A common question I receive from investors is, “How much money will I make if I were to invest $100,000 today?”
Keep in mind, we’re talking about estimated returns. In other words, the answer is based on projections and research. These estimations are not guaranteed, as any investment carries a risk.
The examples provided below are meant to help you understand what is possible when investing in real estate syndications.
This article will explore the 3 main standards you should look into when evaluating projected returns on a potential real estate syndication deal:
- Projected hold time
- Projected cash-on-cash returns
- Projected profits at the sale
Projected Hold Time: ~5 Years
The projected hold time, 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 capital would be invested in the deal.
A hold time of around five years is beneficial for a few reasons:
- Plenty can change in just five years. You could start and complete a college degree, move, get married, or …you get the point. You need enough time to earn healthy returns, but not so much that your kids graduate before the sale.
- Considering market cycles, five years is a modest stint in which to invest, make improvements, allow appreciation, and exit before it’s time to remodel again.
- A five-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 5-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: 7-8% 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 eight percent per year, the projected cash flow would be about $8,000 per year or about $667 per month. That’s $40,000 over the five-year hold.
Just for kicks, notice the same value invested in a “high” interest savings account (earning 1%). That would return $1,000 a year and a measly $5,000 over a 5 year period.
That’s a difference of $35,000 over the span of 5 years!
Projected Profit Upon Sale: ~40-60%
Perhaps the largest puzzle piece is the projected profit upon sale. Typically, we aim for about 60% in profit at the sale in year 5.
In five years’ time, the units have been updated, tenants are strong, and rent accurately reflects market rates. Since commercial property values are based on the amount of income generated, these improvements, along with market appreciation, typically lead to a substantial increase in the overall value of the asset, thus leading to sizable profits upon the sale.
Final Thoughts On Estimated Returns
Sounds easy enough? Perhaps before seeing this breakdown, you thought high returns percentages were too good to be true.
When it comes to investing your capital in a commercial real estate syndication, you control your risk by carefully choosing who you’re investing with. Then, the asset and risk management is up to the sponsor.
Usually, in the deals we do through the Koo Investor Club, we look for the following:
- 5-year hold
- 7-8% annual cash-on-cash returns
- 40-60% profits upon sale
Sticking with the previous example, you’d invest $100,000, hold for 5 years, collect $8,000 per year in cash flow distributions paid out monthly (a total of $40,000 over 5 years), and earn $60,000 in profit at the sale.
This results in $200,000 at the end of 5 years – $100,000 of your initial investment, and $100,000 in total returns.
As already mentioned, the outcomes described above aren’t guaranteed. Each investment opportunity comes with its own unique circumstances, but this should provide you with a good idea of what to expect.
Are you ready to secure your capital in reliable, tangible, passive real estate investmetns? Book a call with me.