If the overall cash-on-cash return for this project is only 10%, it’s not a viable deal. Investors generally want annualized returns from a combination of cash flow and equity on sale in the mid-to-high teens, and if they perceive it as a risky investment, they may be seeking even higher returns. And in that case, how do you get paid?
One of the reasons you are seeing such small returns is that you may be trying to analyze this as an all-cash deal. That rarely works for anything except single-family residences. For commercial properties, you will need to get debt for a portion of the purchase price to make the deal viable. This is generally necessary in any commercial real estate deal, as a lender is your least expensive investor — meaning their interest rates are significantly less than what your private investors want. If you finance a portion of the purchase at a lower rate, it gives you “leverage” that helps boost the returns you can offer investors (and have something left over for yourself), as you won’t need to raise as much capital from them.
But if your analysis shows that you are not able to keep at least 25% of the profits for yourself (or your team) within a couple of years of acquisition, you’ll likely be doing a whole lot of work for investors with little upside for you.
