Here at Gibby’s, we’re focused on making your money make money, rather than you working hard for your money. So, naturally, people want to know how hard their money could be working if it were invested in one of our commercial real estate syndication deals.

The question potential investors ask most is typically something like, “If I were to invest $50,000 with you today, what kinds of returns should I expect?”

We totally understand. You want to know how investing in a multifamily real estate syndication, for example, can make your money work for you. You’re curious to know if real estate syndications are really worth taking the risk and how passive real estate investing stacks up to the returns you might get from other real estate deals.

In short, should you invest in real estate?

To help you answer that question, let us start by informing you that we’ll be discussing projected returns. That is, these outcomes are approximations based on our prior experiences as limited partners and deal sponsors for several real estate syndication deals, as well as our investment analyses and best judgments, but they aren’t guaranteed, and there is always risk involved with any investment. The examples presented here are meant only to assist you in developing your real estate investment strategy.

Essential Factors For Commercial Real Estate Syndication Returns

Let’s start by taking a prevalent real estate syndication asset type – a multifamily apartment building and talk about how it generates revenue. This way, you can understand what it takes at the property level for commercial real estate to generate passive income for passive investors.

Multifamily real estate generates revenue primarily through rental income, although other amenities like laundry, parking premiums, and storage have potential as additional income streams. Therefore, commercial real estate, such as this hypothetical multifamily real estate property, is valued based on its revenue.

In a value-add multifamily syndication, the sponsor team may complete renovations, repaint buildings, hire new property management, and make other general property improvements to force appreciation. With improved grounds, updated units that justify rent increases, and lower overhead costs, the sponsor team creates space between property expenses and the multifamily real estate asset’s revenue each month. This “space” is distributed as cash flow to passive investors.

In this post, we’ll look at the three most important factors to consider as you evaluate the pros and cons of each real estate syndication investment opportunity.

  1. Projected hold time
  2. Projected cash-on-cash returns
  3. Projected returns at the sale

Projected Real Estate Investment Hold Time: ~5 Years

Perhaps the most straightforward concept, the projected hold time, is the number of years we would keep the asset before selling it. This indicates how long your funds will be invested in the deal.

Most real estate syndication investments we see require a projected hold time of 5-10 years. The real estate market is ever-changing, so real estate investments are typically held until the market reaches its peak – and then sold.

A hold duration of around five years is advantageous for several reasons:

  1. You could start and finish a college degree in just five years, relocate, get married, or have children. But, five years from now, it’s likely you’ll have different investing goals, expectations, and needs than you do now.
  2. Considering real estate market cycles, five years is the average time needed for the general partner team to complete value-add improvements, allow appreciation, and exit the syndication deal before it’s time to remodel again.
  3. A five-year projected hold allows for a cushion between the anticipated sale and the typical seven-to-ten-year commercial loan term.

We may sell the property for a profit sooner than planned if real estate market conditions peak during the hold period. Alternatively, we can keep the property for a little longer if market conditions deteriorate during this time.

Projected 7-8% Returns Per Year From Cash Flow

Next, we arrive at cash-on-cash returns, also known as cash flow or passive income. Cash flow or passive income is the pot of money that limited partners receive after expenses.

Some real estate syndication investment opportunities allow investors to enter the deal at various tiers with preferred returns. Preferred return limited partners are first in line to earn cash flow distributions, before non-preferred return investors and way before the general partners.

As a limited partner (passive investor), let’s pretend 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. Over five years, that’s $40,000 in passive income earned from investing in syndications.

Just for fun, compare that to a “high” interest savings account (returning $1,000 per year and just $5,000 over five years).

That’s a difference of $35,000 in passive income over five years!

Of course, we have to consider real estate market conditions and the specific real estate investment opportunity. So you’re invited to have an insider’s peek at the numbers on real estate syndication deals Gibby’s Capital has already on the books or is currently offering to investors by joining the Gibby’s Investor Club today.

Projected 40-60% Projected Profit Upon Sale

The most significant piece of the commercial real estate syndication income puzzle is the anticipated profit at the sale. We aim to achieve around 60% profit for investors in year five.

Generally speaking, a ten percent projected annual increase in value is considered normal in real estate syndication investments, though some opportunities yield more than that.

The units have been modernized in five years, tenants are established, and rent has increased to match market rates. As a result, commercial real estate property values are based on the amount of income generated. As a result of these improvements and market appreciation, the asset’s overall value often rises significantly, often resulting in significant profit margins when it is sold.

This projected real estate profit from the sale allows real estate investors to boast high returns (above 10% annually) on their investment.

What Kind Of Returns To Expect From Investing Alongside Us In A Commercial Real Estate Syndication

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

  • 5-year hold
  • 7-8% annual cash-on-cash returns
  • 40-60% profits upon sale 

Referencing the example from above, you’d invest $100,000 in a commercial real estate syndication, remain invested for five years while the business plan is executed, collect $8,000 a year in cash flow distributions paid out monthly (a total of $40,000 over five years), and make $60,000 in profit at the sale. This equates to $200,000 at the end of five years – $100,000 from your original investment and $100,000 in total returns.

Again, these figures aren’t guaranteed, and each real estate syndication deal is unique, but this should provide you a good idea of what to anticipate.

Before making any commercial real estate syndication investment, we encourage you to conduct your own due diligence, talk with sponsors and other experienced passive syndication investors, and carefully consider your investment and financial goals. Real estate syndications can be an excellent investment as part of your diversified investment portfolio.