Let’s be honest—real estate deal structures can sound complicated.
Preferred returns. Equity splits. Waterfalls. These terms might seem intimidating, especially if you’re new to passive investing. But the truth is, you don’t need a finance degree to understand how your money works for you. At CREI Partners, we’re all about transparency and education. Let’s break it down in plain language.
1. What Is a Preferred Return?
Think of this as your spot at the front of the line.
A preferred return is a way to prioritize paying investors before the sponsor (the operator of the deal) gets a share of the profits. It’s not a guaranteed return, but it does mean you, the investor, are “preferred” when it comes to profit distribution—typically expressed as a percentage.
At CREI Partners, our deals often include multiple classes of investors, each with different preferred returns based on the level of risk, capital contribution, and liquidity:
- Class A Investors: Typically receive a 9% preferred return with no upside participation (meaning you’re prioritized for income but don’t share in profits beyond that fixed return).
- Class B Investors: Often receive an 8% preferred return plus a share of upside profits through equity splits.
- Class C Investors: May receive a 7% preferred return, with a greater share of the upside potential—designed for long-term investors who want equity growth in addition to income.
These tiers help investors choose the strategy that fits their personal goals—whether that’s steady income, equity growth, or a blend of both.
2. What Are Splits?
Once preferred returns are paid, splits determine how the remaining profits are shared between the passive investors and the sponsor.
Example:
Let’s say Class B investors get an 8% preferred return. After that, remaining profits might be split 70/30, meaning 70% to investors, 30% to the sponsor.
Splits create alignment—you’re incentivized to see the deal succeed, and so is the sponsor. The better the deal performs, the more everyone benefits.
3. What’s a Waterfall Structure?
This is where it gets a bit more layered—but still manageable.
A waterfall just means profits “flow” to different parties in stages, depending on performance. It often looks like this:
- Preferred Return Paid: (7%, 8%, or 9% depending on your class)
- Return of Capital: Investors get their original investment back
- Profit Split: Remaining profits are distributed (e.g., 70/30)
- Performance Bonus (optional): If the investment exceeds a return threshold (like 15% IRR), the sponsor may earn a larger share as a reward for strong performance
Waterfall structures reward both consistency and excellence—investors are paid first, and the sponsor earns more only if they deliver above expectations.
4. Why It Matters to You
Understanding how preferred returns, splits, and waterfalls work helps you:
- Choose the investor class that fits your financial goals
- Understand when and how you’ll get paid
- Ask sharper questions during due diligence
- Partner with operators who align incentives fairly
At CREI Partners, we build our investment structures around investor success—with clearly defined terms, transparent communication, and flexibility for different investment strategies.
Final Thought
You don’t need a finance degree—you just need a sponsor who explains things clearly and puts your goals first. Whether you’re seeking steady cash flow, long-term equity growth, or a mix of both, our team is here to help guide your path.
Have questions about Class A, B, or C investment options? Let’s schedule a quick call. Visit https://calendly.com/shelbi-creipartners/30min to schedule a 30 minute call with Shelbi today!
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