A preferred return is a minimum hurdle rate that investors in a real estate deal must receive before the sponsor earns any share of profits. It is one of the most important structural protections available to investors in private real estate offerings, and its presence (or absence) says a great deal about a sponsor’s commitment to investor alignment.
In a typical structure, an investor might receive a 7–9% preferred return on their invested capital annually. Until that threshold is met through distributions, the sponsor receives only their management fee — no profit share, no carried interest. This structure ensures that the sponsor only benefits from upside after investors have received a baseline return.
How Preferred Returns Work in Practice
Suppose an investor commits $250,000 to a multi-family deal with an 8% preferred return. In year one, the property generates sufficient cash flow to pay the investor $20,000 (8% of $250,000). This full preferred return is paid before the sponsor receives any promote. If cash flow is insufficient in a given year, the unpaid preferred return accrues — meaning it must be satisfied from future cash flows or at sale before the sponsor participates in profits.
At RIYT, most of our investment structures include a preferred return in the 7–9% range, depending on the risk profile and asset class. We view the preferred return not as a ceiling but as a floor — a commitment to investors that we will prioritize their returns before our own profit participation.