% Per Year
Next, consider cash-on-cash returns, otherwise known as cash flow or passive income. Cash-on-cash returns are what remain after vacancy costs, mortgage, and expenses. It’s the pot of money that gets distributed to investors.
If you invested $100,000, and earned ten percent per year, the projected cash flow would be about $10,000 per year or about $883 per month. That’s $60,000 over the six-year hold. Steady income that you can use to support your lifestyle month after month or grow your retirement nest.
Then at the end of the holding period the apartment is sold. At that time you will receive your original $100,000 back and a percent of any profits from the sale, which can be a significant amount.
Just for kicks, notice the same value invested in a “high” interest savings account (earning 1%) over six years would earn a measly $6,000. That’s a difference of $54,000 over the span of 6 years!
Preservation of Capital
So you already know that you will receive exceptional steady returns on your money and have all of your initial investment returned to you upon sale of the property. However another huge benefit of apartment investing is preservation of capital.
In your retirement years, you should consider a capital preservation strategy to safeguard your assets rather than using high-risk strategies to grow your portfolio. It’s key that you mitigate risk and shift more to a conservative strategy such as investing in real estate.
When you are ready, we are here to walk you through the investing process. To get started, join the Investor Circle.