Case Study #3 - Preferred Returns

In this case study, Fernando Angelucci looks at preferred returns.
First, it is important to understand what a preferred return is. Basically, what this means is that whoever puts in money in the deal, they are gonna get their income first as the preferred return party.
In dealing with this, it is important to know if it is an absolute preferred return or an annual one. And there is a big difference between the two.
Learn more about what a Preferred Return is and how it can relate to your business in this 5-minute video.
Fernando O. Angelucci is Founder and President of Titan Wealth Group. He also leads the firm’s finance and acquisitions departments. Fernando Angelucci and Steven Wear founded Titan Wealth Group in 2015, and under his leadership, the firm’s revenue has grown over 100% year over year. Today,
Find out more at
https://www.TheStorageStud.com
http://titanwealthgroup.com/
Titan Wealth Group operates nationwide sourcing off market investment properties for Titan Wealth Group’s acquisition as well as servicing a network of thousands of active real estate investors world wide. Prior to founding Titan Wealth Group, Fernando worked for Dow Chemical, a Fortune 50 company, rolling out a flagship product estimated to gross $1B in global revenues.
With an engineering background, Fernando is able to approach real estate investing with a keen analytical mindset that allows Titan Wealth Group to identify opportunities and project accurate pictures of future performance.
Fernando graduated from the University of Illinois at Urbana-Champaign with a B.A. degree in Technical Systems Management.
Titan Wealth Group was founded in 2015 with the vision of gathering individual investors that have the means to invest but lack either the time to find high-yield investment opportunities or the access to these off-market deals. All too often, founders Fernando Angelucci & Steven Wear came across investors who had deployed their capital only to regret the lack of consistency or degree of returns their investments were producing. In response, Titan Wealth Group provides access to highly-vetted real estate secured investments and off-market acquisition opportunities primarily in the Greater Chicago MSA. Today, Titan Wealth Group not only assists individual investors but has grown to support the acquisition goals and capital deployment of investment groups, private equity firms, and real estate investment trusts (REITs).
As a facilitator of wealth growth, Titan Wealth Group believes that success is not limited to the sum of our efforts and is infinite with what can be accomplished through partnership.
#SelfStorage #RealEstateInvesting #AlternativeFunds

---------------------------------------------------------------------------------

I was just asked the question on, how do preferred returns work? Is it annual? Is it total? Or is it considered interest? Is it considered capital gains? So let's first look at what a preferred return is. What a preferred return means is that whoever puts in money into a deal, they're going to get their income first as the preferred return party before anybody else. Now let's say we're working with a 6% preferred return. The second question as a potential investor that you should be asking your syndicator or your sponsor is, is this an absolute preferred return? Or is this an annual preferred return?

And here's the difference. Say there is a five year project that is offering a 6% preferred return on your money. If it's an absolute preferred return, what that means is over that five years, you'll get all of your money back, plus 6% profit on top of that. So if you put a hundred thousand dollars in, that hundred thousand dollars will come back to you in that five years, plus that 6% on top. So now you're at $106,000 returned. And then the equity splits will take, will come into effect after that.

Now, if it's an annual 6% return, preferred return. What that means is every year you will be making $6,000 on your hundred thousand dollars invested. Once you get to that 6% in that year, say it only takes six months in that year to get to the 6% return, then everything after that will be split. So that's kind of the difference between absolute and annual preferred returns. Now let's talk about how it's classified. This is something where the answer really depends. It depends on how the syndication is structured. What type of tax strategies your syndicator or your sponsor is using, and then how that income is returned to you.

So for example, one way is to have interest income. So when you have interest income, you may not necessarily be an owner in the project. You may not actually own any part of that project, but you're actually more of a lender. You're in a debt position. You lent a syndicator, a hundred thousand dollars, and he's willing to pay you 6% on that hundred thousand dollars, almost like a coupon, if you will. And once that income comes back to you, it's considered interest income, which is taxed at a different rate than say equity.

Now that second way that you can get your money returned to you is what's called return of equity. It's actually not taxed at all. Say, you invest a thousand dollars into a syndication and each year it pays you $6,000. What that $6,000 can be classified as is a return of your hundred thousand. So every time he gets 6,000, all the way up until you get your initial hundred thousand dollars back, that is return of equity is not considered taxable income. Now, again, I'm not an accountant, I'm not an attorney. I don't claim to play one on TV or on YouTube. So please, you know, talk to your counsel and your advisors before you do any type of investment.

Another thing that you can do is once you've had all of your initial investment return to you, any income above that, if you're in an equity position, as opposed to a debt position can be classified as capital gains. Now, again, there's a ton of tax advantageous ways to receive that income. You can receive it, you know, over a longer period of time using some advanced strategies, like a charitable remainder trust, or you can roll those returns into another property using a 1031 like kind exchange. And that will defer the taxes down the line.

Another thing that you can also do is you can just take the income and pay the capital gains on it. There's a lot of different strategies out there, and it's always important to talk to investment advisor or a CPA to see what the best way to receive that income is for you and see how that works with the way that the syndicator or the sponsor is structuring that syndication.

So if you'd like to learn more about preferred returns or how income and different types of syndications are taxed, feel free to drop us a line at www.TheStorageStud.com. And again, my name is Fernando Angelucci, wishing you good luck and good fortune, until next time.