You see an impressive 18% projected return on a private real estate deal, but how investors get paid is the real question. The journey from a property’s profit to your pocket is a complex path of fees and profit splits that every savvy investor must understand. On this episode of the 5-Minute PRIME Podcast, host Martin Maxwell continues the masterclass on private real estate syndications by following the money. We’ll deconstruct the entire economic engine of a private deal, moving beyond the marketing to reveal how investors get paid—and when.
Tune in to learn:
- The Asymmetric Partnership: A clear breakdown of the “sweat equity” role of the General Partner (GP) versus the “capital equity” role of the Limited Partner (LP) in a private syndication deal.
- Deconstructing the Waterfall: A step-by-step guide to the profit-sharing structure that dictates who gets paid first and how investors get paid depending on deal performance.
- Finding the “Gotchas”: A practical guide to scrutinizing the Operating Agreement for critical investor protections like voting rights, capital calls, and GP removal clauses—all key to a secure private syndication deal.
- Real-World Contract Language: A simple, real-world example that shows you the math of how cash flow is distributed—and how investors get paid versus what’s projected.
Are you ready to look past the hype and truly understand how investors get paid in a private real estate deal? Subscribe now to learn how to follow the money.
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Show Notes: How Investors Get Paid
Key Takeaways
- The journey from a property’s profit to an investor’s pocket is a structured path of fees and profit splits called a distribution waterfall.
- Sponsor fees (Acquisition, Asset Management, etc.) are the cost of expertise and should be transparent and reasonable, not avoided.
- The distribution waterfall prioritizes investors first through a “Preferred Return” (or “Pref”).
- A “cumulative” preferred return is a critical term, ensuring any shortfalls are paid back before the sponsor is paid their bonus. A non-cumulative pref is a major red flag.
- The sponsor’s performance bonus, the “Promote” or “Carried Interest,” is paid only after investors have received their preferred return and their initial capital back.
- This structure aligns the interests of the investors (Limited Partners) and the operator (General Partner), rewarding the sponsor for delivering a successful project.
Action Step:
- Find an investment summary for a private real estate deal, either online or one you’ve received.
- Locate the “Distribution Structure” or “Waterfall” section.
- Practice identifying the two key numbers: the Preferred Return percentage and the final profit split (the Promote).
Mentioned in This Episode
Episodes to Revisit:
- Episode 70: The Sponsor & The Contract: How to Vet the People and the Paperwork in a Private Syndication Deal
Challenge for Today: Private real estate syndications
- Visit a sponsor’s website and find a real estate investment summary
- Look for the section labeled “Distribution Structure” or “Waterfall”
- Identify the Preferred Return percentage
- Identify the Profit Split or Promote
- Take note of whether these terms are clearly explained
- Train your eye to recognize these numbers before evaluating projected returns
