When do passive investors get paid—and how much? Read on to understand the 3 ways Limited Partners (LPs) earn money in a multifamily syndication!
The beautiful thing about passive investing in multifamily syndications is that you receive cash flow, get your principal back and make a return.
But when do you get paid and how much can you expect?
In this week’s video blog, we go over the 3 ways passive investors get paid and WHEN to expect that money!
We look at cash flow distributions, explaining how often passive investors receive checks and what our passive investors earn at Nighthawk Equity.
You’ll understand the ins and outs of a cash out refinance and learn how passive investors can redeploy that money for infinite returns!
Watch the video below (or keep reading).
As a passive investor in a multifamily syndication, there are 3 ways you can get paid:
- Cash flow distributions
- Cash out refinance
- Sale of property
Let’s go through each in turn and talk about when and how these payments can occur.
Cash Flow Distributions
When your multifamily investment property earns a profit, so do you! The frequency varies by project and operator, but most passive investors get a check monthly, quarterly, or annually.
In most cases, you will receive your cash flow distribution 30 to 45 days after the end of the period. For example, your check for March would come at the end of April.
One thing to keep in mind: Your first cash flow distribution may be delayed depending on the type of project. If you’re passive investing in a stable value-add deal, the building was earning money when you bought it. So, you will start getting distribution checks right away!
If, on the other hand, you’re investing in a heavy value-add deal, it may take 6 to 12 months to stabilize the property. In other words, your syndicator will need time to make some basic improvements and raise occupancy before the first cash flow distributions can be delivered.
(To learn more about earning cash flow distributions as a passive investor, watch my video on The Potential Returns of Multifamily Real Estate!)
Cash-on-Cash Return
A related term you need to know is cash-on-cash (CoC) return. Let’s say you made a passive investment of $100K, and you earn $7K in annual cash flow distribution. The CoC return is calculated by taking the initial investment divided by your cash flow distribution:
100K/7K = 7% CoC return
At Nighthawk Equity, we shoot for CoC returns between 7% and 9% upon stabilization of the property. And we work to hit that target no later than Year 2.
Another cool thing to remember here is that adding value to the building will grow your CoC return. As the operator renovates and increases the money coming in, your cash flow distribution checks get bigger too!
Cash-Out Refinance
Passive investors get another (much bigger) pay day in the case of a cash-out refinance. If you invest in a value-add deal and the syndicator’s team does their job, the building’s net operating income will increase over time.
Then, they can refinance the property at a higher valuation (it’s worth a lot more now that it’s earning more!). Now the operator can pay off the loan and give their passive investors a big chunk of their principal back. And hold the property to continue bringing in cash flow.
Here’s an example of how this works: We syndicated a 321-unit deal in Memphis called. Countryview. We purchased the deal for $6.8M and made $1M in capital improvements.
Now listen to this… We recently refinanced the property, and it was valued at $15M! This allowed us to return 84% of investors’ principal—and they continue owning 80% of the asset.
When you think about it, this is a pretty awesome scenario. Our passive investors got most of their initial investment back (which reduces their risk). They are now free to redeploy that money in a new multifamily syndication. But they still own equity in the original deal!
This leads to what we call infinite returns. Passive investors are still getting cash flow distribution checks based on their initial investment in Countryview. But they have a huge portion of that original investment back—and available to invest in a new deal for another similar payout!
Sale of the Property
Last but not least, passive investors get paid when a property is sold. The syndicator repays the loan first and returns your principal investment. And then, profits from the sale are split by equity.
At Nighthawk, the life of a deal is right around 5 to 7 years. In other words, we aim to return the majority of our passive investors’ capital (either through a cash-out refinance or sale of the property) within that time frame.
Show Me the Money!
So, when do passive investors get paid for putting their money in a multifamily syndication?
- You earn regular cash flow distribution checks either monthly, quarterly, or annually
- You get a bigger pay day after a cash-out refinance OR sale of the property
If you’re still unsure about investing in multifamily syndications, check out my special report called What’s the Better Investment: The Stock Market or Real Estate. It might open your eyes about the true returns of the stock market and the absolutely amazing opportunity we have with real estate syndications.
If you’re ready to take the next step, and you want to invest in one of our upcoming multifamily investment opportunities, please join our Nighthawk Investor Club. You’ll be asked to fill out a short questionnaire and schedule a phone call with our Nighthawk team so that we can get to know each other a bit more. We can then present you with an upcoming opportunity.
