Understanding Real Estate Investment Waterfalls
A waterfall distribution structure determines how profits are split between GPs (sponsors) and LPs (investors). Watch the animation below to see how money flows through each tier.
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See how distributions flow from gross proceeds to investors and sponsors.
1 Return of Capital
First, investors get their original investment back. This is "return of capital" - your principal is returned 100% before any profits are distributed.
2 LP Preferred Return
Next, LPs receive their preferred return (typically 6-8% annually). This is like interest on your investment - a guaranteed return before the GP receives any promote.
3 GP Catch-Up
The GP "catches up" — receiving 100% of distributions until they've earned their promote share of all profits distributed so far. This ensures the GP's promote applies to the full profit, not just residual.
4 GP Promote / Carried Interest
After the catch-up, profits are split according to the waterfall (typically 80/20 or 70/30). The GP "promote" rewards them for outperforming.
5 Remaining LP Profits
The remaining profits after GP promote go to LPs. In a 80/20 split, LPs get 80% of all profits above the catch-up tier.