How Do Passive Investors Make Money in Apartment Syndications?

Dear Hi there,
Passive real estate investing has proven to be an excellent way to build steady streams of passive income, and capital appreciation, without all of the hassles of managing properties themselves. Passive investing can actually generate you better returns than if you were trying to invest and manage real estate on your own, plus you don’t have to do all the hard work. You get to reap the rewards of cash flow, tax benefits, hedging against inflation, and appreciation, and you get to focus on the things that matter the most to you in your free time such as your family or hobbies. It’s clear there are some great ways to profit and earn returns in apartment syndications, so let’s dive into the typical structures of how passive investors get paid.

Investors in real estate syndications are typically equity investors, which allows them to participate in the upside profits of the property when it is sold or refinanced. Along with the profits at sale, equity investors get to receive distributions paid from the cash flow that the apartment is generating.

Typically the ongoing return that is received by the investor is called the preferred return. The preferred return is the amount that the passive investor (also known as the Limited Partner, or LP) receives before the General Partner (also known as the GP) is compensated. Preferred returns often range between 5-8% which means that the GP doesn’t get compensated until at least a 5-8% return has been achieved. The GP will be highly motivated to achieve a return much higher than the preferred return otherwise they won’t receive any of the profits from the property.

After the preferred return is hit, then there is a profit split between the GP and the LP. This is what motivates the GP to manage the deal well, because over the preferred return, a common profit split is 70% to the LP and 30% to the GP. Substantial profits can be realized when the property is actually sold because any profits from debt paydown, and any increase in value due to market appreciation or from renovations get to be realized. Some GPs look to split the profits 50/50 with the LPs for returns over the preferred return. We feel that the majority of the returns should be given to the LPs so at CPI Capital we make sure that we don’t take more than 30% of the profits. Our biggest goal is to deliver strong returns to our investors and align with them for the long run.

To learn more about passive investing and how CPI Capital structures our deals, sign up for our Exclusive Investors Club.

– August Biniaz
Co-CEO, Canadian Passive Investing

– Ava Benesocky
Co-CEO, Canadian Passive Investing