What is a Preferred Return? | The Basics of Multifamily Investing

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Learn the breakdown of a preferred return and the safety it provides to investors. In this video we will simplify preferred return and what that means to your multifamily investment! In this video we show an example of a 7% preferred return with a 30% split to sponsors. With Jim’s investment of $100,000 Jim will receive a 7% preferred return each year or $7000 BEFORE the sponsors took a single dollar. A preferred return adds protection to multifamily investors and accountability to the sponsorship team- or in other words the people who put the deal together and manage your investment!

This is David David is looking to invest in real estate but has come across a term that he is unfamiliar with. Preferred Return. David seeks out help from his friend Jim who has been investing in multifamily real estate for many years! Jim tells david that is awesome news, because a preferred return adds extra protection for investors! Jim gives David an example of preferred return from his first multifamily investment. Jim says the preferred return of his first deal was 7% with a 30% split to sponsors after the preferred return was paid. In that deal, Jim had invested $100,000. That meant that each year,Jim got 7% return, or $7,000 first, before the sponsors took a single dollar for their split! After Jim was paid 7%, the remaining net gains were split with the sponsors, where investors took 70% and sponsors took 30%. Jim tells David that a preferred return builds accountability from the sponsor team and allows management to show its investors that the property is expected to not only reach the preferred return but exceed it! A preferred return is a powerful because it is accrued, meaning that if the economy is down and the property is only able to pay out 5% to investors that year, the remaining 2% are still owed to the investors, and they must be paid before the sponsors can get paid! David is excited because he now understands the importance of a preferred return on investment deals, and why it’s a powerful tool to help protect investors.