Follow the Money: How to Actually Get Paid in a Private Real Estate Deal

Show Notes

You put $100,000 into a syndication deal. The sponsor promised 8% preferred return and a 70/30 split. A year later you're getting checks — but are they right? Where does the money actually go before it hits your account?

I'm Martin Maxwell, and today on 5-Minute PRIME we're following the money. Part 3 of our syndication series: distribution waterfalls, preferred returns, and the promote structures that determine whether you see 8% or 18%.

Preferred returns: your first line of defense

So what's a preferred return?

It's your first claim on cash flow. Before the sponsor sees a dime of profit, you get paid up to that pref. A 7% preferred return on $100,000 means you're owed $7,000 per year before the sponsor participates. If the property only generates $6,000, you get $6,000 and the sponsor gets nothing. That's the whole point.

Typical pref ranges: 6% to 8%. Right now, 7–8% is common. If a sponsor offers 5% pref on a deal with 6.5% debt — that's a red flag. The math doesn't work. You want a pref that at least covers a reasonable return before the sponsor eats into your share.

Here's the reaction beat: a 7% pref on $100K is $583 per month. That's real money. Make sure the structure guarantees it.

The waterfall: how profits cascade

After the pref is met, the waterfall kicks in. That's the cascade of how remaining profits split.

Common structure: 70/30 or 80/20. You get 70–80% of profits above the pref; the sponsor gets the rest. The sponsor's share is the "promote" or "carried interest." They're incentivized to outperform because they only participate above the pref.

Example: property generates $12,000 in distributable cash flow on your $100K. Pref is 7% ($7,000). You get the first $7,000. The remaining $5,000 splits 70/30 — you get $3,500, sponsor gets $1,500. Your total: $10,500. That's 10.5% cash-on-cash return for the year.

Promote and carried interest explained

The promote is the sponsor's bonus for beating the hurdle. Sometimes there's a second tier — a "catch-up" or "super promote" above a higher IRR hurdle.

Typical hurdle: 12–15% IRR. Below that, sponsor gets their 20–30% of profits. Above 15% IRR, some deals shift to 50/50 or 60/40 in the sponsor's favor. That's the "super promote" — they're rewarded for crushing it.

The question: is the hurdle realistic? A 15% IRR hurdle on a value-add deal in a 6-cap market might be achievable. A 15% hurdle on a stabilized 5-cap property in San Francisco? Unlikely. The sponsor would never hit it, so the promote is theoretical. That's fine — it aligns incentives. But if the hurdle is 8% and the sponsor takes 50% above that, you're giving away a lot for mediocre performance.

Questions to ask before wiring money

1. What's the preferred return, and is it cumulative? Cumulative means shortfalls roll forward — if they don't pay you 7% in year one, they owe it in year two before taking their share.

1. What's the split after the pref? 70/30? 80/20? Get it in writing.

1. Is there a promote hurdle? What IRR triggers the sponsor's bonus tier?

1. Monthly or quarterly distributions? Monthly helps with cash flow planning. Quarterly's common but means lumpier checks.

1. When do distributions start? Some deals have a ramp period. Know the timeline.

If you're building your syndication knowledge, check out our Syndication Guide and the NOI and cash-on-cash return terms in the glossary. Next episode: the value-add playbook — how pros force a property to be worth more.