Both asset classes follow a waterfall distribution process.

Real estate syndications invest in a wide variety of assets, ranging from multi-family buildings, single-family homes, commercial buildings, and rentals. While each waterfall process can range substantially, waterfalls typically follow the below process:

Return of capital: 100% of cash flow is returned to investors
Preferred return: Also referred to as a “hurdle rate,” all cash flow is returned to investors until they achieve a preferred return on their initial investment, often between 6% and 10% but sometimes higher.
Catch-up: All cash flow goes to the GP until they receive their pre-determined percentage of profits.
Carried interest/promote: The sponsor or GP receives a disproportionally larger share of the profits, typically once certain return thresholds are passed.

SMB acquisitions also implement a waterfall return, often a preferred participating structure that pays a preferred return between 8% and 12% on an investor’s initial investment that hasn’t been returned yet. Once investors receive their capital paid back, they are entitled to their share of the business's profits through common equity distributions. Finally, investors are entitled to their portion of the net sale proceeds once the business is exited, which can be a significant increase in value based on market conditions and EBITDA expansion.

Returns for real estate syndications can range; however, investors can expect anywhere from 5%-15% IRR and a 1.2-2x MOIC for low to moderate risk syndications (core and core-plus assets) to 15-25% IRR and 1.5x to 3x MOIC for higher risk syndications (value-add and opportunistic investments). Returns on SMB acquisitions can vary as well, but often target a 25-35% IRR and 3-4x MOIC on a 5-year exit.

While SMBs can pose greater operational risks than real estate syndications, investing in this asset class can also generate greater returns on average than real estate syndications.

404

This page could not be found.