What Is a Preferred Return—And Why It Matters to Investors

A preferred return is one way sponsors align with passive investors. Here’s how it works, and why it matters when evaluating syndication deals.

If you’ve been exploring real estate syndications, you’ve probably heard the term “preferred return.” But what does it actually mean—and why should you care?

A preferred return (or “pref”) is one of the most common investor-friendly structures in multifamily deals—and one that smart investors should understand.

What Is a Preferred Return?

A preferred return is a target annual return that the sponsor agrees to pay limited partners before they (the sponsor or GP) receive a share of the profits.

It’s typically stated as a percentage—often 6–8% per year.

How It Works (Simplified)

Let’s say you invest $100,000 into a deal with an 8% preferred return.

• That means you’re entitled to the first $8,000 per year in profits, before the sponsor takes their performance split.

• If the property doesn’t generate that much in a given year, the unpaid amount may accrue and be paid later—depending on the deal structure.

Why It Matters

A preferred return:

• Aligns interests between sponsors and investors

• Protects passive capital by putting investors first

• Helps you gauge the deal’s income potential in the early years

• Can affect how cash flow is distributed during hold periods and at exit

What It Doesn’t Guarantee

It’s important to note: the preferred return is not guaranteed. If the property doesn’t perform, you may not receive the full (or any) preferred return. It’s a target, not a promise.

Questions to Ask:

• “Is there a preferred return in this deal?”

• “Is it cumulative or non-cumulative?”

• “Does the GP participate in profits before or after the pref is met?”

• “How is it calculated and tracked?”

Final Thought
A preferred return can be a meaningful way to prioritize investor capital and align incentives. But like everything in real estate investing, the details matter.

Understand the pref. Ask how it’s structured. And make sure it supports—not just sells—the sponsor’s integrity.