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March 31, 2023

Multifamily Real Estate Syndication Returns: Average Returns For Investors

Real estate investors can generate healthy profits, but returns depend on investment nature and talent.

Multifamily Real Estate Syndication Returns: Average Returns For Investors

If you are thinking about getting started with real estate investing, then most likely, you want to have some idea of what kind of returns you can expect. While the nature of your investments and your investing talent will largely impact the returns that you can generate, many real estate investors generate healthy real estate investing profits.

What is a Good Return for a Real Estate Syndication

Real estate syndications are managed by “sponsors” who are usually comprised of a team of real estate investing experts. It is for this reason that many high-net-worth individuals and seasoned real estate pros choose to work with real estate syndications. However, not all real estate syndications generate the same profits. Sponsors for real estate syndications handle the investment selection and property management.

The average multifamily syndication generates returns of between 7-10% in rental income from rental properties. This is called a “cash-on-cash” return. These returns are distributed to investors at regular intervals. Usually, these intervals are either on a monthly or yearly basis.

So, if a real estate syndication generates returns on the higher end of the 7-10% range, then they are considered very good. If the returns for rental income are above 10%, then they are considered to be excellent.

What is a Good Rate of Return on Multifamily Real Estate?

The returns for multifamily real estate investing without a syndication are similar to the returns you can expect if you do use a syndication. For example, 7-10% is still considered average, and anything above this is considered to be excellent.

For many real estate investors, 7-10% cash-on-cash returns are more than enough and they are satisfied with this amount. However, for some real estate, average returns are not enough and they only try to invest in multifamily properties that have rates of return that are above 10%.

A number of factors can impact the rate of return including the neighborhood, the price point at which the property was acquired, the quality and reliability of tenants, and more.

How Has Multifamily Real Estate Performed Over Time?

Between 1992 to 2018, multifamily real estate had the highest average annual returns of any commercial real estate sector. The average rate of return per year for multifamily real estate during this period was 9.75%.

With a 9.75% annual rate of return, multifamily real estate was a more profitable real estate investment than hotels, industrial real estate, retail real estate, and offices. The second-best performing type of real estate over this 25-year period was hotels, which experienced an average annual rate of return of 9.61%.

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Multifamily Real Estate vs. The S&P 500 Index

In addition to real estate, many people often cite the S&P 500 index as one of the best and most reliable investments in the world. The S&P 500 is a market-capitalization-weighted index of the top 500 companies in the United States. This index was first created in 1926. Since its inception through December 31st, 2022, the S&P 500 index has had an annualized return of 9.82%.

So,  what this means is that the average returns for multifamily real estate are almost identical to the average returns of the stocks for the 500 largest companies in the US. This goes to show you how powerful and effective multifamily real estate is as an investment.

What Could Cause Multifamily Returns to Be Lower?

There are a number of factors that could potentially cause returns for multifamily properties to be lower. Here is a list of some of those factors.

The purchase price of the property was too expensive

If the purchase price of the property was too expensive, then the monthly rent might not be 2% of the purchase price. If the monthly rent is not 2% of the purchase price, then it means that your cash flow, and thus returns will not be as strong.

There is a housing crash

If there is a housing crash, this could cause a drop in rent prices which would also result in a reduced return for investors.

The property is being poorly managed

If a property is poorly managed, it could mean that maintenance issues are not being resolved quickly and/or vacancies are not being filled quickly. If either of these issues are occurring it can create problems. This is because if maintenance issues are not resolved quickly it could cause tenants to move out and it can harm the reputation of the property. Then, if vacancies are not filled quickly, it can lead to months in which rent is not paid because there is not a tenant in the unit.

There is an issue with the neighborhood

Sometimes, neighborhood issues can result in a reduced profitability for rental properties. For example, if there is a sudden increase in violence, break-ins, auto theft, etc. in the neighborhood, then it can cause vacancies to increase and rental value to decrease. Also, natural disasters and severe man-made accidents such as the train derailment in East Palestine, Ohio can cause rental values to drop and vacancies to increase, both of which will reduce the profitability of the rental property.

Conclusion

Multifamily real estate has proven itself over time to be one of the best investment vehicles for investors to use to build and grow their wealth over time. If you are looking for a great place to put your money, then multifamily real estate should definitely be something that you consider.

It is true that the S&P 500 returns have been slightly higher on average for certain parts of the last century. However, multifamily real estate is a great way to diversify. Many investors choose to allocate certain portions of their investment portfolio to stocks and indexes such as the S&P 500 and to real estate. When it comes to real estate, multifamily has produced the highest returns over most of the last thirty years compared to other types of real estate investments such as hotels and office buildings.

So, multifamily real estate is a great option and it could be ideal for you. If you would like to get started with multifamily real estate investing, then consider working with a syndication to simplify the process.

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