GOOD RETURNS FOR A SYNDICATION/FUND?

Question

Hey BP,

I know most real estate syndications/funds give their investors a 7-8% pref, but what is considered an overall average or good return percentage for a real estate fund?

Thanks!

Paul Moore · Answer

Hi @Jordan Santiago! You got some great feedback above. Great question in the first place.

What @Kyle Kovats is suggesting sounds like a lot of work to me. Maybe too much for some.

I'm being a bit tongue-in-cheek. This is fabulous advice from somebody who has been around. Thanks @Kyle Kovats! He's correct that it is most important to vet the syndicator first. A few tips on doing that would include:

1. Join Jim Pfeifer's Left Field Investors. It's important to have a community of people around.

2. Join Ian Ippolito's Private Investors Club. They do a lot of review on operators and deals.

3. Get and read @Brian Burke's outstanding BP book The Hands-Off Investor. Reading Brian's book will show you that Kyle is right indeed. It is a lot of work.

But far less work than it took to earn the money you will be investing with people you barely know. And far less painful than losing money from investing with the wrong people in the wrong deal.

It is worth it to get to know all of the details you can. This would include a flight or drive to see them and their properties. This would include checking them out online and paying for criminal and background checks. This would include dozens of things that we do when vetting our investments. And you'll get a lot of that from Brian's book. Good luck and happy investing!

Kyle Kovats · Answer

@Jordan Santiago tough question but I’ll take a crack at it. I have invested millions as an LP and the #1 lesson by far I can share is that EVERY SINGLE DEAL will market “good” returns between 16-20% average annualized. Heres are a couple bits

- Don’t invest in the property, invest in the people running the deal. The people are sooooo much more important than the property. Find the right people and rest assure they’ll find the right property.

- When vetting GP’s before investing in their deals ask the following. 1) what are your two most recent deals? 2) how are they doing? 3) can I see the recording of your webinar when you were raising equity with your original projections? 4) can I see your most recent monthly reports/financials that you shared with your investors?

Hope that helps

Tilden Moschetti · Answer

Hi @Jordan Santiago

It is a risk/reward balance at the end of the day. As a syndication attorney I see 100+ offers a year and the most successful target a return that works for who their investors are.

I posted a video about it, if it is of interest:

Chris Seveney · Answer

@Jordan Santiago

As

Others have mentioned you need to take into account risk as well as net returns.

I like to look at:

1. What is the sensitivity analysis, meaning how sensitive are the returns to changes in proforma for things like cash flow, interest rates etc

2.What are the tax implications? For me I would rather get 8% in a fund that has dividends than 10% in a LLC issuing a k-1 because I am in the 37% bracket and returns are the same/slightly better as a dividend

3. What are the fees involved? How much is sponsor taking in fees?

4. Is it truly a pref? If fees are involved you are not getting paid first.

Those are just some of the things I look for as an investor, managing a fund as well I have read 100’s of PPM’s and there are a lot of nuances to be aware of

Bryan Hancock · Answer

The preferred return is only one component of a syndicated offering.  As others have mentioned the overall return that is offered in a fund will depend on a number of things.  Some of the big variables are the product type and thus the likelihood of risk manifesting.  Risk is either positive or negative and can be borne out by the likely dispersion of returns.  A ground-up hotel development that depends on successful operations and skillful management should offer higher returns than a NNN lease product.  Funds that blend these various product types will offer different returns in line with the perceived (or actual) risk associated with the underlying.

Another major variable is the skill and track record of the management of the sponsoring entity that controls the asset.  As sponsors mature in their journey the return and deal structure they offer to attract capital to their projects generally decreases.  This is a typical supply/demand phenomenon, but it also is generally a function of their prowess in being able to market the opportunity properly and thus have the right conversations with suitable investors in sufficient quantity.

The trick (game?) as an investor is to find sponsors who are good bets that afford good returns without bearing a disproportionate amount of risk.  When in doubt have a bias toward a longer track record, lower minimums to try someone out, and less-risky product types.  The quickest way to double your money is to fold it over and stuff it back in your pocket.

Brock Mogensen · Answer

It depends on what sort of deals you are targeting and what return metric you are looking at.

These are a few rule of thumbs I like to follow to determine a good deal, from a return perspective, to LP's:

IRR: 17%+

Equity Multiple: 2X over 5 yr hold, 3X over 10 yr hold

Average Cash on Cash: 10%+

Will Fraser · Answer

Totally depends on the overall deal and what the LPs get out of it.  If there all capital will be paid back and then equity retained then a lower pref would be palatable, but if the rate of return is all there is, then a higher pref is a must.

GOOD RETURNS FOR A SYNDICATION/FUND?

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