What Is “Preferred Return” in Multifamily Investing?

A Preferred Return (often called “pref”) is a minimum annual return that Limited Partners (LPs) are promised before the General Partners (GPs) earn any performance based profits.

It is a way to protect investors first and align the interests of the operator with the passive investors.

How It Works

1️⃣ LPs Get Paid First

If a deal has an 8% preferred return, it means:

🔹 LPs must receive an 8% annual return on their invested capital before the GPs can share in any additional profits or promote

Example:

If an LP invests $100,000 in a deal with an 8% preferred return, they are entitled to: ➡ $8,000 per year (before GPs participate in profit sharing).

This ensures LPs have priority.

2️⃣ Not a Guaranteed Payment

A preferred return is not guaranteed it is based on the property’s performance and cash flow.
If the property doesn’t generate enough income that year, unpaid preferred returns accrue and must be paid later when cash flow supports it (depending on deal structure).

3️⃣ Accrual Protects Investors

If the deal pays only 5% in year one (but pref is 8%), the remaining 3% is accrued and carried forward.

LPs must eventually be made whole before GPs participate in profits.

4️⃣ Aligns Interests Between LPs and GPs

Preferred return ensures that:

• GPs focus on strong operations
• LPs receive priority in distributions
• Risks are reduced for passive investors
• The partnership has transparent profit allocation

Why Preferred Return Benefits LPs

✔ Investor first structure
✔ Reduces risk
✔ Prioritizes LP income
✔ Holds GPs accountable
✔ Improves fairness and transparency

Summary

Preferred Return is the minimum annual return LP investors receive before the operators share in any profits. It ensures Limited Partners are paid first, aligns interests with the General Partners, and provides a more secure and transparent investment structure.