Return OF and Return ON Investments


When a syndicator or deal sponsor presents a deal to a limited partner he/she will present you with a projection on returns to be expected from the deal.

Need to Know – Capital Account

The first thing to understand is that when you invest in a syndication, the amount you invest creates a Capital Account that reflects the amount of the investment. How the Sponsor characterizes investor distributions throughout the deal will have an effect on this account and how the profit from the sale of the property is handled.

Return OF

In a “return of” situation, every distribution that is sent out is considered a return OF the investors capital and not a return ON that capital. So, with every distribution you receive, your capital account will be decreased by the amount of the distribution.

Example – Investors contribute $1,000,000 to the deal so their capital accounts are $1,000,000. Over a five year period the investors receive $100,000 (10%) per year in distributions so at the end of that fifth year they have received $500,000 and their capital accounts have been paid down to $500,000

Return ON

When the Sponsor structures it as a return ON you will start with the same $1,000,000 in the investor’s capital account to reflect their initial investment. This time however, distributions are not returning their capital, they are instead providing them with a return on their investment. Because of this, distributions do not decrease the investor’s capital account value.

Example – Investors contribute the same $1,000,000 and have the same $1,000,000 Capital Account value. After year five of receiving the same distributions of $500,000 their capital is still the same as the day they initially invested, $1,000,000 as the distributions were a return ON their investment.

So What ??

Why do we need to know this? When the property is sold the Sponsor will generally return the balance of your capital account to you from the profit on the sale before they take their cut or “promote” (this is considered the Sponsor being subordinate to the investor as they get paid after the investors of which they may also be if they invested some of their own capital in the deal). 

In the return OF example, the capital account at the end of year five is $500,000

Return “Of” Example – Investors contribute $1,000,000 for the deal with a return “OF” and an 80/20 promote structure.

In our Return OF scenario the investor’s capital account has been paid down to $500,000 after five years. Now the property sells at the end of year five and there is a $2,000,000 gross profit after paying off the loan and some fees and commissions. The investors first will receive their remaining capital account balance ($500,000), the sponsor will then receive their 20% of the remainder ($300,000) with the investors receiving 80% or $1,200,000.

So, the investors received $500,000 in cash flow distributions through the first five years, a return of their remaining capital account balance of $500,000 and then their 80% share of the net profit (after their capital account has been returned) which was $1,200,000.

So, the investors contributed $1,000,000 and received $2,200,000 through cash flow distributions, repaying of their capital account and their share of the net profit from sale. They received a 120% profit over the five year hold period or 24% annualized.

Return “On” Example – Since this scenario was a return “on” their investment, their capital account remained the same $1,000,000 despite the $500,000 in cash flow distributions they received.

At the end of year five when the property is sold you have the same gross profit of $2,000,000. This time when the sponsor returns the capital accounts it is the full $1,000,000, not just the $500,000 in the return “of” example. So, they received the balance of their capital accounts ($1,000,000) leaving $1,000,000 in profit to be distributed at the 80/20 rate. From this split they receive an additional $800,000.

The investors contributed the same $1,000,000 and received $2,3000,000 in cash flow distributions, return of their capital accounts at sale, and their share of the net profit from sale. This time they received a 130% profit over the five year hold period or 26% annualized.


This is a rather simplified look at the differences in OF and ON, it is done to simply illustrate what the changing a single letter can mean in your investment.The difference in the investor’s return between Return OF vs. Return ON is not always going to be a large difference though it can be. The main thing is to understand the difference, how the sponsor is structuring the deal and what the end result is projected to be for the investor. 

There is no “right” or “wrong” way to do this, simply different approaches. Part of being a sophisticated investor means you should understand what they’re doing. 

Bottom line should be whether or not the projected return for you as the limited partner/passive investor, regardless of their characterization of the returns, fits within your investing expectations and model.


Known in the real estate world as the Apt-Guy℠, Bruce Petersen is a serial syndicator who started with a 48-unit building and has now syndicated over 1,100 units. As the founder and CEO of Bluebonnet Asset Manager LLC and Bluebonnet Commercial Management, Bruce is a #1 Best Selling Author and has received local and national recognition for his syndication efforts. He was the recipient of the Austin Apartment Association’s Independent Rental Owner of the Year for 2016 and the National Apartment Association’s Independent Rental Owner of the Year for 2017. In addition to being a TV personality and public speaker, Bruce also mentors people on how to invest in apartment complexes.

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