What do these return metrics mean?

Many sponsors can inundate potential investors with a variety of different financial metrics to make the investment look more complicated and sophisticated than it actually is. Our goal is to show all investors the deal summary in the simplest terms possible. It is important for any investor to be able to quickly digest a given deal and to compare it with the opportunity of investing in something else.

  • Preferred Return - For example, if you invested $100,000 in a deal and the preferred return is 7%, assuming the deal had sufficient cash flow, the annual cash distributed to the investor would be at least $7,000 ($100,000 x 7%).

  • Internal Rate of Return (IRR) - The annual compounded rate of growth that an investment is expected to generate. For example, if the IRR of the deal is 15%, assuming there was no refinance event, you should expect to double your investment value in 5 years. For more in-depth analysis, see this article.

  • Cash on Cash Return - Measures the amount of cash flow relative to the amount of cash invested in a property investment and is calculated on a pre-tax basis. It measures only the return for the current period, typically one year, rather than for the life of the investment or project.

What are the different offering types?

The offering type designations below do not impact the investor, however are strategic decisions a GP team must make when forming the offering. You will see these designations in all real estate syndications.

  • 506(b) - A GP can raise an unlimited amount of money as long as they do not publicly advertise or solicit investments for the fund. Investors do not have to be accredited but limited to 35 non-accredited investors. An unlimited amount of accredited investors can participate.

  • 506(c) - A GP can perform general solicitation and advertising without any limitation on how much capital they can raise. Investors must be accredited and the GP must take steps to to verify their accredited status.

What is an LP and GP?

  • General Partner (GP) - The GP team finds the investment opportunity, does the legwork and research, raises capital and manages the asset.

  • Limited Partner (LP) - The LP invests the money and have limited liability and input in any decision-making process.