In a real estate syndication, a preferred return is a type of return that investors receive before the general partner (GP) receives any distributions. The preferred return is typically a fixed percentage of the total investment, and it is paid out to investors regularly, such as monthly or quarterly. The preferred return is typically in the range of 5-8%.
The preferred return serves several purposes. First, it provides investors with a guaranteed minimum return on their investment, which can be especially important in a real estate investment where the return may be uncertain. Second, it helps align the interests of the GP and the investors by ensuring that the GP does not receive any distributions until the investors have received their preferred return.
It’s important to note that the preferred return does not necessarily represent the total return on investment (ROI) for investors. The total ROI will depend on the performance of the investment, and it may be higher or lower than the preferred return. Additionally, the preferred return is paid out of cash flow, before any distributions to the GP, which means that the GP will not receive any distribution until the investors received their preferred return.
Finally, it’s also worth mentioning that not all real estate syndications have a preferred return, and some may have different terms of distribution. It’s important to read and understand the terms of the investment and the structure of the syndication before investing.