How long will it be before I get my money back?
“How long will it be before I get my money back?” This is probably one of the first questions a new (and seasoned) investor thinks about when they are considering investing in a passive real estate syndication investment opportunity. As we have seen in previous articles capital preservation is, and should be, one of the top priorities of an investor and the deal sponsor that they will be investing with.
If the deal sponsor cannot answer this question, then perhaps you should think hard about whether to invest with this deal sponsor. To make sure we are on the same page we are not talking about the on-going cash flow, tax benefits and the other ways you get paid while you are invested in real estate but rather when do you get back the original money you invested in the deal. Before worrying about the return on your money there is always the concern about return of your money.
Part of the answer to this question relates to vetting a deal sponsor such that you have confidence in their character and competence. Their character is important so that you know they are a trustworthy person that would be a good steward of your money with full intention of returning it. Their competence is important as it shows that the deal sponsor actually has the technical skills and experience to carry out their business plan in such a way that at a minimum you would be getting your money back.
The Securities and Exchange commission expects accredited investors and sophisticated investors to have the know how (or at least be connected to those that have the know-how) to vet a deal sponsor before investing.
“Umm, so when will I get my money back?”
Right – so to answer your question.
As with many questions the answer is “it depends.” Assuming you have done your due diligence on the deal sponsor then the return of your money is contingent on the business plan for the investment opportunity. Although the business plan is the main driver of when you will get your money back there are a few other factors to consider.
Real estate is an illiquid investment which means that once you invest your money in real estate it could take an extended time period to get your capital back. You cannot log onto an application on your phone and sell your shares of a real estate syndication in a few seconds as syndications are private market transactions.
The life cycle of a syndication investment opportunity can range from 3-10+ years which means that your money could potentially be held for the entire life of the deal or for a shorter or longer period.
6 factors that can impact the timing of the return of your money.
Below are 6 different factors that can impact the timing of the return of your money.
Business Plan Timeline – The business plan timeline is the quickest way to know when to expect your money back. Given that there may be unknowns that occur during the investment life cycle the conservative approach is to assume that you will not get your capital back until the end of the disclosed timeline of completion of the investment life cycle. As noted before, real estate syndications typically range from 3-10+ years.
Business Plan Investment Strategy – There are several investment strategies when it comes to real estate syndications which range from turn-key and value-add investments to completely distressed properties or ground up developments. Based on the type of investment strategy there is a natural expectation around the return of your capital. At the end of the spectrum of the riskiest deals (ground up developments or distressed investments) it is most likely you will not get any capital return until the end of the business plan. In other more moderate deals such as turn-key or value-add investment strategies there may be a refinance during the life of the deal, and you will obtain a portion of your original capital back at this time.
Success Of The Business Plan - No one invests to lose money but there are times where a deal does not go as planned. As with all investments there is risk and there is a chance that you will lose all your money. Real estate does provide tremendous risk adjusted returns however and has many ways deal sponsors can protect an investors’ capital. If a deal is not going well then there may be a premature sale of the property or investors may ultimately break even if the deal extends through the full life cycle.
Pace Of Success Of The Business Plan - Many times deal sponsors will not project a refinance in their investment opportunities but if a deal is performing better than expected or has reached certain goal returns sooner than expected the deal sponsor can opt to do a refinance or even sell the property. This would of course result in the investor getting a portion (in case of the refinance) or all their profit back (in case of a refinance or sale).
Overall Market Conditions At Time Of Scheduled Exit – An investment opportunity may be performing well for the entire life of the deal but the exit (sale, refinance or other means of getting your capital back) can erode all of those previous profits if not done well. Deal sponsors, as good stewards of your investments, would evaluate the market conditions at the time of the exit that was planned and disclosed on the deal offering summary. If there is currently a recessionary environment and investment targets would not be reached the deal sponsor may opt to hold onto the property longer until the market improves and an exit can occur such that investors would obtain a better overall return on their investment.
Third Party Risks – As noted before, with the success of the business plan, investing is inherently risky. There may be additional third-party risks and factors that force the sale or refinance of a property. Some of these factors may be maturing debt, regulatory changes and natural disasters.
As you can see there are many factors that impact when you will get your original investment capital back. We’ve laid out 6 of the main factors that you should consider and ask the deal sponsor about when investing. As a passive investor be sure to do your due diligence and look for deal sponsors that prioritize capital preservation.