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  • Rick Martin

WHAT RETURNS CAN WE EXPECT TO EARN BY INVESTING IN A REAL ESTATE SYNDICATION?



For most of us investors, it takes a long time to make your first million. While some are willing to bet it all on cryptocurrency (and perhaps lose it all), most of us forge a path of working, saving, and investing. The good news is that once we have that first million, we can do our homework, invest it wisely and notch up our money's velocity. You will then find that the second million will arrive a lot faster. My six-year-old son is the only one ever with cash in the house. He keeps a piggy bank. I borrow $20.00 from him, and I tell him that I will pay him back $21.00. I tell him, son, "get your money working hard, so you don't have to."

So how do you get your money working hard for you? How do we ramp up the velocity of our money without casting our fate to the wind? Real Estate. And we want to know that if we are going to put in a large sum of money, just what will come out on the other side. Thus, let's take a peek at the returns of a typical apartment syndication

No two real estate investments are the same. There are a million ways to structure a real estate deal and just as many potential outcomes.

Some deals offer substantial potential upside but also come with huge risks. Others provide steady cash flow but without the potential for appreciation.


At Fortress Federation, we're investors first.

We look for deals that we would invest in ourselves and do our due diligence to ensure we feel comfortable investing our own money in the deal. Only then do we offer those opportunities to our investors.


We look at a lot of deals. And just like snowflakes, no two are the same. But we've established some criteria that we look for when evaluating deals, and these are the benchmarks we typically aim for in the investment opportunities we offer.


In this post, we'll look at some of the typical returns we aim to offer investors.


It goes without saying. Insert Disclaimer returns. As with any investment, we cannot guarantee any returns, and there's a risk associated with any investment. It will give you a rough ballpark of the kinds of returns we're typically considering.


As the title of this post suggests, these are only PROJECTED returns. As with any investment, we cannot guarantee any returns, and there's risk associated with any investment. It will give you a rough ballpark of the kinds of returns we're typically considering.

With that, let's get to it.


Three Main Criteria


If you've ever seen an investment summary for a real estate syndication, you know that there are a TON of facts and figures in there.


Each metric has its merits and tells you something about the asset and the deal at hand. When doing our quick synopsis of a deal, we look at three main criteria:

  1. Projected hold time

  2. Projected cash-on-cash returns

  3. Projected profits at the sale of the asset

Projected Hold Time: ~5 Years


The projected hold time is the easiest of the three criteria to understand. As the name would suggest, projected hold time is the amount of time we plan to hold the asset before selling it. Typically, we look at projects that have a hold time of around five years. Why five years? Well, a few reasons.


First, five years is a relatively long time, if you think about it. Technically, you could have six children during that time. You could start and complete a college degree. Five years is a decent chunk of time.


There are certainly some investors who are at a point in their lives where they want to invest for a more extended period. However, we find that five years is a reasonable length of time for most investors. Long enough to see some healthy returns, but not too long that you feel like your kids will have graduated from high school before you get access to that money again.


Given real estate market cycles, five years is a modest timeline for us to get in, update the property, give the asset and market a little time to appreciate, and get out before lingering for too long (when it'll be time to update those units all over again).

Plus, commercial real estate loans are often on a seven- or ten-year fixed term, so with a five-year projected hold time, that gives us a bit of buffer to hold the asset a little longer if needed. In case the market is soft at the time, we'd initially projected a sale.


The market has tightened over the last several years, and for some deals to work, typical hold times now can be six-year years. I should also point out that if cap rates compress quickly, value increases can justify a sale after only three years. You want your deal to have multiple exit strategies, whether three, five, six, or even ten years' time. However, it is most common to see deals underwritten based on a 5-yr hold.


Projected Cash-on-Cash Returns: 8% Per year


The next core metric we look at is the cash-on-cash returns, also known as the cash flow, which makes up the passive income you get during the investment.


Cash-on-cash returns are 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.


For the projects we're looking at, we like to see cash-on-cash returns of about eight percent per year. Depending on whether the deal is C-class, B-class, or A-class, there is a range you can expect.


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, or roughly $2,000 per quarter.


Cash flow comes out to roughly $40,000 throughout a five-year hold.


But let's not stop there.


Projected Profit Upon Sale: 40-60%


Perhaps the most significant piece of the puzzle is the projected profit upon sale of the asset in year five (which we are assuming).


The units are updated at this point, the tenant base is strong, and rents are at market rates. These improvements contribute to the overall revenue that the asset can generate, thereby increasing the property value. (Remember that commercial properties are valued based on the amount of income the asset generates, so these improvements typically add significant value to the property by the time of the sale.)


For the projects we're looking at, the projected profit at the sale is around forty to sixty percent.


Sticking with the previous example, if you were to invest $100,000, you would receive $40-60,000 in profits upon the asset's sale in year five.


The profit that is on top of the cash-on-cash returns you're receiving throughout the hold time.

I should also point out that the projected profit on sale considers the improvements and efficiencies the sponsor team plans to implement. Still, it does NOT factor in the appreciation of that particular market.


This is an important distinction.

When we choose markets to invest in, we're always looking for areas where job growth is strong, and as a by-product of that, the population is increasing, which leads to increased demand for housing, which, in turn, leads to increased rents.


However, when putting together these projected returns, we always underwrite conservatively, and we never count on that market appreciation.


We factor in baseline inflation, but anything on top of that is a bonus. Even if the market tanks during the hold, we can ensure that the investment can still stay afloat and that investor capital is protected.

Preserving investor capital is always the number one priority, above and beyond any shiny projected returns.

Summing It All Up

So there it is. Projected returns for our typical middle-of-the-road investment looks like this:

  • 5-year hold

  • 8-10% annual cash-on-cash returns

  • 40-60% profits upon sale of the asset in year five

If you were to invest $100,000 in a real estate syndication deal with these projected returns, you would end up with roughly $200,000 at the end of five years.

$100,000 of your original principal + $40,000 in cash-on-cash returns + $60,000 in profits upon sale = $200,000 at the end of five years


Double your money in five years? Not bad. You can see how we can increase the velocity of money. So as I tell my son, get your money working hard, so you don't have to.


If you’re interested in leveraging passive real estate investments on your path to early retirement a great place to start is by joining the Fortress Federation Investor Club.