What is a preferred return?

In a real estate syndication some sponsors (general partners) will offer a preferred return commonly known as a “Pref”. What is it? It’s the return that limited partners (passive investors) get before any of the general partners are paid. If the pref is 6% they will get a return of 6% every year at a minimum. The remaining profit would be split according to the equity percentage split in the deal. So if the deal split is 75% LPs and 25% to the GPs then the left over profit on the deal is split accordingly.

Let’s take the example of investing $100,000. With a 6% pref the investor would receive $6,000 in distributions that year. They would also be paid on the profit above and beyond the 6%. So if an additional $10,000 in profit is made $7,500 would go to the LPs (in accordance with their ownership of shares). $2,500 would go to the GPs.