Preferred Return: Your Priority Paycheck in Multifamily

 In many real estate investments, General Partners and Limited Partners agree on various ways for both groups of investors to get paid when the property is profitable. We’ve written about this a couple of other times along with tons of other terms and strategies for how many deals get returns to investors. See our Waterfall Structure post, and the Syndication Terms post a percentage if you’re interested in those deep dives!

Today, we’re going to deep dive into the Preferred Return and how this can be a major value add for a Limited Partner in a syndication. The Preferred Return states investors will receive a certain percentage of their investment before the general partners receive profits.

1. This return comes from the cash flow of the property, so it’s important to understand the business plan of the deal and when Pref will be activated.
   

2. It is not guaranteed payout, however it comes before the GP team gets paid, so there is incentive for the GP Team to continue managing the business plan well so that they will get paid as well down the road.
   

3. Typically, the Pref is cumulative, so if there is a quarter or period that is low cash-flow, the Pref will need to be paid later before the GP team is paid.

   1. Example: If you invest $100,000 in a deal with an 8 percent Pref, you are owed $8,000 before the sponsor earns a paycheck. If the property only generates $5,000 that year, the remaining $3,000 accrues and is carried forward.
      

4. Typically, as capital is returned through the life of the property (or from sale, refinance, etc.) the Pref will reduce because it is calculated based on unreturned capital. 

   
   

Standard Preferred Returns are about 8% but can vary depending on the business plan and specific deal, occasionally up to 12%.

If you’re a visual learner, here’s a quick video that breaks down what a Pref is and how it looks in the real world!

Caleb and I are continuing to monitor the market and explore potential investments that meet our criteria for investing and would offer a strong business plan. We are available to discuss the current state of the market, your goals for investing and any other questions you may have. Schedule a call with us from the links below!