Return of Capital Vs. Return on Capital

It can seem that the difference between Return on Capital and Return of Capital are non-influential, and we get that sentiment! However, there are important distinctions between the two and how they affect a potential investment that we hope to clarify for you.

Return of Capital

An investor receives a flow of distributions during the life of the investment, repaying their initial capital investment over time. As the investor receives distributions, their investment value in the property decreases, lowering future distributions. This is not a method of investment that we utilize at Pinions Principal Partners, and this description is only used for clarification purposes.

Return on Capital

In contrast to Return of Capital, the investment sum in the property is not reducing as the investor receives distributions. As distributions are occurring, the investor is receiving a preferred return based on the profits produced from the investment. If the management plan has performed based off the target goals, the investor has the Return of Capital at the exit/sale of the property. Any additional appreciation or equity accumulated in the deal is also disturbed according to the PPM (Private Placement Memorandum) as Return on Capital. Your Return on Capital

Cash on Cash

Calculates the annual cash income earned on the cash invested in a property, once expenses and debt service are paid and minimum requirements of the business plan are being met. Cash on Cash can be an indicator of short-term profitability of a syndication.

Preferred Return

A profit distribution preference whereby profits, either from operations, sale, or refinance, are distributed to one class of equity before another until a certain rate of return on the initial investment is reached. The pref is stated as a percentage, typically 6-8% cumulative return on initial investment; however, it can also be stated as a certain equity multiple.

Equity Multiple

A financial metric that measures the total return on an investment relative to the initial investment.

Bonus Depreciation

A tax incentive that allows a business to deduct a percentage of costs associated with the business to lower taxes. Please speak with your tax advisor in more detail about Bonus Depreciation and how you may leverage this in a Real Estate syndication.

How It Works in a Real Estate Syndication

• Investors contribute capital (e.g., $50,000).

• Throughout the hold period, they receive cash flow distributions (e.g., 7% per year) potentially as a preferred return (before sponsors/general partners receive distributions).

• The property appreciates in value due to operational improvements and market growth.

• Upon sale, the increased equity is distributed as an additional return ON capital before the initial investment is repaid (return OF capital).

  
  

As you consider investment opportunities, it is important to combine this information, as well as consulting with experts to determine if the investment meets your goals and vision for your future. Let’s schedule a call to talk more about your financial goals and vision, and how multifamily syndication can fit into your playbook!

Happy Investing,

Kristin + Caleb