One of the most common questions that we get asked is, “If I were to invest $50,000 with you today, what kinds of returns should I expect?”
I get it, you worked hard for your money, now you want your money to work hard you. As it should be!
There are 3 main metrics I like to look at:
– Projected hold time
– Cash-on-cash return
– Profit upon exit
For the sake of explaining these metrics we will use the following investment terms:
Hold Time: 3-5 years
Avg. CoC: 6%
Equity Multiple: 2x
Projected hold time:
This one is simple to understand. This is the number of years we plan on holding the property before selling it. Your capital will be invested in the deal for the duration of the project. Most of our projects are 3 – 5 years.
The value-add (the improvement phase of the property) typically lasts 12-36 months after acquiring the asset.
Because of that, the highest increase in property value occurs during the first 1-3 years and we will seek to exit the property as soon as the value-add phase has been completed (sometimes sooner if the right buyer/offer comes along before completing all renovations).
Think of it as a single family home flip. Once the renovation is complete, you sell for maximum profit.
Cash-on-cash return:
This is sometimes abbreviated as “CoC.” This measures the cash flow distributions an investor will receive in the form of annual percentage.
Let’s say you are looking at a deal that has “6% Average CoC”
In the example below, let’s say you invest $50K.
Year 1 may yield 4% in cash flow = $2,000
Year 2 may yield 5% in cash flow = $2,500
Year 3 may yield 7% in cash flow = $3,500
Year 4 may yield 8% in cash flow = $4,000
Cash flow increases as we renovate units and increase rents.
In some syndications you will receive cash flow distributions monthly and some others quarterly.
Profit upon the exit
It is time to exit the property and you are about to get your initial investment back PLUS profit!
This is where the bulk of your money is made in a value-add multifamily syndication.
The amount you receive as profit will vary, but the syndication team is always trying to hit or exceed projections, so you can say that if the deal you invested $50K in was supposed to 2x your money (put in $50K and receive $100K) then if you have already received $12,000 in cash flow distributions, the profit will be somewhere in the ballpark of $38K.
To summarize… what kind of returns can you expect if you invest $50K???
You need to add the cash flows PLUS the profit, so in this investment example it will be:
Cash flow
Year 1 = $2,000
Year 2 = $2,500
Year 3 = $3,500
Year 4 = $4,000
Profit
Year 4 = $38,000
Return of initial capital
Year 4 = $50,000
Your $50,000 investment turns into $100,000 in 4 years.
This return is over 17% average annual return!
It is important to note that these are PROJECTED numbers.
I have seen deals where the projected Equity Multiple is 2x and it resulted in 2.5x!
But I have also seen the opposite where the deal came in at around 1.6x.
Always do a thorough due diligence on the sponsor and previous deals.
If you want to learn more let’s talk! Schedule a time to talk here
Satch Bernhardt
CEO | V1 Capital
