Your money should be working for you 25 hours a day 8 days a week, so you don’t have to. And yes, you read those numbers correctly because with inflation, the crazy market, the Covid pandemic, and a potential war on the horizon, 24/7 is not enough!
We achieved so much in our medical careers, and were proud of those accomplishments, but we were missing holidays and family celebrations, and we recognized that wasn’t what we’d envisioned for our lives. We wanted to create a passive income stream that meant we could spend more time with our kids and less time working in our high-pressure, stressful careers.
One of the passive income streams we have explored in detail is commercial real estate syndication deals. Prior to going all-in with any endeavor, it’s imperative to know how the projected returns (and risks) stack up against what you’d see through other real estate investment strategies. We’ve distilled the main points of our research to help you make an informed decision about whether commercial real estate syndication opportunities are an advantageous avenue for you.
There are three central criteria to focus on when looking into projected return on investment in detail:
- Hold time
- Cash on cash returns
- Profits at sale
Keep in mind when reading through the insights below that we’re referring to projected returns. We’d love to be able to see the future and give you absolutes, but as with all investments, there are associated risks. The numbers we’ve used here are based on our research and analysis, but they aren’t guaranteed; they’re here to give you a best estimate and guide to how your investment in a real estate syndication might look.
Optimal Projected Hold Time
The hold time is the number of years that your capital is invested in the real estate syndication. We would generally expect to keep an asset for around five years before we sell, and you would see a return on your investment.
We’re often asked why five years is the optimal hold time, and the answer is threefold;
- So much can change in five years. When you think about it, in five years, that newborn will be in school, you could move to the other side of the country, you could change careers … the list is almost endless. It boils down that five years works best because it gives you enough time to earn healthy returns without tying your money up for an unfeasibly long time.
- When we look at market cycles, five years is a reasonable time in which to invest in property, make improvements on that house or apartment, allow appreciation, and reap the financial rewards before it’s time to start renovating all over again.
- Planning for a five-year hold gives investors a buffer zone between a planned sale and the typical seven- to ten-year commercial loan term. We’ve found that it gives us some space to hold the asset for a little longer if the market dips and allows it to bounce back.
What are the Projected Cash-on-Cash Returns?
6-8% 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!
Evaluating Projected Profit Upon Sale
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.
One Way To Estimate Your Projected Returns on A Real Estate Syndication
We hope this article provides you the much-needed insight as to how the projected returns in a real estate syndication look like. Real estate syndications are structured completely different from most other investment endeavors and the returns are calculated differently too!
To recap the details, in our commercial real estate syndication deals, we’re generally shooting for:
A five-year asset hold
- 6-8% annual cash-on-cash returns
- 40-60% profits upon sale
Let’s review the example numbers above. If you invest $100,000 in a syndication with a hold period of 5 years, you might expect to bank $8,000 each year in cash flow distributions, which adds up to a grand total of $40,000 over five years (paid monthly) plus $60,000 in profit when the assets sells. So, after five years, your original $100,000 has worked hard (with minimal input and stress from you) and is now $200,000.
Our motivation behind finding the right investment opportunities is focused on finding the right fit for your lifestyle and your vision of financial freedom. Although these are projected, not guaranteed, the numbers are a reasonable representation of what you can expect when you invest in real estate syndication through the 25/8 Investor Club.