The Waterfall Structure Explained: How Investors Get Paid in Private Real Estate Deals

Private real estate investments can generate strong returns — but understanding how those returns are distributed is key. That’s where the waterfall structure comes in.

What Is a Waterfall?
A waterfall structure defines how cash flow and profits are divided between investors and sponsors. Think of it as a series of steps (or tiers) that outline who gets paid first, second, and so on.

Typical Waterfall Example:
1️⃣ Preferred Return (the “Pref”) – Investors receive a set return (e.g., 8%) before the sponsor participates.
2️⃣ Catch-Up Tier – Sponsors may earn a small portion once the pref is met.
3️⃣ Profit Split Tiers – Remaining profits are divided (e.g., 70/30 or 60/40) between investors and the sponsor, based on performance.

Why It Matters
A clear waterfall ensures fairness and alignment between sponsors and investors. It rewards performance while protecting investors’ downside.

At Summit Horizon Capital
We believe education and transparency come first. Every investor should know exactly how and when returns are paid.

📘 Learn more in our Passive Investor Starter Kit → SummitHorizonCapital.com