How do you make money via syndication? (Buy and hold)

[Travis Doyle]

Hey folks--trying to setup a fund to attract some private capital and was thinking of two options to structure it.

A) we dilute our investors equity and cut ourselves some, maybe 20%

B) offer them a preferred return

It seems like most people go with option B, but how?

Let's say I am working with a 12 cap, bought for 100k, 12k in NOI with a 10% pref return, where I split profits above 10% with investors 50/50. *I am not invested at all.* How do I make money on this? Am I thinking about this correctly?

1) I pay 10,000 to the investors

2) I then pay the remainder of the profits until everyone is paid back

3) once everyone is paid back 100%, then I start my profit sharing after the 10% hurdle is reached and pay myself 1,000

The problem being is that we do not have a "liquidity event" to speak of after we purchase the home, we just hold...so as a sponsor, am I supposed to wait years down the line until everyone is paid back in full before profit sharing after the 10%?

Why would anyone do this? I would have to wait years to make 1,000 dollars off this deal.

If you have experience in this field and would love to chat, I am all ears. Just let me know!

Thanks

[Bryan Hancock]

Investors in syndications generally don't deploy capital to projects with indefinite holding periods.  The longer you use capital the smaller the pool of capital will get.  Most optimal holding periods from a ROE standpoint are 5 or fewer years.  

A typical waterfall will look like:

1.  Return capital FIRST

2.  Preferred return of X% (6-10%)

3. Some split thereafter. This can be pari passu or can involve all manner of elaborate sharing arrangements. For instance it can be a certain split until some IRR is achieved and then some other split thereafter or any other number of combinations. The more elaborate this is the harder it is to explain/sell

OR

1.  Return capital FIRST

2.  Preferred return of X%

3.  Make-up return to match X% to the promoter

4.  Then some split