Preferred Returns Explained — What Every Passive Investor Should Know

If you’ve reviewed a private real estate deal, you’ve likely seen the term “preferred return.” It’s one of the most common (and most misunderstood) concepts in private investing.

What Is a Preferred Return?
A preferred return — often called a “pref” — guarantees investors receive a minimum annual return before sponsors participate in profit sharing.

For example:
If a project offers an 8% preferred return, investors receive that 8% first. Only after they’re paid does the sponsor (the operator or fund manager) share in additional profits.

Why It Matters
Preferred returns align the interests of investors and sponsors. Investors get predictable income and priority on distributions, while sponsors are incentivized to exceed that hurdle and perform.

Different Structures
Not all preferred returns are equal. Some are:

Cumulative: unpaid returns roll over to the next year.
Non-cumulative: missed returns don’t carry forward.
Understanding the structure helps investors accurately project income expectations.

The Bigger Picture
Preferred returns are only one part of the deal. Investors should also review:

The equity split (how profits are shared)
The waterfall structure (who gets paid, when)
The sponsor’s track record
At Summit Horizon Capital, we walk investors through these terms clearly — so you understand where your money goes and how it grows.

📥 Download the Passive Investor Starter Kit to learn more: SummitHorizonCapital.com