Investors Are Paid in 2 Ways: Preferred Returns and Equity Splits

Investors make money from both the rental income (cash flow) the property produces throughout the duration of the investment, as well as from the upside profit made when property is sold at a higher value at the end. 

Preferred Returns  

Preferred returns (”Pref”) are cash dividends paid for the duration of the fund project based upon the rental revenue that the properties generates from its tenants. It is typically between 6-9% annually, and is paid to the Limited Partner (LP) investors before any money is paid to the General Partners (GP). Most deals would distribute this cash to investors on a monthly or quarterly basis directly into their bank accounts.*

Basic Example:  If an investor joins a fund deal as a passive LP, investing $100K and the preferred return is 8%, then would receive $667 per month in their bank account ($8,000/12), which would amount to a total of $40K by the end of the 5 year project (the typical length of a fund deal).

*While preferred returns are commonly paid monthly or quarterly, this is not guaranteed. If the project requires additional reserves, or is not performing well, the GPs reserve the right to withhold the preferred distribution. In this case, it will accrue, and be paid out at a later period or when the property is sold. 

Equity Splits and Profits From Sale

In a syndication, the GP and the LP own the property together. The common structure used to share this ownership is a “70/30 split. In this case, the LPs get 70% of the total equity (ownership) of the property for bringing the money, while the GP gets 30% of the equity for finding the deal and executing the business plan. 

In most fund’s, the goal is to ultimately sell the investment property at the end of the project its new, higher valuation. At that time, the profits from sale are then split among the GPs and LPs based upon the equity split. At this point, the investor is paid based on what they own. 

Basic Example: At the end of the business plan, the property is sold and the profit from the sale is approximately $5 Million. Of that profit, 70% or $3.5 Million, would be distributed among the LP investors based upon the amount of their original investment. The other 30% goes to the GPs. This is where the majority of an investor’s projected return comes from. 

How To Achieve $1000/Month, Compounding Your Investments Over Time

  • If you invest $50K today: $50K generates = $333 in monthly cashflow*
  • In 5 years, it will become: $100K
  • If you re-invest the new total in similar deals: $100K generates = $666 monthly cash flow
  • In 5 years from that point, $100K has the potential to become $200K.
  • So, in 10 years you now have $200K.  Reinvested in similar deals, it generates = $1333 in monthly cash flow.

Here’s this schedule that simply illustrates the power of compounding, all things equal:

Today = $50,000 

5 years = $100,000

10 years = $200,000

15 years = $400,000

20 years = $800,000

25 years = $1,600,000 

30 years = $3,200,000

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