BPI Episode #6: Know Your Numbers: Returns Every Passive Investor Should Track

Welcome to Building Passive Income, the podcast for professionals, entrepreneurs and investors who want to build wealth, diversify beyond Wall street, and create financial freedom through passive commercial real estate investing. Your host is Wayne Courageous iii, a seasoned investor and founder of CREI Partners, a leading commercial real estate investment company. He spent nearly two decades navigating and educating others on the commercial real estate, from multifamily to storage to retail. Each episode is under 15 minutes, intentionally short, easy to understand, and packed with insights that help you grow your income and protect your capital without becoming a landlord or sacrificing your time. If you're ready to learn fast and invest smarter, you're in the right place. Let's get started.

Welcome back to Building Passive Income Podcast. I'm your host, Wayne Courage iii. Really excited about this one. I get a lot of questions about what returns can you expect in commercial real estate syndications. To understand that, though, there's some terminology that we're going to go through. Obviously annual returns, cash on cash equity, upside, preferred returns. But let's start with typical annual returns. On an annual I typically see, at least from a CRI Partners standpoint, what we typically see 15 to 20% average annual returns. And what that's doing is it's taking the cash flow that you're getting throughout each year. We pay out quarterly basis. Some groups do monthly, some do semiannual. You know, there's different ways, but we do quarterly. But you're getting that income throughout if that's the business plan and then you have the equity upside. So when the property sells or maybe there's a refinance, you know, there's some type of capital event where you're able to return that capital and it's typically from a sale. So you have that cash flow and then you have the upside. So that's where when you look collectively at everything, you're looking typically for us, 15 to 20%. Now, would we be okay with a 12 to 18%? Absolutely. Because you look at the markets the way they are today, and even in just in general, a 12 to 18% average annual return is fantastic because you're not only getting that return, but you're also getting the tax depreciation that offsets that income, which really boost the returns even further. Now there is recapture tax capital gains and there's ways to work through either a 1031 or something like that down the road. But just in general, like having that cash flow and looking at it from a holistic hold period and then exit. That's where we typically see for us 15 to 20%. But in some cases, you know, depending on what the market's doing, 12 to 18%. So that's one thing I would definitely look at is an average annual return. The other thing is a cash on cash. This takes into account the cash that the property or the investment is giving on a year to year basis on your initial investment. So if you had an investment of say $100,000 and your cash on cash for that year is 6%, then you had a $6,000 cash on cash, right? This typically yields 6 to 10% annually. Now in multifamily and a lot of investments. Year one could be 4%. And we'll talk about a preferred return shortly. But say if it's at a 4% over time, as leases change out, ideally, you know, higher rents, lower operating expenses. Think of everything like a business. Think of all these properties as a business. So you have your rental income, you have your expenses, you have your debt service and then the profit. That profit based on your paradis share of ownership is what you would receive in returns. And that return is the cash on cash. So it doesn't go from year over year, this cash on cash for that year. If it was an 8%, you got $8,000 in return. So I have an investor as an example. He's invested over a million dollars and he averages 8 to 9% cash on cash. So from our investments, you know, he's at least getting 80 to 90,000 a year passively. And then he's got his depreciation that's coming in and helping him, you know, lower his tax liability. In fact, pretty close to zero. And so something to look at on that standpoint is cash on cash. Those are two average annual returns, cash on cash. These are very, very important terminologies in commercial real estate space. The other one is equity multiple. And I really like this one because it's easy to understand. If you invest 100,000 and your equity multiple is 1.8, then your investment is 180,000. Once complete, you have the 100,000 return of return capital and then you have the 80,000 in profit. So 180, we typically like to see 1.8 to 2x and I think, you know, other sponsors, they may go down as low as 1.7 or 2. And it just depends on risk. Right? And that risk is just like in a stock, you've got your value stocks, you got your growth stocks, and depending on where the risk is really determines, you know, the upside. For example, like the more risk, the more Upside. If there's low risk and high up high upside, it may be something to see, like, you know, what's, what's going on there. Doesn't seem all that right. But typically high risk, high returns, low risk, low returns. And depending on where you are in the cycle of investing, that may be okay. I'll give you an example. A lot of our investors really like 10% preferred return, but they don't care about the upside want they invest as an example, they want to see a $25,000 return on an annual basis and they want to be higher in the capital stack. Now when we sell, they won't get the equity upside, but that's okay because they were getting that 10% because they valued cash flow. And in the future episodes, we're going to talk about cash flow versus equity investor. But for now we're going to stick to, you know, what we're trying to get across here, which is the returns. So cash on cash equity, multiple average annual returns. There's also what's called a preferred return. So depending on how the investment is set up, it may be profits are split 60, 40, so 60% to passive investors, 40% to the sponsor. It may be split up 75, 25. What we like to do and what I like to do, it makes sure the carat benefits the passive investor first. And that's what's called a preferred return. So typically, you know, it could be a 7 or 8% preferred return. And so as I mentioned early on in this show, if it's a 4% year one, I still owe you 3 or 4% to get you whole at that 7 to 8% preferred return before I can get any profit. So if you're one, you're at 4% and I owe you, say 3 or 4% of a return, it accrues into the following year and the following year, the following year, and even potentially at exit. But from that standpoint, you're not as concerned about like that annual, maybe you like that 4 to 5%. It feels good to have that cash flow and then the depreciation, of course. But the other 2 to 3% that you're accruing along the way makes the upside, you know, at exit it goes back to that average annual returns. As it's completely combined together, you'll get that, you know, average annual returns. But that preferred return, I feel like is really, really important. It puts the preference on the passive investors to get the return first before the sponsors. Something to consider when looking at a deal is the investor is Is the investment company doing a preferred structure or is it simply just a split? There's no right or wrong, everybody does it different. But it's something up to you to consider, like what's best for you and where do you want to fit in that preferred stack. I also want to say that like these projections, they're not guarantees, they're a risk. And if you've talked to multifamily investors or retail office, at some point, the cycles go up and down and there are risk, right? But if you've gone with a cap, with a sponsor who has navigated storms, who hasn't put their head under a pillow when things get tough, that communicates to their investors, those are all really good, really great things, right? And you want to feed off and live in those sponsors worlds in a way of investing. But when I mentioned, you know, a 6 to 10% cash on cash, you know, 15 to 20% average annual returns, like that all takes a lot of work. And through companies like ourselves, like we have team to execute to the best of our ability. But it is something for you to know like, just like investing in the stock market, definitely not as risky as investing in the crypto market. But there's different types of investments and as an alternative investment there is risk market conditions, sponsor execution, business plan, lack of liquidity, potential capital calls. So those are all things not to be scared of, but just to be aware of. And that's why we're doing this podcast, is so that you're asking the right questions, you're feeling comfortable because you're yourself are reducing the risk so you can maximize cash on cash returns, average annual returns, average equity multiple. One thing we didn't really talk about, and I'll, you know, really want to talk about, is internal rate of return. So the internal rate of return is taking all the future cash flows and bringing it back to present value. And so if your IRR is 15 to 20%, like that's a really great IR. If it's 7 to 10, 12%, it may not be as attractive because you can have other investments that allows you to get to a higher ir, right? And so that's what I love about the internal rate of return, is you can compare investments a lot of that ir. The faster I get money to you to return your capital and your investment, the higher the ir, the longer it takes me to return that capital. Even if it's a higher equity multiple, it's a lower ir. So which one do you use? Do you use IR for the internal rate of return cash on cash equity multiple. There's no right or wrong. You know, for me personally, I really like equity multiple and I like cash on cash. I like knowing that the property is able to cash flow. Now we have development deals that will not cashflow day one. Right? That's understandable. It's going to take two years to build and that's why then at that point I really love the equity upside. Because at that point you're getting that higher risk, higher return. So you're going to get that extra bump in equity multiple. So there's no right or wrong, just whatever's best for you. So hopefully this helped. Check out our passiveinvestorcoaching.com program. It's free. There's a lot of information. I'm excited to keep this going. There's a lot of great episodes that are ahead where we're going to be talking through passive investing and hopefully giving you some aha moments to definitely reach out. Definitely. Check out our website@creipartners.com and then again our passiveinvestorcoaching.com program so we can connect and build a relationship and hopefully continue adding value to you. Thank you for being a subscriber. Thank you for listening. Please share with your friends and family. What I'm enjoying most out of this is providing knowledge in hopes that it's helping the community to make more well informed decisions in their investments. So anyway, I hope everybody's doing well and excited just to continue onto our next episode. Talk to you all soon.

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