As you can imagine, every real estate syndication is different. Even if in the same market or asset class, every deal can be structured differently, be managed differently, or just be susceptible to different economic conditions.

Imagine setting off on a hike that you’ve done before. Are you going to have the same weather? Will your body feel the same? Will that Snickers bar taste just as good at the summit. Nope (except for maybe the Snicker’s bar).

Same goes for real estate.

Some deals have a huge upside, or payout, upon sale of the asset. Other deals favor monthly cash flow returns but without the potential for appreciation.

At Flow State Investing, we’re passive investors just like you. And we put investor interests first.

We invest in deals ourselves and perform due diligence to ensure that we feel comfortable putting our own money into the deal. If we like the deal, we’ll open it up to our investor group to leverage the power of the group and help more people invest passively.

This means we see a lot of different deals. No two are the same.

We do, however, have certain criteria we look for when evaluating deals. These standards have become our baseline for offering a deal to our group. In this post, we’ll look at some of the typical returns that form our baseline criteria for offering a real estate syndication deal to our group.

Big Ol’ Disclaimer

Hopefully, you saw this coming from a mile away, but here we go anyway. 

Let’s insert a big fat disclaimer here before we dive into numbers. This is for the slim margin of people who will want to cite this post when your exact returns don’t align with what we’re about to show. 

These are PROJECTED returns, as you may have noticed with the title of this article. We can’t guarantee any returns, just like any investment you make. And there is risk associated with any investment. Consider this a general idea of the kinds of returns we consider. 

You’ll see specific projected returns for each deal we offer if you join our Investor Circle group to start seeing the deals.

On to the good stuff (the number stuff!).

Three Main Metrics for Understanding Returns

Each investment summary offers a TON of facts and figures to help you understand the deal. If you love numbers, you’ll warm right up to these. If you don’t love numbers, take time to understand the three key metrics that are commonly presented. 

Each metric tells you a certain something about the asset and the deal at hand. When doing our quick dude diligence of a deal, we want to see each of these three elements that describe projected returns:

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

Let’s dive into each and let you know where we like to see our baseline fall.

Projected Cash-on-Cash Returns: 6-8% Per Year

The first core metric we want to see are the cash-on-cash returns, also known as the cash flow. This is the passive income you’ll receive during the course of the investment (typically monthly or quarterly). 

Cash-on-cash returns are what’s left after the expenses have been paid. These can come as vacancy costs, mortgage, and maintenance. This pot of money gets distributed to investors.

For the deals we’re looking at, we like to see cash-on-cash returns of about six to eight percent per year.

That is, if you were to invest $100,000, the projected cash-on-cash returns for each year of the investment would be about $6,000 to $8,000, or roughly $1,500 to $2,000 per quarter.

This comes out to roughly $30,000 to $40,000 over the course of a five-year hold (we’ll dive into hold time next).

Syndications Compared to Savings Account

Let’s take a look at that savings account of yours. Just for fun. 

Over the same amount of time (5 years), if you were to put $100,000 into a savings account at an optimistic average of one percent (for simplicity’s sake), you’d make about $5,000 in interest over the course of the five years ($1,000 per year for 5 years).

At the end of 5 years you’d be sitting at:

• Real Estate Syndication: $140,000
• Savings Account: $105,000

Hopefully, you’ve smarter than putting your savings into a savings account for the long haul (we know you’re savvy). This is a no-brainer.

Syndications Compared to the Stock Market

While long-term averages in the stock market hover right around the same return rate, these have been shown to be really volatile. For instance, between January 2000 to January 2009 the market was returning an ugly -3.8% return (if you reinvested your dividends). 

Yikes.

What if you planned on using that money at the end of those 9 years?

Of course, over the 40 year period from the year 1982 to the year 2000, the market return was around 11.9% with dividends reinvested. Clearly, the stock market is a long game and can fit well into a diversified portfolio if used correctly. 

Projected Hold Time: ~5 Years

This is perhaps the simplest of the three criteria to grasp. As you may predict, projected hold time is the amount of time we plan to own, or hold, the asset before selling it. Typically, we look at projects that have a hold time of around five years.

Five years is our sweet spot for a few reasons.

First, five years is a relatively long time, if you think about it. Most people work 2-3 different jobs in the span of 5 years these days, and they may move just as many times. Technically, you could also have six children during that time (that’s busy). You could fully start and complete a college degree. You get the point. 

We find some investors who prefer longer hold times. Perhaps they are younger and are coming from an index-investing mindset where wealth grows over decades to mitigate the smaller spikes and troughs. However, in real estate syndications, five years is a good length of time to see healthy returns and even some appreciation. But it isn’t so long that your money is held up through multiple big life transitions.

Real estate cycles also favor the five-year hold time.

In five years, we can get into a property, fix it up with our value-add strategy, allow some time for appreciation, and get out before staying in it too long (and having to rehab those units all over again).

Commercial real estate loans typically come in a seven- or a ten-year fixed term as well. With our five-year hold time, we have a bit of a buffer to hold the asset longer if needed, in case the market isn’t favorable to sell in year five.

Projected Profit Upon Sale: 40-60%

But in real estate, there can be more than just monthly cash flow. Often the biggest element of typical returns in real estate syndications is the projected profit upon sale of the asset after the hold time.

If the asset is a multifamily apartment building, each of the units has been updated and rented out. The occupancy rate (percentage of tenants in units) is strong and rents are right at the market rate. These improvements contribute to the total revenue generated by the asset, which increases the property value. 

Side note: Commercial properties are valued based on the net income the asset generates, not on the value of the similar neighboring property down the road as in a residential real estate. Any improvement and subsequent increase in rent can add significant value to the property and thus increase the sale price.

For the projects we consider offering to our group, the projected profit at the sale is around forty to sixty percent.

Going with the previous example, if you were to invest $100,000, you would receive $40,000 – 60,000 in profits upon the sale of the asset in year five.

That’s in addition to the quarterly cash-on-cash returns you’re receiving throughout the hold time.

It is also worth pointing out that when you see a projected profit on an investment summary, you are not seeing any appreciation factored into the projected returns. Only the planned improvements to the property and the increase in revenue those would provide are factored into that projection.

This is worth emphasizing again.

When we evaluate different markets, we always want to see the indicators for appreciation like job growth and population growth. More housing is needed in these areas over time, which leads to an increase in rents.

Yet, when we run the numbers on a property, we don’t want to bank on that appreciation to hit our benchmark for upside returns. We underwrite conservatively and don’t factor in appreciation. We do factor in baseline inflation. Anything above that is a bonus.

This is a huge risk mitigation strategy.

Even if the market takes a nosedive while we own the asset, we can rest assured that the investment can still stay afloat, thereby protecting each investor.

Preserving investor capital is always our number one priority, above and beyond any shiny projected returns.

Pulling it All Typical Return Metrics Together

That sums up our average, middle-of-the-road returns for a typical investment here at Flow State. We look for:

• 7-8% annual cash-on-cash returns
• 5-year hold time
• 40-60% profits upon sale of the asset in year five

Let’s look again at that $100,000 invested in a real estate syndication deal with these projected returns. At the end of the hold time, you would end up with roughly $175,000 to $200,000.

Original among invested: $100,000 

Cash-on-cash returns: $40,000

Profits upon sale: $60,000 

$100,000 + $40,000 + $60,000 = $200,000 at the end of five years

Double your money in five years? (Thats a 2x equity multiple!) Try asking for that from a savings account or the stock market in a 5-year span of time.