Where Does Cash Flow Actually Come From In A Real Estate Syndication?

Do you have real estate syndication investment on your mind but are hesitant since it seems a bit too good to be true? It’s not just you. When they first discover the possible cash flow returns they may make by investing passively in real estate syndications, many investors are taken aback. Understanding where that cash flow originates and how it moves from the asset itself to your bank account is the key to allaying your questions and scepticism, and that’s precisely what we’ll explore in this post.

Cash Flow Distributions

You may typically anticipate to begin receiving monthly cash flow distributions within the first few months following closure, which will be your new source of passive income! But why are these investments so profitable? What is the true source of the money? 

Where Cash Flow Comes From

Number of the size or number of tenants, every investment property is a resource that both creates income and incurs expenditures. Let’s discuss how apartment buildings make revenue, typical costs they have to pay, and how cash flow is determined.

Gross Potential Income

The tenants’ monthly rent payments are an apartment building’s primary source of income. 

Let’s use an example where the average rent in a building with 100 units is $800. Accordingly, the monthly gross potential income is $80,000, or $960,000 annually. 


Monthly Gross Potential Income

100 units x $800 each = $80,000 per month


Annual Gross Potential Income

$80,000 per month x 12 months = $960,000 per year

Now, don’t get too excited. I hate to break it to you, but that $960,000 is the gross POTENTIAL income for the whole complex assuming 0% vacancy and full rent payments with no expenses, deals, or discounts (e.g., “first month’s rent free!”).

Net Rental Income

When loss to lease, concessions, and vacancy expenses are subtracted from prospective income, what remains is referred to as net rental income. 

Assuming only 10% of the units are vacant (i.e., in a 100 apartment complex, only 10 are empty), at $800 a month, the monthly vacancy cost would be $8,000.


Vacancy Cost

10 units vacant x $800 in lost rent per unit = $8,000 vacancy cost per month

If the vacancy rate remains constant throughout the year, the annual vacancy cost would be $96,000.

$8,000 per month x 12 months = $96,000 per year


Net Rental Income

Remember, to get the net rental income, we must take the gross potential income (the total income if all units were filled) and subtract out the vacancy cost.

$960,000 annual gross potential income – $96,000 annual vacancy cost = $864,000 annual net rental income

Operating Expenses

Remember that there are also business expenditures.  Maintenance, repairs, property management, cleaning, landscaping, utilities, legal and bank fees, pest control, and other operating costs must be covered. There are variations in requirements and cost structures across different apartment complexes. Let’s assume that the total anticipated running costs per month come to $38,000, or $456,000 annually. The sponsor team would gradually seek to lower these costs, but for now, we’ll utilise this sum as a starting point.


Annual Operating Expenses

$38,000 monthly operating expenses x 12 months = $456,000 annual operating expenses

Net Operating Income (NOI)

NOI or Net Operating Income is what’s left from the net rental income after operating expenses are removed.

$864,000 net rental income – $456,000 operating expenses = $408,000 NOI

It’s okay if you’re a little confused right now! There are several numbers in this. It’s crucial to keep in mind that you want the NOI to be positive and as high as it can be, indicating that the asset has the ability to turn a profit and produce the cash flow distributions that first drew you into the situation.


Let’s go on to the mortgage now. You have to repay the lender, just as with any other real estate acquisition. The down payment and loan amount for a commercial property acquisition are similar to those for single-family house purchases; typically, there is a 25% down payment and 75% leverage. Monthly principal and interest payments are required to repay the loan. Let’s assume that the group owes $240,000 in mortgage payments in this instance, or $20,000 every month.


Annual Mortgage Payments

$20,000 monthly mortgage x 12 months = $240,000 annual mortgage payments

Cash Flow / Cash on Cash Returns

We now know our cash flow for the first year after deducting the costs from the income.  The sponsor team may optimise the property and its costs in coming years, changing a number of variables, so keep in mind that while this is not a guarantee, the cash flow statistics tend to rise with time.


First-Year Total Cash Flow

$408,000 NOI – $240,000 mortgage = $168,000 first-year total cash flow

This amount is then split up, according to the agreed-upon structure for the deal. Assuming this deal uses an 80/20 deal structure, 80% of the profits go to the investors (i.e., the limited partners), and 20% goes to the sponsor team (i.e., the general partners).


First Year Cash Flow to Investors

$168,000 first-year cash flow x 80% = $134,400 first-year cash flow to investors.You would get a portion of that cash flow each month in the form of a distribution check or a direct deposit, depending on your level of commitment.


Your Monthly Cash Flow Distribution Checks

If you had invested $100,000 in this contract, you may have anticipated receiving a cheque for $667 every month, or $8,628 a year. 

There you have it, then. The rent that the renters pay is what generates the monthly cash flow that goes into your bank account. We then subtract the costs, pay the mortgage, taxes, and insurance, then split the remaining funds and distribute them to investors.  Is this residual income assured? Without a doubt.  Taking into account all the factors, including the location, team members, tenants, economy, and many more, it’s critical to remember that these figures are only estimations, although being helpful. While projections are entertaining to follow, they should never be considered as gospel. But now that you know where the cash flow in a real estate syndicate originates from, you should be able to examine and verify the numbers in the pro forma and investment description more carefully, which will help you choose wiser investments.

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