Exploring Projected Returns in a Real Estate Syndication

by | Jul 10, 2020 | Investing Process, Real Estate Investing 101 | 0 comments

One of the most common questions we’re asked is, “If I were to invest $50,000 with you today, what kinds of returns should I expect?”

And hey, we get it. You want to know how hard a real estate syndication can make your money work for you, and how passive real estate investing stacks up to the returns you’re getting through other investment vehicles.

Before answering that question, you should first know we’ll be talking about projected​ returns here. That is, these returns are projections, based on our analyses and best guesses, but they aren’t guaranteed, and there’s always risk associated with any investment. We try to under-promise and over-perform, so there’s a good chance a deal will do better than our projections…but there’s also risk it could do worse. The examples here are only meant to provide some ballpark ideas to get you started.

In this article, we’ll explore the 3 main criteria you should look into when evaluating projected returns on a potential syndicated real estate deal.

The Main Criteria

Each real estate syndication investment summary contains a barrage of useful data. We recommend you focus on these core concepts:

  1. Projected hold time
  2. Projected cash returns
  3. Projected profits at the sale
  4. Projected total return (cash returns over the hold time plus profits at sale)

Projected Hold Time: 3 to 5 Years

The projected hold time, perhaps the easiest concept, is the number of years we plan to hold the asset before selling it. This is the amount of time your capital would be invested in the deal. Various syndicators have different projected holding times based on their investment strategy and individual project business plans. They can range from 1 to 2 years for repositioning a property (major value-add) to 7 to 10 years or longer for turnkey properties.

Our team at BluSky Equity Partners looks for deals to partner in with other sponsors that have light to moderate value-add potential and room for operational/financial improvement. This lets us plan for a 3 to 5-year holding period — we plan for 5 years, but may exit earlier if we’re able. This is more conservative (less risky) than major value-add deals but tends to provide higher returns than turnkey deals.

A hold time of around five years is beneficial for a few reasons:


  • Plenty can change in just five years. You could move, get married, have kids, change careers, 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 time provides a buffer between the estimated sale and the typical 7 to 10-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 without being forced to refinance or sell
    when it’s down.
  •  Within 5 years we can get close to doubling your money (i.e., 100% return) — perhaps even better if the deal out-performs our projections. 5 years is the “sweet spot” where we can return your principal and maximize your returns before the likelihood of major unplanned-for expenditures (that could eat away at your returns) increases.

Projected Cash-on-Cash Returns: Minimum 7% Per Year (average)

Next, consider cash returns, otherwise known as cash flow, passive income, or cash-on-cash returns. Cash returns are the operating profits that remain after vacancy costs, mortgage, and expenses. It’s the pot of money that gets distributed to investors. This component of the total return is much more predictable than the projected profits at sale.

We look for properties where our 5-year average cash return to our investors will be at least 7 percent. Returns are typically lower in years 1 and 2 and higher in years 4 and 5, so understand that even a fantastic project’s returns might be less than 7 percent at the beginning.

If you invested $100,000, and earned 7 percent per year (average), the projected cash flow would be about $7,000 per year or about $1,750 per quarter. That’s $35,000 over the five-year holding period.

Just for kicks, notice the same value invested in a “high interest” savings account (earning 1%) over five years would earn a measly $5,000.

That’s a difference of $30,000 over the span of 5 years!

Projected Profit Upon Sale

Perhaps the largest puzzle piece is the projected profit upon sale. In five years, 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, the value-add improvements we do, along with market appreciation, typically lead to a substantial increase in the overall value of the asset, thus leading to sizeable profits upon sale.

However, the profit at sale is the hardest part of the total return to project since it’s impossible to know for sure what the market cap rates will be in 5 years. Because of that, this part of the total return is more speculative. In fact, our projections plan for selling in a worse market than when we bought to make sure we’re not taking undue risk. However, if the property out-performs our projections, this is also what could lead to significantly higher-than-projected returns.

From the sale of the property in our example, you’d receive your original $100,000 investment back plus a profit of…let’s say $40,000.

Projected Total Return: Min. 75%

This is simply the total amount of cash returns delivered during the holding period plus the projected profit at sale. We look for properties that are projected to provide our investors 75% or higher total returns over 5 years.

Summing It All Up

Simple enough, right? Typically, in the deals we do, we are looking for the following:

  • 5-year hold
  • Minimum 7% average annual cash returns
  • Value increase leads to profits at sale
  • Minimum 75% total return over the holding period

Sticking with the previous example, you’d invest $100,000, hold for 5 years, collect $7,000 per year (average) in cash flow distributions paid out quarterly (a total of $35,000 over 5 years), and earn $40,000 in profit at the sale.

This results in $175,000 at the end of 5 years – $100,000 of your initial investment, and $75,000 in total returns.

I bet you can’t find a savings account like that!