What are preferred returns?
A look at a past deal
The power of refinances
Impact of UBIT for SDIRA investors
Now it’s time to discuss everyone’s favorite topic: returns.
Let’s think back to the lesson just before this on syndications. If you recall, most deals are typically split 70/30, with 70% of the profits going to Limited Partners and 30% going to the General Partners.
But in thinking about this, what if for the first year in a project, the property only returns a small 5% on our investment? That’s not a lot, are we really going to split 5% 70/30? The answer is no, and this is where the concept of a preferred return comes into play. Most opportunities offer around an 8% preferred return. This means that the General Partners won’t receive any profits until an 8% return for Limited Partners is met. So when passively investing, you should expect to receive 100% of the profits up to 8% and then after that, everything is split 70/30.
So what would happen in the case we just talked about, where only 5% is returned in a year? Well the preferred return now begins to accrue and the remaining 3% that wasn’t realized is rolled over to the following year. So in the next year, Limited Partners will receive 100% of the profits, now up to 11%. Only until any accrued preferred return is met will the General Partners share in the profits of an investment.
A Case Study
To see returns in action, check out the video above where we cover a property currently in Wall to Main's portfolio that we own and operate with our partners.
Apply now to see your own returns in action as a Main Street Investor.