- The Real Estate Investor Role
Though they do not have any day to day responsibilities in a real estate syndication, investors are compensated for the risk they take providing the equity in a project in two ways; they typically receive a preferred return and a share of the profits.
1. Preferred Return
The preferred return is compensation paid to syndicate investors that is a percentage of the total amount they have invested and either paid current from ongoing cash-flow, or accumulated until the project has enough cash to make the payment. It functions much like interest payments from a bank, though, unlike at a bank, there is no guarantee it will be paid as the project must make money for there to be enough cash to make the preferred return payment.
For example, if the preferred return on a project is 8% and an investor invests $100,000 in the project, they will receive $8,000 per year, usually accumulated and not compounded, until they receive their initial investment back in full.
The most common preferred returns paid are 8%, by 40% of all projects, then 10%, which is paid by 30% of all projects, then 9% and 12% are the next most commonly paid preferred returns.
The outliers range between 2% and 22%, and in some very rare instances, projects pay zero preferred return.
2. Profit Share
Investors are also compensated for participating in the deal with profits and appreciation. A real estate syndication investor’s share of profits is paid in proportion to how much the investor put into the deal.
For Example: If you plan to invest $100,000 in a deal, and are receiving a 10% preferred return, you could potentially make $10,000 each year, as long as the property is generating enough income.
Once every investor receives their preferred return, the remainder is split up between the Sponsor and investors, based on a preexisting profit structure, 80/20, 70/30, etc. In an 80/20 situation, if there are $1 million left in profit after the preferred returns get paid out, the investors would get $800,000, and the Sponsor or Syndicator would get $200,000.
