We are incredibly excited to launch the Real Estate Syndication Calculator. This Calculator helps passive investors visualize and better understand how real estate syndications can help them grow wealth as part of their portfolio. For years we have struggled to explain the benefits adequately, but as everyone says, “An image is worth a thousand words.” We hope the Calculator is helpful in your journey of understanding and imagining your future portfolio growth potential.
You can try out the calculator here for yourself!
In this article, we will go over a few examples to help you better interpret the results and the setup.
Inputs and Settings
We will be honest we felt quite giddy when we first saw the initial versions of the Calculator in action. It was so much fun to play with different settings and quickly see all the results. With that came the desire to add different settings that you can use so you have the flexibility to adjust your Inputs. We will go over each setting in a bit more detail.
Initial Investment
We all need to start somewhere – this is the amount of your initial investment. This can be any amount you want to run a simulation on. A few notes – typically, a minimum investment in syndication will be $25K-$50K. Also, the larger your initial investment is, the larger your distributions, and the sooner you are likely to be able to reinvest (if Reinvest Distributions is “On”).
Additional Yearly Contributions
When we invest, ideally, we want to add to our investments, right? Well, here, you can specify how much you would want to contribute yearly to your investment pool. Note that just because you are adding an amount here does not mean you can invest the contributions immediately. You still need to be able to reach the Reinvestment Threshold to deploy the contribution and have it work for you!. Speaking on Reinvestment Threshold….
Reinvestment Threshold
Unlike the stock market, where we can invest in smaller shares and sometimes fractional shares with real estate syndications, you usually have a “minimum investment” defined by the sponsor. Typically a minimum investment in syndication will be $25K-$50K. The Calculator assumes that you can only reinvest into a syndication when you have enough available funds at the end of a quarter. Those available funds can come from these sources:
- Distributions – if Reinvest Distributions is “On”
- Additional Yearly Contributions
- Gain on Sale and Capital Return – Note: this amount is always available for reinvestment even if Reinvest Distributions is “Off.”
Once you have enough funds available, the new investment is made in the beginning of the following quarter.
Reinvest Distributions
This option determines if your distributions from the Yearly Distributions would be held for reinvestment or not. You might want to turn this option “Off” if you plan to spend the yearly distributions instead of adding them to the reinvestment pool. This is common for passive investors who plan to live off their passive investments. Needless to say, reinvesting distributions can accelerate your wealth accumulation dramatically. Don’t believe us? With the Calculator’s default settings, if you have Reinvest Distributions to “On” at the end of the 15 years, you will have $1,037,206 still working for you. Without distributions reinvestment – $486,425. Big difference, right?
Yearly Distributions
This is the amount in percentage that you are expecting to receive from your sponsor. We have included a flat distribution amount of 7%, as this is what we typically see as a preferred return promised to the passive investors. This will depend on many factors, from deal specifics to the asset class, so feel free to play with the setting. The Calculator also assumes that this is a constant amount distributed starting with the first quarter. Realistically on a value add deal, this might not be the case; however, this is for illustrative purposes only. If you would like to see other options and features in the future, please do not hesitate to submit a feature request!
Hold Period (Years)
Most of the deals you will see presented to you will have a hold period specified. This is typically 5-7 years on a multifamily value add deal or shorter on a development deal. For the Calculator defaults, we chose five as a good middle ground. But you have the power; feel free to play with this setting!
Equity Multiple
The deals you will see will also have an equity multiple specified. In general, a lot of the sponsors will try and double your money in X years. So for defaults, we again chose a middle ground. An equity multiple of 2 with a hold period of 5 years will result in an AAR (Average Annual Return) of 20%. You can read more about Equity Multiple in this article: IRR, AAR, Equity multiple, oh my!
Simulate years
Finally, it is your choice of how many years you would like to simulate the calculations for. Just remember that you need at least the number of years selected in Hold Period because usually, the majority of your returns (and funds available for reinvestment) become available on Sale.
Excited? Feel free to play with the Calculator!
Results
Here comes the exciting part – Results! We hope the Results Summary is clear as it outlines the result at the end of the Simulated number of Years. However, the next two sections are even more exciting – the Visualization and the Summary Table! The status of your investments is as of the beginning of the final quarter, as things like a sale make the numbers a bit more complicated to communicate concisely.
Visualization
We know this might not be the most exciting view on a mobile device, so head out to your computer for a better view. The visualization is very interactive – you can roll over a particular quarter to see the associated numbers, zoom in and out and export your graph to an image.
You will see two vertical axis – one dedicated to the investments (Cummylative Invested, Total Contributions, and Investment) and one for Distributions. We have split them because it is harder to distinguish the growth of the distribution when the amounts are so much lower than the cumulative Invested.
Often you might see the Cumulative Invested and Distributions lines overlap. This is because they are very closely correlated as the growth of Investment results in the growth of Distributions.
You will also see the Total Contributions – this is all the money you have contributed through your initial investment and subsequent Yearly Contributions.
Finally, the little dots indicate when a reinvestment happens. As we discussed above, you need to reach the Reinvestment Threshold in order to deploy the funds. This illustrates all the times this happens. You will notice that the further in time we go, the more often the dots are moving to each quarter (depending on the simulation years).
Summary Table
Depending on the Simulation Years you have defined, you will see a slightly different view of this table. By default, you will see (if available)
- Year 1 Q1 – this is your first quarter
- Year 5/10/20 Q4 – this is the state of your investments at the beginning of Q4 in year 5. Note: funds from a sale are available at the end of the quarter and are reinvested at the begging of the next quarter, so if you have a 5 year investment period, you might see a gain on sale that is not in the “Cumulative invested”
- Simulated Year Q4 – this is the end of the simulation. Note: these are the funds at the beginning of the quarter. We chose the beginning for the purpose of simplicity because the end of the quarter becomes complicated to communicate.
Export Detailed Table
If you want to dive into the numbers quarterly, feel free to download the detailed data in a CSV format. A few more fields you might see in the sheet:
- Funds At End Of Quarter – AS we mentioned above, the sale is assumed to be at the end of the quarter. This column helps evaluate the preparation for the next quarter’s investment.
- Gain on Sale – This is the amount that is contributed in this quarter based on a sale driven by the Hold Period.
- Return of Capital – The amount of capital returned. This should equal either your initial investment amount in the first occurrence or the reinvested amounts from prior quarters.
Conclusion
Phew, this was a long one. We hope this article provides more clarity around all the cool features of the Real Estate Syndication Calculator. Happy analyzing!
