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- What is a Preferred Return?
What is a Preferred Return?
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What is a Preferred Rate of Return?
A preferred return is a minimum rate of return that investors receive before a general partner or sponsor can earn a performance fee or participate in an investment's profits. It's also known as a hurdle rate.
Preferred returns are commonly used in real estate and private equity investing. They can be expressed as a percentage or equity multiple. For example, an 8% cumulative return on the initial investment is a preferred return.
Preferred returns are important because they:
- Reward early investors 
- Show confidence in profitability 
- Align the interests of investors and operators 
- Shape investor risks, rewards, and partnerships 
In real estate investing, preferred returns are typically between 6% and 9% depending on the investment's risk. They are calculated by the sponsor on a compounding or simple interest basis.
The exact mechanics of preferred returns can vary based on the operating agreement and subscription documents signed by investors.

