Have you ever wondered how real estate syndications actually make money? It’s simpler than you might think, yet incredibly powerful when executed properly.
At its core, a syndication pools together capital from multiple investors to purchase a larger asset that would be difficult to acquire individually. Oftentimes, syndications are used to acquire multimillion-dollar commercial real estate properties.
When managed strategically, these investments generate strong returns through two primary channels: cash flow and appreciation. In this post, I’ll walk you through exactly how you’ll get paid as a passive investor in a syndication.
The Strategy: Value-Add Real Estate Investing
The most common and effective strategy in multifamily syndications is called value-add investing. This approach involves acquiring a property that has potential for improvement—either through physical renovations, better management, or both.
When we buy a property, we look for opportunities to:
- Improve amenities like gyms, dog parks, and landscaping
- Renovate outdated units with modern finishes
- Streamline operations to reduce expenses
- Enhance the overall tenant experience
These improvements allow us to charge higher rents, attract better tenants, and increase the property’s Net Operating Income (NOI) — which is the primary factor in increasing the asset’s value in commercial real estate.
Why Net Operating Income (NOI) Matters
In commercial real estate, the value of a property isn’t based on comparable sales like it is in single-family homes. Instead, it’s based on how much income the property generates. This is measured by Net Operating Income, or NOI, which is simply the revenue from rents minus the operating expenses.
The formula used to determine property value is:
Property Value = NOI ÷ Cap Rate
The Cap Rate, or capitalization rate, reflects the market’s return expectations based on risk, location, and other economic factors.
For example:
- If we purchase an apartment building with an NOI of $500,000 and a cap rate of 6%, the property is valued at $8.33 million.
- After renovations and improved management, if we grow the NOI to $800,000, the value increases to $13.33 million at the same cap rate.
- If the market supports a more favorable cap rate of 5% because the property is now more desirable, that same $800,000 in NOI results in a new valuation of $16 million.
That’s nearly a $7.7 million increase in value, created through strategic upgrades and professional management.
Two Ways Passive Investors Make Money in a Syndication
When you invest in a real estate syndication as a passive investor, you’re not responsible for the day-to-day management of the asset, but you still receive distributions. Your returns come from two key sources:
1. Ongoing Cash Flow
After all expenses are paid—including debt service and reserves—the remaining income is distributed to investors. This typically happens quarterly and provides regular passive income during the hold period of the asset.
2. Profit from the Sale
At the end of the hold period, usually five to seven years, the property is sold. Investors then receive their share of the profit from the sale, including the equity that was created through the increase in NOI and improved cap rates.
What to Do Next
Real estate syndications make money by improving properties, increasing income, and raising value. It’s a straightforward model that works—when done right. As an investor, you benefit from cash flow, appreciation, and the ability to grow your wealth passively while someone else handles the heavy lifting.
If you’re ready to learn more about this strategy and how it can fit into your wealth-building plan, click the link below to watch the full video on this topic.
If you’re interested in learning more about passive investing in real estate through real estate syndications, I encourage you to visit NighthawkEquity.com.
You can also apply to join our Investor Club, where we share upcoming opportunities before we market them to the public.