Real Estate Equity Waterfalls Explained
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- Опубликовано: 7 авг 2019
- Real Estate Equity Waterfalls Explained // Ah, real estate equity waterfalls. One of the most daunting and complicated parts of a real estate syndication or fund. Often times, when reading something online about equity waterfalls or having someone try and explain waterfalls to you can make you even more confused. So what is a real estate equity waterfall, really?
What I often wanted to say to people when I first learning this stuff (but was too afraid to) is, “Explain this to me like I’m a 5th grader.” So in today’s video, I’m going to break down real estate equity waterfalls, real estate promote structures, and real estate syndication structures in a way that actually makes sense.
Want to learn how to build real estate equity waterfall models from scratch in Excel? Check out The Real Estate Equity Waterfall Modeling Master Class here: breakintocre.com/courses/
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Want to see a video on any other waterfall structures? Let me know in the comments. Thanks for watching!
Absolutely! Very interested in how FMRR and Reinvestment Rates play in the waterfall spreadsheet.
@@christianhauck9375 thanks for the feedback!
Great to see you on youtube, Sensei!!!
Great explainer. Thank you!
Thanks for that understandable example!
Thank you. Great Video
Thank you this will help a lot with my interview!!!
Excellent. Do your courses include the live, downloadable models?
Thank you! SO GOOD.
Great video!
wow you are excellent at explaining PERE
This was a great explanation. Thanks, Justin!
Thankss alott, currently in my final year of BSc in real estate and this vid really help me in my study!
Best video on Equity waterfalls!
You are the best!
Great Video
Thanks!
Best video to explain this model. Thank you!
Hello| Thank you a lot.
My Cuestion is that you only can apply the promote a posteriori, I mean when the project is finished, because, as I think, during the project life, you only know the cash flow you are receiving each month, but you really don´t know the final IRR of the project until it will be closed ( I mean you sold the property ) so, you pay the basic interest rate each month ( 8% in the example) and then, when you sold or refinance the property, then you really know the amount of profits and you could apply the promote.
Is that as I say?
Thank you so much for this informational video. I struggled to understand this in my finance class and got so much clarity from watching this video a couple times.
Very well explained.
Thanks
Thanks for watching!
I wasnt financial free until my 40’s and I’m still in my 40’s, bought my second house already, earn on a monthly through passive income and got 4 out of 5 goals, just hope it encourages someone that it doesn’t matter if you don’t have any of them right now, you can start TODAY regardless your age INVEST and change your future! Investing is a grand choice I made. Great video! Thanks for sharing!
Very inspiring! I love this""
Glad I came across this comment section. I was struggling to decide what to do with a good amount of money in the bank doing nothing. I would be happy if you could advise me, as I am ready to go the passive income path...
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@@eadad4371 look her up on the internet and leave her a message she's quite popular for her services as she was recently featured on cnn. She can work with anyone irrespective of where their located
@@marktil. I have had the intentions of starting investing. But I always thought it was late and I think I need to stop procrastinating. I will definitely 🔍 Regina Louise Collaro and see what she can advise .Thanks a lot . This was of so much help to me .
Thank you very much for those helpful comments, crystal clear now !
Thank you so much, it was really awesome
Excelent explanation! Waterfall is always very hard to explain to investors. Thanks
Great video. Very well done. Thank You!
Thanks for watching!
I’m gonna enroll to the annually subscription and will recommend that to all of my colleagues.
Thanks Justin you’re the best
Great to hear, Nayef! Looking forward to having you in the program!
How can I model a refinance in the middle of the deal?
Is there anyway you could possibly send me that spreadsheet.... would help a TONNNNNN
You are the best. Thank you
your a great teacher and you explained it perfectly
Very clear. Thank you for educating us
You're very welcome - thanks for watching!
Best and easiest way to understand the real estate concepts 👏👏👏 could you also make a video on cash management and it's types ??? Would be helpful.
Thanks for breaking it down!
Happy to help - thanks for watching!
is preferred return effectively cash on cash return? say you are in a JV format
Very good question. Almost always, the preferred return is going to be an IRR, not a cash-on-cash return. This makes sure that the LP receives a return of all capital invested before the GP earns any promoted interest.
thank you so much for explaining this so well! I will def sign up for the course. I'm a real estate major and I'm in NYC. I found your videos so helpful. I'm also trying to break into REPE.
Your explanations are the best. Thank you so much!
Thank you for all your support, Anna!
Leaving the tech industry to take an analyst position at a CRE PE firm; These videos are saving me. Seriously considering your full course. Thanks!
Great to hear!
You earned yourself a subscriber sir
Lets say the cash flow ends up being negative, who pays for it? the sponsor or general partner? or is it a split? Assuming same numbers in your video... thanks!
The sponsor because in a limited partnership only the General Partner(s) is responsible for signing the debt. Unless the LP happens to be a KP which in that case they would be the one guaranteeing the loan
how to calculate irr
Excellent explanation, very understandable.
Great to hear! Thanks for watching!
Taking a structured finance course, this helps a lot. Thank you.
Thanks for watching, Antonio!
Are you using IRR correctly here when you talk about the 8%? If 8% is the rate required to hit NPV of 0, then isn't the father actually asking for an 8% return (not internal rate of return)? When the father asks for an 8% return on his investment, he is essentially stating that he wants to earn an 8% annual return on the $950,000 he contributed as equity in the real estate property. This is a fixed percentage return on his initial investment and is not the same as IRR?
Uncle Mark was MIA. I’m still looking for him
Great video! Please explain though how you got $1,000,000 in profit? And more importantly, what do you mean by $400,000 in profit up to 8% of IRR? Where I'm confused is, if the Mark invested $950,000, and you said he'd generate an 8% return on his investment YoY that's $76,000.... where does this $400,000 up to 8% come from and what does that even mean? Please explain. THANKYOU!
Is it possible to get any discount on your course?
udemy is usually always on sale
Hi Justin, great explanation, great video. I just have a quick question. How did you get the 14% IRR (GP) and 40% IRR (LP) at the end? I can't figure out how you got those numbers. Thanks!
Hey Michelle, really good question. I wanted to keep this video as simple as possible, which is why I left out several of the calculations, but it's tough to explain this through text without seeing it in action in Excel. If you want to learn the math behind the GP and LP IRR calculations and how all of this works, I'd recommend checking out the Equity Waterfall Modeling course referenced in the video (link here: breakintocre.com/courses).
Guarantors?
Thank You! Just invested in two of your UDEMY Courses! The Real Estate Equity Waterfall Modeling Master Class and The Complete Guide To Multifamily Real Estate Investing. I run a 506(c) and in the middle of the legal structuring right now. I love how helpful this is for almost any skill level. I even want to show my Fiance the course so she can hear it from another voice and be a pro too! Looking forward to tightening up my skills! #RootingForUsAll2Win #FundamentalFourBook
Great to hear, Kerry! Glad to have you in the courses!
@@BreakIntoCRE Absolutely, I just brought the Pro Forma course as well. After I asked a question on Udemy I realized you had a whole course on it and made the investment.
@@kerryleehartley great to hear!
@@BreakIntoCRE you should switch to teachable. Udemy will aggressively cut the price of your course without your consent.
How do you calculate the 400,000 at 8% ?
Hey Stavros, this is run through an equity waterfall model in Excel which can get pretty complex, but it's essentially the profit that will get the LP to the 8.0% IRR, and no higher. This depends on the overall cash flows of the deal and the sale timing, as well. For more information on how to calculate this and build this out in Excel on a live deal, you may want to check out this course: www.udemy.com/course/the-real-estate-equity-waterfall-modeling-master-class/?couponCode=BICRETREEWMMC1119
Thank you for the video. I am working on a ground up real estate development project and equity waterfalls are what most investors are requesting since they are contributing more of the private equity capital. Is the Excel Spreadsheet that you created available for download..?
Thanks Justin! Great presentation!
Anyone wants to learn Real Estate Financing, his Udemy courses are great resources with a lot of details to start.
Excellent explanation, thank you!
I was thinking of studying for MREF or MRED or Certification in both. But having watched your videos I believe that the optimal methodology would be to get a very solid grounding in excel modelling to become an expert in this first, then go further with CCIM Advanced ...then go get a MRED or MREF later on..... As I want to have my own real estate investments, getting a solid grip of the numbers to build a credible plan to convince lenders is the key it would appear. The waterfall model is very similar to the hedge fund model . Get investors in and then charge 1% management and 20% of outperformance keeping the rest. That’s how they get rich.
Great explanation! Is it common for a GP to charge 2% fees on AUM over the holding period?
Definitely, often 2% per annum
thank you very much for this explanation...
Skip to 1:35
The real key to understanding this (should have spent more time on this pt) is that for the promote, the GP gets 30% of the LP’s profits PLUS his original stake 5% of his profits. For a beginner, intuitively one may think that all profits above the pref are split 70/30, but it’s actually split as I described...
Very Well Explained !
How do you get paid on a monthly basis, lets say you do a monthly equity waterfall and you've invested 10% of equity and on a levered basis your cash flow is $30k. Sorry if my question doe not make sense haha
Hey Jeronimo, good question and it does make sense. With the way most waterfalls are structured, you’ll only earn 10% of the $30k ($3,000) and you won’t earn any promoted interest until a capital event (sale or refinance). Most structures are based on an IRR target, which requires a return of capital plus a preferred return in order to trigger promoted interest.
Very well explained. I'm buying your course on Udemy, thanks!
Great to hear!
Hey did you end up buying it? How did you find it? I'm thinking of buying it too
Hi ! great explanation. I had a doubt. Is it different for private equity fee structure? I read that in PE you take 30% of the total remaining profits (after deducting hurdle rate) and not just from the LPs share. The rest goes to LPs. GPs share is not considered while distributing profits. Please can you help with this?
Great explanation, but I have a couple questions.
1. How did you calculate, how much is calculated at the 8% IRR and how much is calculated above the 8% IRR?
2. Is the split based on a sale of the property or after the property is cash-out refinanced after 5 years?
3. What kind of assurance do you give your "uncle"? (i.e. his name is on the title or loan, maybe a separate business contract)?
Hey Troy, happy to help.
1. The calculation of the profits below and above the IRR requires an IRR calculation in Excel and an equity waterfall model to build this out - I'd recommend course I mentioned in the video (link in description) if you want to get into the details of how to calculate this.
2. Depends on the partnership structure (varies deal to deal), but usually the promoted interest can be earned with a refinance, assuming the LP investor has all its capital returned and hits the preferred IRR.
3. You'll usually enter a JV operating agreement that governs the distributions on the deal, but since your uncle is an equity investor, he will generally have no recourse against the GP if he doesn't hit his preferred return. Long story short, not much assurance. He will just be a part owner of the entity that owns the property.
Thank you.
No problem.
Hey, do you mind sharing your thoughts on carried interest as an additional alternative of receiving income as a GP? Is this something that is customary within the RE fund structures? Or is it typically a simple waterfall structure plus management fees? Thank you!
“Until we hit a 8% irr let’s split the profits 5/95” - How do they know they hit an 8% IRR? If it’s a rental property making like 1% of property value per month from rent how do they know how well they are doing?
I think most investors that use the IRR are value add investors, so they plan to raise NOI/increase property value in some way where they predetermine what improvements they're going to do that can raise it to that 8 percent and over. I think the 1% of property value you mention is just standard ROI calculation and is something more commonly found in Buy and Hold investments where they typically don't tend to chase after aggressive returns.
step 1: know someone whos rich
I didn't understand the million dollar profit in it?
How do you know that the first USD 400k are related to the 8% and the USD 600.000 are related to part over the hurdle rate? Was this just an assumption?
Great Video! I am underwriting a vacant 20 unit building that will require some rehab for a 4 year levered hold. With the equity waterfall structure in my scenario, would the LP's only receive funds at time of sale/refinance? Or should they be receiving quarterly/yearly payments once the property is fully stabilized? Sorry if my question doesn't make sense lol Thank you for your content!
Hey Josef, this will all be spelled out in your Operating Agreement which I don't know the details of, but in a traditional waterfall structure the LP would receive its pro rata share of the cash flow once the property is stabilized, as well as funds when the property is sold/refinanced.
@@BreakIntoCRE Just to confirm, this pro-rata share of the cashflow and proceeds of the sale would also be at the 95/5 split? Thank you
U r so handsome. Im brand new at Real Estate. Blue grass gurl w big dreams...💙😎🌴
Can you also make a video on how to find an uncle with 950K to invest? Joking, great video ;)
Incredible! Thank you
This guy lets flats
In this example you are saying that the preferred equity is a 95/5 split. Is this most common(the proportional split), because I’ve also heard that with preferred equity the LP would get 100% up to the hurdle rate.
I don't quite understand where the originally 65% of the $3,000,000 comes from, but also how/when do you pay Uncle Mark his $950,000? Can anyone help? :(
65% (2 Mio. roughly) would come from debt from lenders/debt investors as there is LTV- Loan to Value Ratio which is used in real estate financing. Remaining 1 Mio. is from equity investor. Also original might have continued as equity part with CRE assets there on asset side which are mostly capital appreciative in nature..
01:40 Start
04:04 Investment numbers overview
Did uncle Mark forget that his nephew pursued a $950MM investment with an 18% return. Why did he all of a sudden agree to target only 8%
One more question. Is the Internal Rate of Return (IRR) the same as a preferred return of the free cash flow..? Thank you.
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Nice video but it is too fast to grasp or to understand the concept indepth. I would request you to go little slower for normal people to understand the concepts by watching your videos..
wish I had an uncle "Mark" would make my pitches so much more pleasurable......