Accredited Investors

So, you’re interested in spreading your wings in real estate investing. However, to become an accredited investor and invest passively in potentially lucrative deals, you must meet specific income/ net worth requirements.

If you do meet these requirements, taking part in accredited investing is one of the smartest decisions you can make. Why? Because these types of passive investors can generate cash flow without having to work a regular 9-to-5. In addition, you can easily generate higher returns and lower your risk when you participate in an apartment syndication deal versus trying to handle your own deal.

Take a peek at the blogs below to become familiar with the accredited investor definition, and explore how to get started in this field. For instance, you can find out the benefits of investing in apartment syndication deals, and the best places to invest in such deals. Then, if you enjoy what you read, feel free to check out my hundreds of other blog posts for other valuable real estate investing insights. Also, take a peek at my Best Real Estate Investing Advice Ever book for even more strategies for winning as a real estate investor.

6 Best Ways to Find Commercial Real Estate Syndicators

Since commercial real estate syndications are a more sophisticated investment strategy for a smaller portion of the population (i.e., accredited investors), it is more difficult to find sponsors compared to other passive investment opportunities. For example, go to your local bank and they will ask you if you are interested in high-yield savings accounts or CDs. Go to any financial website or speak with a financial advisor and you’ll learn about stock, bond, and mutual fund opportunities. REITs are even more widely discussed than syndications.

In this blog post, I will outline some of the best strategies for finding commercial real estate syndicators to passively invest with. The six ways to find commercial real estate syndicators below are based on Ryan Gibson’s, CIO and co-founder of Spartan Investment Group, presentation at this year’s Best Ever Conference.

 

1. Online

Did you know that there are websites dedicated to creating a database of syndicators who are raising money for commercial real estate opportunities? Two of the most popular websites are 506 Investor Group and FormDs. Both resources are different but serve the same purpose: to help accredited investors find commercial real estate syndicators.

506 Investor Group is a private and confidential group of passive investors who discuss, evaluate, and share due diligence on alternative investments, including commercial real estate syndications. One resource you can access without a membership is the Rate Sponsors page. View a list of sponsors, which includes what they invest in and their ratings and reviews from other members in the 506 Investor Group.

FormDs, on the other hand, is a free database of all SEC filings (called “Form Ds”) of startups, growing businesses, hedge funds, and private equity firms, which includes commercial real estate syndications. On FormDs, you can search by the sponsor or company name, or you can filter by type (i.e., commercial real estate) and location.

A simple approach is to use FormDs to find a group and 506 Investor Group to review the group before scheduling an introductory call.

 

2. Networking

Speaking with other high net worth individuals is another way to find commercial real estate syndicators. Someone in your circle of influence (friend, neighbor, work colleague, etc.) may be passively investing in commercial real estate without you even knowing.

 

3. Funds

Another way to find a commercial real estate syndicator is through a fund that invests with commercial real estate operators. Known as the “funds of fund” model, a group will pool together investments from accredited investors and invest in other types of funds, like a commercial real estate fund. So, rather than finding a commercial real estate syndicator yourself, you find a group that specializes in investing with other apartment syndicators.

 

4. Commercial real estate events

Meetup groups and conferences that focus on commercial real estate are great resources for finding commercial real estate syndicators. You will either meet commercial real estate syndicators directly, or you will meet people who passively invest with commercial real estate investors. Here’s a list of real estate investor meetups to get you started.

 

5. Commercial real estate projects

If you see a commercial real estate development or rehab project in your area, chances are it is a syndicated deal. You can find out who syndicated the project by looking up the property parcel on the local county auditor/appraiser site and determining who owns the asset. Most likely, it is owned by an entity, but you can go to either the SEC website or the Secretary of State website to look up the owner of the entity.

 

6. Referrals

Once you find one operator to passively invest with, they can be a great source for other syndicators. They likely know other operators who are syndicating projects, either in the same niche or different niche. After you are happy with their performance, reach out to them for a referral.

Referrals from other operators (or other passive investors) are the best way to find commercial real estate syndicators, because they are pre-qualified, in a sense. You still want to screen them (here is a blog with the most important questions to ask when qualifying a syndicator); however, they come with more legitimacy since they were referred to you by a trusted source.

 

Best Ways to Find Commercial Real Estate Syndicators

The best way to find pre-qualified commercial real estate syndicators is from referrals. In addition to referrals, use websites, like 506 Investment Group and FormDs, to find and review prospective syndicators. Network with other high net worth individuals in your network to learn who they are investing with. Work with funds who invest in commercial real estate funds. Attend commercial real estate meetup groups and conferences. Lastly, assume any new commercial real estate project in your area is a syndication deal and locate the group that manages the project.

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Welcome to the Accredited Investor Club

Picture a dimly lit room, full of some of the world’s wealthiest individuals, privately gathering to discuss the future of the world. Rockefeller. Morgan. Carnegie. All of the world’s biggest players are there, deciding which markets will succeed, which assets will thrive, and who will end up footing the bill.

For ages, many of the world’s “best deals” were available only to insiders or those “in the know” with special connections. If you did not have those special connections, you were not given an opportunity to learn about the best deals, even if you did happen to have large amounts of wealth. As a result, connections became even more important than capital, establishing a system that was inherently asymmetrical.

Essentially, this created a dichotomy of investors. One group of people who could access everything, including the best opportunities on Main Street, and another group who could not, who were instead relegated with the rest of the herd to the thralls of Wall Street and told that this is as good as it gets. Various regulations prevented everyday people from discovering these private, alternative investment opportunities, even if the sponsor of these particular deals wanted to tell everyone about them, as these sorts of communications were all categorized as illegal solicitations.

The combination of legal restrictions, deliberate exclusivity, and concentrated wealth created a world in which it became extremely difficult for many people, even wealthy people, to authentically have a seat at the table. To truly succeed and gain access to the world’s best deals, you would need to have a direct link to the smoky rooms themselves — otherwise, you wouldn’t have any way to learn about these deals until they appeared in the next day’s paper.

Recently, however, things began to change, and the tables finally began to turn.

The passage of the Jumpstart Our Businesses Act (the “JOBS Act”) in 2012 marked a major departure from the previous way of doing things. With the passage of the JOBS Act, many previously illegal actions became legitimized, including soliciting deals to the general public and crowdfunding certain ventures.

In a very short amount of time, the smoky backrooms of years past opened themselves to qualified investors. As long as an individual can qualify under certain income or net worth parameters, they can now learn about, explore, and invest in a once inaccessible, wide range of financial opportunities.

 

What is a Qualified Investor?

Today, the “qualified investor” is the J.P. Morgan or John D. Rockefeller of years past. To become a qualified investor, you do not need to be a billionaire, though in most cases you will still need to have a considerable amount of wealth or income. However, access to information is no longer limited, which has helped extend membership to the secret, exclusive club to several new members.

To be a qualified investor, the Securities and Exchange Commission (SEC) requires you to meet the definition of an accredited investor, meaning someone who:

  1. has a net worth of at least $1 million (excluding your primary residence) or
  2. an annual income of at least $200,000 ($300,000 if combined with a spouse) in each of the last two years, with a reasonable expectation that such income will continue for the current year.

With the passage of the JOBS Act, individuals who meet the criteria mentioned above can now legitimately participate in a range of new investment opportunities, such as crowdfunding, venture capital funds, private equity funds, real estate syndications, hedge funds, and more.

The modern accredited investor’s club is still exclusive, but it is one that is actively calling for qualified individuals to join. No longer do you need a special invite, instead, you just need enough income or net worth to finally play in the great game of wealth-building that others have been enjoying for years.

Wealthy individuals across the United States have been flocking to these new opportunities because, frankly, they are much better than traditional options. The S&P 500 Index has yielded an average historic return of about 10% per year. This is a standard benchmark against which many other investments are tested. If an investment opportunity can yield a greater rate of return — without exposure to more risk — then it will certainly be an investment worth considering.

In markets that are less saturated than the stock market, the possibility for strong returns remains much higher. For example, it is not unusual for real estate syndications to yield an average annualized return of 15-25% per year, which does not even take into account the tax benefits not afforded to stock investors.

Today’s Accredited Investors

Today, there are about 12 million accredited investors in the United States. In 1983, there were just above a million. The number of people who can participate in this exclusive club is indeed increasing, and while participation still requires wealth, it is clear that more people can legitimately shape their own economy than ever before.

For some investments, you may need to verify your accredited investor status by a third party, such as a CPA or an attorney, and in other investments, you may just need to self-certify. Furthermore, there are some private, alternative investment opportunities that you may participate in even if you aren’t accredited, but you will need to be “in the know” like in years past.

 

Seth Bradley is real estate entrepreneur and an expert at creating passive income while still working as a highly paid professional. He’s closed billions of dollars in real estate transactions as a real estate attorney, investor, and broker. He’s the managing partner of Law Capital Partners, a private equity firm focused on multifamily and opportunistic acquisitions. He’s a former big law attorney and is now the managing partner of his own firm, Bradley Law Limited, helping his clients with their real estate and asset protection needs. He’s also the host of the Passive Income Attorney Podcast, educating attorneys and other professionals on how to stop trading their time for money so that they can practice when they want to, not because they have to. Get started building a future full of freedom at Invest – Law Capital Partners

 

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Helpful vs. Hurtful

Lessons from Investment Markets of the Past

When I was a kid in the 1960s my parents weren’t broke, but we didn’t have a lot. Thankfully, we had enough. My Dad was an engineer at Boeing, and Mom was a bookkeeper. Lots of parents just like mine were trying to make it in the world. World War II and the Depression were far enough behind that the sting had faded; it was time to make their mark in the world. On Friday nights at [8:00], Louis Rukeyser was on TV for 30 minutes talking about the stock market with some of the world’s most influential Wall Street titans. If you are old enough to remember Rukeyser, you remember his show Wall Street Week in Review and the catchy tune with glam pictures of the New York Stock Exchange. Back then, Rukeyser was a big deal. There was no such thing as a TV clicker let alone the internet. Rukeyser, other TV media, and the newspaper were how people kept up with the world.

Times and markets have changed. While the methods of gathering investment information differ then vs. now – there is still a constant and that constant is: risk!

 

Learning from the 1970s market

Back in the ’70s, interest rates were a lot higher than they are now. During those years when I was setting the table and sitting next to Dad watching Wall Street Week, the Federal Funds rate was anywhere from 4% – 20%. If there was one aspect of the economy that characterized the 1970s, it was inflation. Persistent for most of the decade, it choked off much of the growth in our nation’s businesses. Paul Volker, then the chairman of the Federal Reserve, had to eventually take decisive action and raise the Fed Funds rate to near 20% to “slay the inflationary dragon”. Money tightened, interest rates spiked, and homeowners with adjustable-rate mortgages (ARMs) were jammed as their mortgage payments shot higher. Enter the recession as unemployment peaked above 10% due to restrictive Fed policy. Thankfully, it worked. From 1980-1983, inflation dropped from above 13% to under 4%.

During this time the stock market was in a horrible sideways bear market arguably caused by rising rates, and there was a point in 1982 where the stock market was priced the same that it had been in 1968. In that same era in downtown Seattle, there was a billboard on the side of the highway that read, “Will the last one out of Seattle please turn out the lights?” (think recession). With all this being said, if you were an investor in 1982, do you think you would have been excited to buy real estate or stocks at that time?

My best guess is that in rough economic conditions most of us would prefer to stay liquid. Bonus question what did you do with your stock portfolio in March/April 2020 with COVID? Buy, sell, or stay put? The answer to this last question tells you everything you need to know about your ability to buy low and sell high. That might sting a little. It does for me.

What is my point? When the Fed has literally had its thumb on the scale of the bond market for 12 years straight, knocking the natural cadence of our free markets onto its keister, there will be an equal and opposite reaction. Think Isaac Newton’s 3d law. Not to be overly dramatic, but it’s worth an internet search; it’s a thing! The “thing” of it is, we have yet to see the equal and opposite reaction. To get super granular here, the “action” began in 2008 when the Fed began flooding the bond market with liquidity. That liquidity injection has continued until this day and there will be a day of reckoning.

 

What will the reaction be?

What will the equal and opposite reaction be? I do not know. But let’s talk about that.

Rarely, if ever, investors are able to time the market with consistent success. What market? Any market. Stocks, bonds, oil, coffee, multifamily, syndicated second mortgage investments, or syndicated storage investments. Kahneman & Tversky, in 1979, nailed it with their Behavioral Economics study, Prospect Theory. In summary: when investing, the current environment subconsciously provides the framework for an expected outcome, and people generally have an aversion to losses. Why didn’t you and I both buy 200 shares of Amazon stock in March of 2020 when it was at $1,800 a share (vs. $3,000 today)? Because our perspective had been framed by the then current and volatile environment and we are loss averse. Now that the stock market has moved higher and is bumping its head on all-time highs, why have we been dragging our feet in selling some stock? We are, again, subconsciously framed by what we have experienced recently and wanting to squeeze a little more juice before dialing back our risk.

If COVID or some other life event has prompted you to evaluate risk and draft your own investment policy, I suggest three things. First, find the sum of your investments both liquid and illiquid less liabilities (home equity/debt not included) then multiply that number by your age with a decimal in front of it. If your number for example is 1,000,000 and you are age 50, the product is $500,000. That number represents the value of your investments you may want to have in conservative/stable investments such as bonds or bond surrogates. Could a syndicated multifamily investment be considered a stable investment? Yes!

Second, identify the annual cash flow you would like to have in retirement and divide that annualized number by 4, then multiply that number by 100. That’s your target net worth when you start playing full-time instead of working full-time. Your job is to grow your net worth to that number without taking excess risk (this is where you take a metric ton of salt and remind yourself what you paid for this advice)!

Third, you need the number from step one to equal the number in step two. Maybe you are 29, have been maxing your 401K at work, and have grown it to $800k. Are you really smart, or were you just fortunate with your timing? Now that the Fed has inflated nearly everything (remember your ego is the most expensive thing you will ever own) it’s a wonderful time to reassess. Investors should focus on making incrementally helpful decisions, not hurtful decisions. Do not make huge or impulsive decisions, ever. Because bonds pay almost nothing currently, consider substituting part of your bond portfolio with a syndicated real estate investment. Individual position sizes of 2-10% of your net worth make sense to me. But don’t take my word for it, ask a trusted friend what they are doing. When making syndicated investments, plan to hold at least seven different investments. The law of averages will help you here, but take your time (several years) as you build that portion of the portfolio.

 

Don’t try to adjust by making big decisions

I started this article by sharing about the investment environment when I was young. Interest rates near 20% and the stock markets P/E ratio was less than seven. Now 40-some years later we have a near opposite environment. The stock market’s P/E ratio is near 30, rivaling the years 2000 and 2008, and interest rates are near zero. As investors, a balanced perspective is often the most helpful. To that end, I suggest reading Ray Dalio on a regular basis. If you are off track from your ideal financial plan, don’t try to adjust by making big decisions. Emotionally we can all be overly hard on ourselves because our crystal ball may look more like a shaken snow globe in the hands of a five-year-old during the holidays. All-or-none bets are scary, bad, and pure luck when successful. My proposition is this: make incrementally helpful and small but strategic changes to your portfolio. Keep in mind the age-old rule of thumb, that your age with a percent sign behind it is your ideal allocation to fixed-income investments. I again volunteer that syndicated real estate assets may be bond surrogates. You may be off track from your target asset allocation. If so, start this spring. Identify what your ideal investment allocation is and make incrementally strategic decisions. Eventually, you can adjust your allocation to reflect your risk profile, and there is nothing wrong with simply saving more.

 

About Ted Greene: 

Ted Greene is part of the Investor Relations team at Spartan Investment Group.  Spartan syndicates self-storage assets for investment. Ted has 24 years of experience in the financial services industry as an investment advisor and Chief Compliance Officer. Ted can be found on LinkedIn at www.linkedin.com/in/ted-greene-dontbeafraid or ted@spartan-investors.com.

 

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The Top 5 Questions to Ask Before Investing

Top 5 Questions to Ask Before Passively Investing

Ryan Gibson, CIO and co-founder of Spartan Investment Group, was one of the featured speakers at this year’s Best Ever Conference. In his presentation, he provided tips to passive investors about the most important questions to ask before investing with a commercial real estate operator. In this blog post, we will outline Ryan’s top five questions.

 

1. Are you an operator or syndicator?

One of the first things you want to know is the role the company you are investing with plays. They are either the operator or a syndicator.

The operator is the group who acquires and sells the investment, as well as implements the business plan. They may also raise a portion or all the capital required to close on the investment.

The syndicator might not actually operate the investment (although, operator and syndicator are oftentimes interchangeable). The syndicator may be a co-GP or owner of a fund who raises capital to invest with other operators.

Whether you are investing directly with an operator or indirectly through a syndicator, you want to know whether their compensation is aligned with the success of the project. That is, is the operator’s or syndicator’s compensation tied to the investment’s cash flow and value? Or it is based on something else, like an asset management fee, percentage of equity raised, etc.? Or it is a combination of both?

Since your return as a passive investor is based on the cash flow and/or value, you want the operator’s or syndicator’s compensation to be based on those same two metrics as well.

 

2. Tell me about a deal gone bad?

This is Ryan’s favorite question. Most of the material you receive about an operator and their investments will be 100% positive. No operator is going to include a section in their company or deal material about a time they lost money on a deal or when a deal went sideways. However, Ryan believes you can learn a lot about an operator from hearing about how they managed a difficult situation. It helps you judge their grit.

Additionally, if an operator says, “We have never had a deal go bad,” it indicates low experience or that they are lying.

 

3. What are your mission, vision, and values?

Having a well-defined mission, vision, and set of values is what Spartan attributed to being named one of the fastest-growing companies by Inc. magazine. The operator’s mission, vision, and values will tell you who they are and why they do what they do. The first thing you want to determine is whether they’ve defined their company’s mission, vision, and values because this indicates a higher level of credibility and professionalism. Then, you want to determine if their mission, vision, and values align with yours.

You will also want to make sure they don’t have a “say-do” gap – that they actually act on their mission, vision, and values. So, ask for a recent example of how they’ve recently used their mission, vision, and/or values to make a business decision.

 

4. Who is on the team?

The structure of their team will impact the success of their investments. The best operators aren’t a “one-person show” where one or a few individuals are wearing all the hats. They should have a deep bench of executives, directors, managers, analysts, assistants, and associates.

It is also beneficial if they are vertically integrated. The more work performed within the company and the less worked outsourced to third-party vendors, the better. That means in-house property management, compliance, construction, investor relations, marketing, underwriting, accounting, etc.

Another good thing to know is how much of the profits generated by the operator and their company is reinvested into hiring new team members and providing growth opportunities for their current team members versus how much is going into their own pockets.

 

5. What is your core business model?

This question may seem odd. Of course, their core business model is buying and managing office buildings, developing and managing self-storage facilities, adding value to apartment communities, etc.

However, this is not always the case. Sometimes, they may be buying office buildings, for example, while working a full-time, W2 job. Or they are focused on one aspect of the overall business model, like finding deals or raising capital. Or the majority of their income is derived from selling education or coaching. The point is, just because someone is involved in commercial real estate doesn’t mean it is their core business model.

Ideally, you are investing with a group who are full-time operators. They have a fully integrated company that buys, manages, and sells commercial real estate. It is okay if they are involved in other industries, like education, coaching, passive investing, etc., but it should be secondary to their core business model.

 

5 Questions to Ask a Commercial Real Estate Company Before Investing

When you are passively investing in commercial real estate, you are placing a lot of trust in the active operator. To ensure your capital is in good hands, here are the top five questions to ask before investing.

Are they responsible for acquiring and selling the investment and implementing the business plan, or do they play a smaller role? Also, is their compensation based on the performance of the deal?

Ask about a time a deal went bad to gauge the experience level, truthfulness, and grit of the operator.

What are their mission, vision, and values, and do they align with yours?

Are they a vertically integrated company that invests in attracting new team members and in the professional development of current team members?

Is their core business model operating commercial real estate?

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How to Add Value to Commercial Real Estate

How to Add Value to Commercial Real Estate

Many of the readers of this blog are multifamily investors or hope to be someday.  While multifamily investing has many positives to it, it is not the only asset class in commercial real estate.  Additionally, in this blog, I discussed the different risk profiles of real estate, and these risk profiles exist in all real estate asset types.  Today, I am going to be discussing what the value-add business plan generally looks like in the various asset types.

At a very high level, the value-add business plan is any business plan that, with minimal capital spent, the operator is able to increase the net operating income of the asset.  These assets will be cash flow positive from day one but have room to grow that cash flow.

 

Multifamily

The value-add multifamily business plan is often one of light renovation.  The previous owners did not choose to spend the capital to keep the property current to tenants.  Therefore, it feels aged and cannot achieve full market rent.

The value-add operator is buying the asset with capital allocated to renovate the units and exterior of the property, but typically in a very cosmetic way.  New cabinets, backsplash, counters, flooring, and fresh paint make up the common upgrade list.  The operator is doing the HGTV treatment to the units.  From time to time, the scope may be a little more intense, but any work is still limited to a single unit at a time, and construction timelines are typically less than two weeks of downtime.  Once the units are renovated, the operator anticipates achieving a higher rent per unit.

There are variations to this plan, but the light, cosmetic upgrades plan is the most common.

 

Retail

Often times the value-add retail business plan has to do with modest levels of vacancy.  The value comes from filling the vacant units and renewing near-term lease expirations.  The vacancy is not so high that it creates a challenging retail environment and will typically sit in the 10-15% range.

Because retail leases tend to be much longer than apartment leases (five to 10 years versus 12 months) even below-market rents are hard to overcome, as the operator is bound to the leases present with the property.  But, a focus on tenant mix is important for a successful retail center.

Like multifamily, there are often some deferred maintenance and capital items that need to be addressed.  The focus of capital improvements is on the common areas.  Common practices include restriping parking lots, installing better lighting, and dressing up pylon signage.

 

Office

Similar to retail, the office lease is longer in the term, so the business plan comes down to filling vacancies and renewing near-term lease expirations.  While tenant mix is not quite as pressing of an issue when compared to retail, office properties, particularly large office buildings, can benefit from a strong tenant mix.  Most properties will have their anchor tenant, and ancillary businesses to that anchor certainly assist in leasing efforts and overall demand.

Once you get into capital improvement, the focus is comparable to retail.  Common areas take precedent, with upgraded lobbies and elevators.  Other common practices are adding amenities for the office workers, like a café and fitness facility on site.

 

Industrial

Value-add industrial properties tend to stem from leasing efforts and below-market rents.  For large projects, filling vacancies is the most common focus on value-add projects.  When it comes to capital, the drivers of where to spend capital come down to renter demands.

Clear heights have grown in recent years.  So a low clear height that might be fairly inexpensive to increase is a great option, but this renovation is typically not financially feasible.  Improving access, parking lot capacity for more trailer storage, and adding technology to the property to aid in the movement and storage of products can help leasing efforts and increase value.

 

Hotel

Hotel and hospitality properties look most similar to multifamily.  Due to the management-intensive nature of hotels, the most common value-add play is to seek out under-managed properties and improve operating efficiencies.

Hotels are primarily a franchise business, with Hilton, Marriot, and Intercontinental owning a majority of the common flags you see.  Because of this arrangement, there are capital improvement components to the value-add play, especially if the existing franchisee does not have the capital to renovate their brand to current brand standards.  This would result in the existing owner either needing to sell, downgrade their brand within the franchisee structure or lose the franchise entirely.  As such, a value-add investor could acquire the operating hotel and begin the renovations to bring the property up to current franchise standards for that brand and thereby keep a higher income stream.

As you can see, every asset class has its own nuances of the value-add business plan, but at the end of the day it boils down to the same thing.  Spend money to take an outdated asset and bring it back to what is currently in demand, thereby increasing the overall income of the asset and the value.

 

About the author:

Evan is the Investor Relations Consultant for Ashcroft Capital.  As such, he spends his days working with investors to better understand their investment goals and background.  With over 13 years in real estate, he has seen all sides of real estate from acquisitions, to capital raising on the equity and debt side, to operations, and actively invests himself.  Please feel free to connect with Evan here.

 

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Big-Picture Financial Strategies to Fuel Your Wealth-Building Machine

Big-Picture Financial Strategies To Fuel Your Wealth-Building Machine

The general consensus out there, and I think you and I would agree, is that school didn’t teach us bologna about managing personal finances. It’s been widely publicized that instead of learning physics and pre-calculus in high school, they should be learning how to balance a checkbook and spend within their means. 

It’s an institutional, generational problem that explains why our parents struggled to maintain middle-class status, not knowing any better than trading their time for money. Passive income wasn’t even on their radar, much less were concepts like infinite banking or syndications. 

Since you’re reading this post, I can tell you’re one of the lucky ones – the sole ostrich in the flock who daringly pulled his/her head out of the sand to seek a better solution. For that, I’m proud of you. Keep reading for the five big-picture concepts that have the power to catapult your financial situation to the next level. 

Personal Finance In Four Stages

One way of stepping back and seeing the big-picture cash flow journey is to break it down into “four pillars” as M.C. Laubscher from Cashflow Ninja calls it. He teaches cash creation, cash capture, cashflow creation, and cash control. 

In the first stage, Cash Creation, you pursue endeavors that create money. This includes getting a degree, finding a great job, creating connections with industry peers and seniority, starting your own business, finding a mentor, and hustling to make bonuses and get raises. You’ve got to earn an income to survive in this world, so this stage is critical to all the other stages. The funny/not funny story, though, is that this is where most people get stuck!

The next stage is called Cash Capture, and this is where you create a buffer between how much you bring home and how much you spend. This is where you’re continuously watching the budget and ensuring you’re saving a portion of your take-home income and hopefully increasing that percentage as quickly as possible. This “gap” between your income and your spending is where you seize the opportunity to capture cash and use it to fund your investments, purchases of appreciating assets, and your infinite banking strategy (I’ll explain this in a little bit.). 

Once you have emergency funds in place, generally have a grasp on your budget and savings, and are consistently capturing that gap, you move on to the cashflow creation stage. Now notice this is Cashflow Creation – very different from the first stage of working for cash. In this third stage, you learn how to use the money you’ve saved and the relationships you’ve nurtured to invest, generate additional cash flow, earn interest, and create income independent from your day job. 

Honestly, you’re probably in this third stage now, actively seeking investment opportunities and leveraging your earnings toward a diversified wealth-building machine inclusive of insurance policies, stocks, REITs, bonds, residential real estate, and appreciating assets like those found in real estate syndication opportunities

The final stage isn’t really a final stage at all (curveball!) but more of an ongoing life-long focus to protect and tailor your overall financial strategy in alignment with your goals. This Cash Control stage involves creating a will, pursuing estate planning, maintaining life and disability insurance policies, and ensuring your finances are set up for longevity. You didn’t learn this stuff in school, so it’s up to you to intentionally learn and refine your financial plan toward protecting your assets from creditors, taxes, and lawsuits and providing a legacy for your loved ones. 

I’m sure you’ve heard the phrase “making your money work hard for you” thrown around, and in a nutshell, focused action in each of these stages throughout your life will do precisely that!

Infinite Banking Strategy

This big-picture strategy also called “becoming your own bank” and “private family banking strategy” is where you use a whole life insurance policy to become your lender, borrower, and beneficiary all at once. This concept blew my mind when I first heard about it, so hang with me. 

Look at the typical bank. They accept people’s deposits in exchange for a “safe” place to store the cash promising minimal interest earnings. The bank loans that money out to others and earns a much steeper amount of interest off the loan. All along, if someone defaults, they are the beneficiaries via collateral, collections, etc. Why deposit your hard-earned cash into a bank for minimal interest and then borrow other money at a higher interest rate? It just doesn’t make sense! 

Here you flip the institution on its head, buck the system, and do your own thing. If you followed the four stages above, you captured cash and have significant savings ready to invest in creating passive cashflow. With this cash, you buy a dividend whole life insurance policy from a mutual insurance company. When written correctly, your policy will allow you to fully fund it quickly and borrow a large portion of that money from inside the policy within the first year. 

Now before your head spins, let me explain. When you fund the policy quickly, you become eligible for dividends and earnings inside the policy itself. When you borrow against your policy at a low rate, you’re still earning interest on the full value, AND you get to reinvest that borrowed money into a real estate syndication. 

Boom! You’ve taken $1 and invested it into two places at the same time, AND now you have an insurance policy too! There are many other details to this, which I’ll save you from right now, but just know this is one tax-advantaged option for creating a wealth-building machine.

Buy Your Time Back

Another wealth-building machine that’s often overlooked is your ability to recapture your most valuable resource – time. When you start out, your focus is to create cash, and it’s highly likely one might spend 40-60 hours a week doing so. 

That’s not a sustainable life/happiness model, though, right? At some point, you want to have captured enough cash and begun to invest in lucrative deals so that you could reduce the amount of time you have to put in and instead spend it doing things you enjoy.

This is where you buy your time back. Maybe that means hiring an assistant to keep you organized and run little errands for you, or perhaps that means hiring household services like laundry, a maid, and a landscaper. In all areas of life, I encourage you to explore the activities you do, their worth, whether you like doing them, and how much of your time and energy they take. When you conclude that specific actions are not worth your time or energy, hire them out and, in exchange, use your time to learn about and pursue the next level of wealth-generation. 

Another way you can fast-track your wealth-building machine is to intentionally surround yourself with people who inspire you. Find connections ten steps ahead of you, who are doing things you wish you could be doing, and then find ways to infuse their lives with value. Use your knowledge and expertise to support them and further develop a positive rapport with them. 

You’ve probably heard the quote by Jim Rohn, “You are the average of the five people you spend the most time with.” Well, recent research shows that who you are is even affected by your friends’ friends and those friends’ friends! This emphasizes how imperative it is to seek masterminds, mentors, and relationships with those you admire. 

When you surround yourself with these valuable connections and adequately nurture the relationship by infusing support into their lives, they will inadvertently share advice and higher-level concepts, giving you the “in” and accelerating your wealth-building journey with fewer mistakes. 

Continuously Break Parkinson’s Law

Finally, the greatest, most valuable high-level advice I can provide is that you have to break Parkinson’s Law over and over again. Parkinson’s Law is the concept that the more income you have, the more you spend. 

You and I conceptually know that you have none to save or invest if you spend everything you make. However, this is the conundrum that most people find themselves in. Each raise or bonus allows them to afford something they’ve been eying and craving for a while, and eventually, they look back and wonder why it feels as if they can never get ahead. 

You, my friend, are ahead of the curve, though, and with the four cash stages, buying your time back, and infinite banking knowledge, you are destined to succeed. You’re keenly aware of how to thrive in that Cash Capture step and ensure your expenses are much less than your income. 

But that’s not enough! You have to continually refocus and reevaluate your cash capture strategies to ensure you always have more and more to invest, fueling your wealth-building machine. With each raise, cashflow check, and bonus, you have to remain conscious of the temptation to spend more and break that cycle again. 

 

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How to Leave Your W2 Job Through Real Estate Investing

How to Leave Your W2 Job Through Passive Real Estate Investing

Whether you’ve been working in a job that you don’t like or find that your career doesn’t have many opportunities for advancement, it’s possible to leave your W2 job and still accrue money to live on by engaging in passive real estate investments. Before you make this kind of move, it’s important that you understand exactly what these investments involve and how you can use them to replace the income that you received at your W2 job. This guide offers a detailed look at what passive investments mean, the types of investments you can make, and how you can leave your current job completely to start investing.

What Is Passive Investing?

Passive investing is a popular investment strategy that involves performing less buying and selling when compared to active investment strategies. The purpose of a passive investment is to hold on to an investment on a long-term basis. Over time, the investment should increase in value, which will allow it to bring in a high ROI. While there are many different types of passive investments that you can make, likely the most common option for passive investors is to place their money into real estate, which can include residential and commercial real estate properties.

When it comes to passive real estate investing, many investors place their money in properties that can be rented out. Along with the property increasing in value over the course of the investment, it’s also possible to obtain income by collecting rent from tenants. Unlike active real estate investments, you won’t be acting as a landlord when you purchase a property. Instead, these investments can be made via real estate funds, real estate investment trusts (REITs), online crowdfunding, and syndication.

When you want to leave your W2 job to start making passive real estate investments, there are two basic methods – direct investing and indirect investing. Direct investing means that you will purchase a portion of a property or the entire property before the place is rented out to tenants. At this point, someone else will be brought in to manage the property, which allows you to handle the investment as a passive investment. There are many reputable property management companies that will take care of collecting monthly rent payments, screening prospective tenants, and performing everyday maintenance on the property that you’ve invested your money in.

As for indirect investing, this occurs when individuals invest their money into a real estate investment trust or another kind of mutual fund that relates to real estate. This type of investment is known as an indirect investment because the property doesn’t need to be managed on a day-to-day basis in order for you to obtain returns on the original investment. Along with returns, you can also gain dividends from funds.

Benefits of Making Passive Investments

The passive form of investing has a number of benefits to it, the primary of which is that you can use this kind of investing to replace the income that you received from your W2 job. While active investments can also provide you with high returns, passive investing is a way to accrue returns without needing to directly manage the investments that you make. Instead, you can travel the world or spend more time with your family.

It’s also important to understand that you don’t need to stop working altogether. In many cases, passive income won’t completely replace the wages that you earned at your main W2 job. At the start, it’s possible that your investments will bring in returns that amount to 25-30 percent of your previous W2 wages, which means that having a side job may still be necessary. Some of the additional benefits that come with making passive investments include:

  • The ability to minimize taxes by reducing the amount of buying and selling that occurs
  • Lower expenses compared to active investing
  • Holding your investments will help you improve your discipline, which could pay dividends for future investment strategies.

Popular Passive Investment Options

As touched upon previously, the main techniques that are used by passive investors who are making investments in real estate include real estate funds, apartment syndication, online crowdfunding, and real estate investment trusts. Before you leave your W2 job, it’s highly recommended that you identify which investment techniques are right for you and your portfolio.

Real Estate Funds

Real estate funds are similar to mutual funds in that they can be passively or actively managed. These funds will usually be invested in real estate operating companies and REITs. A small number of real estate funds invest their money directly into the properties. Short-term income is rare with a real estate fund. Income is usually obtained by allowing the fund to appreciate in value over an extended period of time. The three separate types of real estate funds include:

  • Private real estate investment funds – These funds are professionally managed and focus on investing in real estate properties. You can only invest in one of these funds if you are a high-net-worth investor who is accredited and who is able to make a large investment.
  • Real estate mutual funds – As mentioned previously, these funds can be passively or actively managed and can operate as an open-end fund or closed-end fund.
  • Real estate exchange-traded funds – These funds invest in shares of REITs and real estate corporations. They can also be traded on major stock exchanges.

Apartment Syndication

An apartment syndication is a kind of investment that involves pooling money together with other investors to purchase and eventually manage an apartment building. A syndicator will raise money from various investors before buying apartment buildings that they believe will generate decent returns. The syndicator is also responsible for managing the investment, which means that you can sit back and enjoy the returns generated from the investment without needing to worry about the particulars of collecting rent or maintaining the building.

Online Crowdfunding

Online crowdfunding has become very popular among passive investors who want to invest in commercial real estate. There are many reputable crowdfunding sites available that you can join before investing your money. The money that you invest will then be pooled together with the money from other passive investors to purchase properties.

You can invest in multiple properties without taking on the hassles that can occur when financing, owning, and managing the property. Keep in mind that most crowdfunding platforms have minimum investment requirements that you must meet before you can continue. These requirements can be anywhere from $500-$25,000.

Real Estate Investment Trusts

Real estate investment trusts are highly appealing to passive investors who want to bring in a high return. There are many different REITs that you can select from, which extend to residential REITs and office REITs. When looking specifically at the FTSE Nareit REIT index, the average annual return from 2010-2020 was around 9.5 percent, which indicates that real estate investment trusts are among the best-performing passive investments that you can make.

The REIT that you place your money into can invest in properties or real estate debt. If the trust invests in a property, you can gain returns from management fees and rental income. By investing in real estate debt, income is generated from the interest on the loan.

Tips for Leaving Your W2 Job to Engage in Passive Real Estate Investing

If you believe that passive real estate investing is right for you and that the benefits far outweigh the risks, it’s important that you know how to leave your W2 job by engaging in this form of investing. The first and most important step is to get your finances in order. Financial freedom is difficult to obtain if you still have an ample amount of debt that must be paid off. Try to make steady payments on your credit card debt and any other debt that you owe to significantly reduce or eliminate your current debt, after which you should try to build your emergency funds. Once you’re in a good financial position, it will be easier to move from your W2 job to passive real estate investing.

As mentioned earlier, there are four basic types of passive investments that you can make. In the beginning, try to focus on just one type of investment before growing your portfolio. Passive investments in real estate tend to generate average returns of 6-8 percent per year along with additional income once you sell the property after 5-10 years. The best aspect of making passive investments is that you won’t need to hire numerous team members to manage the properties that you invest in.

If you join a real estate investment fund or a crowdfunding platform, all of the finer details will be handled by someone else. If you join a crowdfunding platform, consider making a smaller investment before delving into larger ones, which should allow you to learn more about the process before you invest a large sum of your money. With these tips in mind, passive real estate investing should be relatively simple.

Why You Should Seek Financial Independence

If you’re no longer satisfied with your job, it’s never been easier to seek financial independence by making passive investments. When performed correctly, you can live off of your passive income and have more time to do the things in life that really interest you. Gaining financial independence through passive real estate investing gives you the opportunity to take more risks in your career, retire early, or spend more time with your family. You’ll also have the freedom to work and live on your own terms, which isn’t feasible with a 9-to-5 job.

Passive real estate investing is a great and proven way to replace some or all of the income that you lose by leaving your W2 job. While you might not earn as much as you did before, you’ll have much more freedom to live your life the way that you want to. Even though making passive investments in real estate isn’t easy, there are more options at your disposal than ever before. If you perform extensive research on an investment opportunity before investing your money, you should be confident that you’re making the right decision.

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What Financial Reports to Send to Passive Apartment Investors

After closing on an apartment syndication deal, one of the responsibilities of the general partners (GP) is to provide the limited partners with ongoing updates on the investment.

Here is a blog post where we outline all the GP’s duties after acquisition.

One aspect of this passive investor communication is providing financial reports on the asset. Not all general partners provide financials to limited partners. However, when they do, there is an increase in trust between the GPs and LPs, which is the number one reason why passive investors chose to invest with one operator over another.

The purpose of this blog post is to outline the process of providing your investors with deal updates by sending them financial reports.

What Financial Reports to Send to Passive Investors

The reason to send passive investors financial reports, aside from increasing transparency and trust, is so that they know what is going on with the investment. The information provided in monthly or quarterly recap emails is a good start, but a spreadsheet with hundreds of data points paints a more detailed picture of the asset’s operations.

Ultimately, how often you send financial reports and the types of financial reports you send is up to you and the preferences of your investors.

The two most relevant financial reports to send to passive investors are the rent roll and the T-12.

A rent roll is a document or spreadsheet containing detailed information on each of the units at the apartment community, along with a variety of data tables with summarized income. The rent roll provides passive investors with a current snapshot of the investment’s revenue.

A T-12 is a document or spreadsheet containing detailed information about the revenue and expenses of the apartment community over the last 12 months. Also referred to as a trailing 12-month profit and loss statement, the T-12 provides passive investors with current and historical revenue and expenses.

A best practice is to send financials at least once a quarter.

How to Obtain Financial Reports

The first step in the process starts before you even have a deal. Most likely, the financial reports will be generated by your property management company. When interviewing property management companies, make sure you set expectations. First, ask them what type of property management software they use and if it can generate custom financial reports. Ideally, they provide you with a sample rent roll and T-12. If they do, how detailed are the reports? Is the T-12 broken down into specific line items? Does the rent roll list out all of the important metrics?

Here are examples of how detailed a rent roll and T-12 should be.

Assuming they generate the right reports, the next question to ask is “will you send me financial reports upon request” and “what is the lead time?” In doing so, you will know if they are willing to send you financial reports and how quickly (or slowly) you can expect to receive them.

How to Send Financial Reports to Passive Investors

One approach is to include links to download the financials in the monthly or quarterly recap emails.

Create a Dropbox folder for each of your properties. Each quarter, upload PDF versions of the rent roll and T-12 to the property’s respective Dropbox folder and include the links in the recap email. For example, include a sentence like, “Also, you can download the quarterly financials (current rent roll and profit and loss statement) by clicking here,” and the wording “clicking here” is hyperlinked to the financial reports.

Another more advanced and efficient option is to upload the financials to an investor portal. Rather than linking to the financials in your recap emails, you can direct the passive investors to the portal.

Before sending the financial reports, make sure that your resident’s and investor’s personal information is removed. Sometimes, the investor distributions will be included at the bottom of the T-12. Only include the line items above the net operating income. Also, make sure you remove the variance column from the T-12. Your property management company’s software may include a column that has the difference between the actuals and the project (i.e., the variance). To avoid confusion, remove the variance column and only send to investors upon request. Consider removing the names of residents for the rent roll too.

How to Handle Passive Investors’ Questions About Financials

Like any questions received from investors, if you know the answer, reply in a timely fashion. If you don’t know the answer, reach out to your property management company.

The most common question you will receive from investors will be about how the T-12 actuals compare to the projections you provided in the PPM. If you are not hitting your projections, speak with your property management company to determine why there is a variance and what is being done to solve the issue. The best responses to investor’s questions include a diagnosis of the issue as well as the solution which should already be implemented.

 

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Recognizing the Risks in Real Estate

In my previous blog, I outlined the 5 main risk classes of real estate. In this follow-up blog, I want to outline some scenarios where those risks materialize.

Core:

Because Core assets are newly built assets in strong markets, these exhibit the least risk. However, when we look at where the returns are truly derived, we can find that there is risk. Core assets draw a bulk of their return from cash flow. So, the risk materializes from impacts to that cash flow.

Back in the financial crisis of 2009-2011, Core assets were hit particularly hard as companies and people started cutting expenses. In the multifamily space, there was a lot of uncertainty about employment at all levels of an organization. Because of this, the high earners that would typically live in the nicer apartments began looking for ways to cut living costs and moved into cheaper, Class B properties.

With the onset of COVID, a different scenario happened with the complete upheaval of the professional workforce moving to work from home, sometimes indefinitely. As a result, Core multifamily projects are experiencing higher vacancy rates and reduced rental rates as city center residents move to the suburbs for more affordable, larger units.

Core Plus:

Similar to Core, Core Plus asset returns are primarily driven by cash flow. Therefore, the same examples listed above still hold true. Although, these assets present a couple unique risks as well. Core Plus can either be a newly built property in a Class B area, or a Class B property in an A or B area.

When talking about Class B areas, by way of comparison, your rents will be lower than new construction in a Class A area. Your tenant base will likely have a lower income than in Class A areas, and therefore likely have a slightly higher risk of layoffs or impacts to earnings.

Beyond the slight increase in tenant risk relative to the typical Core asset, you often have an older asset. While these assets are remodeled with most deferred maintenance addressed by the prior owner, there is additional capital expenditures relative to new construction. The maintenance costs with the Core Pluss asset are higher than Core, and there is the increased chance of large ticket repairs.

Value Add:

Value Add assets generate their returns from both cash flow and appreciation. The same risks that effect cash flow outlined above can occur with Value Add assets as well. Similar to Core Plus, since these assets are dated, they tend to be lower rent options and therefore may see a higher-risk tenant base.

Value Add assets tend to require a reasonably significant amount of capital to be spent to renovate the property. Therefore, construction costs become a risk. Whether this be timeline or cost, both can affect the returns of the asset. A real-world example of this is the current situation with COVID, which is causing a significant increase on construction material costs. While the Value Add operator is typically not doing major construction relative to redevelopment or new development, these cost overruns can still impact investor returns.

Often times, a significant portion of the overall return of the asset comes from appreciation, which carries its own risks. Markets can shift dramatically over an operator’s hold period, meaning the asset cannot be sold at a favorable price. Often in multifamily syndications, approximately half of the overall return to the investors comes from profit at sale. Market shifts effecting the long-term value of the asset can create significant volatility in the overall returns.

Opportunistic:

Opportunistic deals or Redevelopment deals create the most risk of any existing class. Since these assets often are cash flow negative through significant vacancy and require significant capital to bring back to leasable, the risks are immeasurable. From unexpected construction costs to longer lease up timelines, there are many moving parts and little to no revenue to offset these potential issues.

Real world examples of these risks include the current increase of all construction materials. Geopolitical issues have been known to effect steel and drywall costs dramatically in a short amount of time. Other renovation risks and cost overruns happen all the time simply by opening up walls and realizing major systems are not to code.

Real risk, also, comes with the overall timeline of an opportunistic investment, specifically as it related to changing tastes of your tenant base. While changes in taste tend to evolve over time, the COVID pandemic has proven that sometimes demand can shift quickly. The longer you have an asset with little to no income, the more pronounced the effects of those shifts can be. Examples of changing tastes range from location preferences to amenities on the property to paint colors.

Development:

The riskiest of all asset classes is development. Again, the same risks are true for Development compared to Opportunistic assets. However, there are some risks that Opportunistic assets won’t encounter; primarily, entitlements.
Entitlements, in general, are all of the sign offs and approvals you need. If you want to change the use of a plot of land, you either need it rezoned or a variance. If you want to put 200 apartment units in an area, you need approval from the sewage department to confirm the sewer system can handle the additional demand, or from the school district to determine if all the new residents will have space in classrooms. You need approval from neighborhood councils, that your design fits into the look and feel of the neighborhood.

At the end of the day, all of the approvals needed to put a new building up create significant risk, as not receiving a single approval can stop a development in its track. While seasoned developers will not acquire a property until they are reasonably confident all approvals can be obtained, if the approvals are not obtained, it can dramatically affect the value of the property, as future developers may be less inclined to even pursue the property knowing the prior developer was not able to obtain the necessary approvals.

As outlined, here and in my prior blog, all investments come with risk. Our job, as investors, is to pursue investments where we feel the risks associated are worth the reward.

About the author:
Evan is the Investor Relations Consultant for Ashcroft Capital. As such, he spends his days working with investors to better understand their investment goals and background. With over 13 years in real estate, he has seen all sides of real estate from acquisitions, to capital raising on the equity and debt side, to operations, and actively invests himself. Please feel free to connect with Evan here.

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REIT vs Private Real Estate Fund

In my life in Investor Relations, I get asked daily: “Is a Fund the same as a REIT?”. Let’s break it down.

What is a REIT, technically speaking?

A REIT is a specific tax structure created in 1960 and has very specific guidelines under the Internal Revenue Code (IRC). A REIT must invest at least 75% of total assets in real estate, cash or US Treasuries. A REIT must derive at least 75% of its gross income from rents, interest on mortgages of real property, or real estate sales. A REIT must pay a minimum of 90% of taxable income in the form of shareholder dividends.

And that brings us to our first big difference. But I will continue with the definitions first.

A REIT must be an entity that’s taxable as a corporation (number 2 difference). A REIT must be managed by a board of directors or trustees. A REIT must have at least 100 shareholders after its first year of existence. And a REIT must have no more than 50% of its shares held by five or fewer individuals.

So, now that we know the technical rules of a REIT, what types of REITs are there?

The most common REIT that people think of is the publicly traded REIT. These are the most visible and any retail investor with a Robinhood app can buy shares. But not all REITs are publicly traded. There are Non-traded REITs. These are companies that publicly report financials and are available to all investors, through licensed Broker Dealers, but do not trade their shares on any exchange. And lastly, there are Private REITs. These are commonly private equity funds with individual or institutional accredited investors, with exempt offerings through a Private Placement.

What is a Private Real Estate Fund?

A Private Real Estate Fund is a private offering, or placement, and issuance of securities. The proceeds of which will be used to invest directly in real estate. Frequently, these funds will buy multiple assets and commingle the funds. There is no specific structure of a Private Real Estate Fund, but they are most commonly structured as a Limited Partnership.

How is a REIT the same as a Private Real Estate Fund?

Most commonly, both will own a diverse portfolio of income producing property. Technically, either could own a single asset, i.e. the Empire State Building is a single asset REIT structure, but portfolios are more common.

How is a REIT different than a Private Real Estate Fund?

The biggest difference for many investors is the tax treatment. Your tax form from a REIT investment will be a 1099-DIV. Your tax form from a Private Real Estate Fund will commonly be a K-1, assuming it is structured as a Limited Partnership.

What is the benefit of a REIT?

While this isn’t a comparison to a Private Real Estate Fund, the single biggest benefit of REITs is the mitigation of the corporate double taxation. Any corporation has to pay corporate taxes first, distribute dividends from after-tax earnings and the shareholders have to pay taxes on the dividends, creating the double taxation. Under the IRC for REITs, if all requirements are met, there is no taxation at the corporate level, only on the shareholders, thereby creating a favorable tax treatment.

What is the benefit of a Private Real Estate Fund?

For many investors, it is the tax treatment through the K-1. Losses can be passed through directly to the Limited Partners on a K-1, which is not available in a REIT and 1099.

Please note: I intentionally kept this blog high level. There are significant differences between a publicly traded REIT and a Private Real Estate Fund in regards to liquidity, access for investors, transparency of reporting, etc. The intent is to outline that a REIT can take many operational forms, but will always have the same tax treatment, which varies significantly from the tax treatment of a Limited Partnership.

About the author:

Evan is the Investor Relations Consultant for Ashcroft Capital.  As such, he spends his days working with investors to better understand their investment goals and background.  With over 13 years in real estate, he has seen all sides of real estate from acquisitions, to capital raising on the equity and debt side, to operations, and actively invests himself.  Please feel free to connect with Evan here and message him through LinkedIn with any questions.

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Planning for the End

All new relationships start with a bit of nerves, a lot of excitement and typically, big hopes for the future. Whether it is a new marriage, a new friendship or a new business partner.

For the Passive Investor, we are focusing on the business partner. As you are interviewing sponsors, often times the focus is on their business plan, track record and overall experience. But, how much time are you focused on the end, the exit, the divorce? Particularly in real estate investments, the exit is a primary driver of overall returns, whether it be core, value-add or a development deal.

Let’s take a look at an example:
A core asset is purchased for $160,000,000. This is a luxury asset in a very good, high income area with strong population growth. The purchase price is about $400,000/door. The sponsor is projecting a 6% average annualized cash on cash return, 15% IRR and 2.5-3x equity multiple over a 10 year hold. This sponsor offers a straight 80/20 profit split from day 1 with no preferred return.

These numbers allow us to get a rough estimate of what the terminal sale value must be to achieve these numbers. Saving you the boredom of my simple excel model, the sales price in year 10 would have to be $261 million dollars, or 61% more than the purchase price, accounting for a year 2 refinance. This equates to $652,000/door.

Is this sale price achievable?
As investors, we are all speculating as to where values are going. Whether the hold is 1 year or 10 years, if I invest today it is because I believe values are going to rise over that period. The point is to ask the question and confirm the sponsor has thought this through.

Of course, there are a multitude of factors that can affect the terminal value of the asset. Some simple questions that I ask sponsors when assessing the projected sales price:

  • Are there comps today that support that price in total dollars?
  • Are there comps today that support your terminal cap rate?
  • Are there comps today that support that price per door?
  • Who is the likely buyer?

Notice I focus on CURRENT comparable properties, as my crystal ball is realistically no better or worse than anyone else’s. If a sponsor is projecting to sell a deal for $100,000,000 at a 5.0% cap rate and $250,000 per door, I will want to see comps showing that the sale of the asset I am invested in is not going to be a record breaker in two out of three of those areas, and ideally all three. As for the last question, while no sponsor can speak to who the specific buyer of an asset will be in 5-10 years, the purpose is to better understand that a) the sponsor has thought about the reality of an exit, and b) better understand if buyers exist in the market at that price.

At the end of the day, each investment is a balancing act of risk. Asset classes, property types, business plans, sponsors, leverage, time horizon are all pieces of the equation that need to be addressed, and many of these are commonly asked in my dealings with investors. But at the end of the day, the only thing that matters to most people is WILL I MAKE MONEY? Understanding where that money is coming from and assessing the feasibility of those results is imperative to answering that question.

Check out other red flags to look for when vetting sponsors here.

About the author:
Evan is the Investor Relations Consultant for Ashcroft Capital and Active and Passive Real Estate Investor. As such, he spends his days working with investors to better understand their investment goals and background. With over 13 years in real estate, he has seen all sides of real estate from acquisitions, to capital raising on the equity and debt side, to operations, and actively invests himself. Please feel free to connect with Evan here.

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How Passively Investing Can Make You a Better Real Estate Investor

If you would like to make more money as a real estate investor, consider the benefits of a good investment. Investing passively is a smart way to make more money and give yourself more free time. You can start a passive income plan no matter if you have not done real estate before or if you have your own business. Learn about this approach and how it could make sense for you over the long run.

Active Versus Passive

If you want a solid wealth building plan, knowing the difference between passive and active investing is a critical part of the process. An active investment is when you go out and look for properties to buy and sell all the time. To maintain your income, you need a steady stream of new homes to buy and sell.

With a passive investment, you keep making money over the long run. You invest in a property and rent it for the best results. You keep your income stream as long as you maintain your property and follow the proper steps.

Passive Investments Increase Your Wealth

Passive investments are a great way to build your portfolio. You can only buy and sell so many properties at a time, so you will reach a profit cap if you are not careful. If you don’t want to face that problem, get passive investments that make the most sense for your bottom line.

Passive investments involve buying properties that people want to rent. Once you buy the property and set up the paperwork, you continue earning a profit without too much effort. If you want to get the most from your effort, invest in vacation rentals.

How to Get Started as a Passive Investor

Learn how to get started as a passive investor. You need to have a plan before you begin and to know how much you are willing to spend. Look at properties in your area to get an idea of what you should do next. Each investment property you buy boosts your profit and takes your business to a whole new level, and you will see the difference in no time.

If you don’t know why passive investments work so well, do as much research as you can. You can find a lot of information online if you know where to look. Also, buy books on passive investments online. This takes your experience to the next level. Learn different passive investment strategies if you would like to succeed over the long run.

When you educate yourself before you begin, you reduce the number of mistakes you make and enhance your projected profitability. It does not take as much as you think to become a passive investment expert.

 

Keep an Eye on the Market

Keep an eye on the market to understand what investment makes sense for you. Look at local prices to see how much profit you can expect. Local rental prices rise and fall over time, so you can’t just look at current prices. Look at past and projected profits to discover what path is right for you, and you will be happy you made the effort.

Watching the market shows you what prices people are willing to pay. Even after your investment properties are in place, you should still watch the market for important changes and updates. Doing so keeps you in the loop and lets you maximize your profits.

 

Try Getting the Best Deal

Try getting the best deal possible to save money. When you look into different investment options, you find a good investment at a fair price. Write down different properties and their prices until you find one that stands out to you more than the rest. You must keep a record of different deals.

Also, some people charge more for the property than they expect you to pay. If you don’t want to pay the full price, negotiate to get a better deal. Speaking with a real-estate professional is another option worth considering. Your expert will help you get the best price possible so that you don’t end up overpaying for your property. A passive investing plan works well no matter your long-term goals.

 

Look for Future Investments

If you get enough passive investments, you won’t have to keep making additional investments if you don’t want to do so. Many people buy old homes or apartments and fix them. They then rent them out for a profit. You can keep doing that each time you get another apartment up and running, or you can stop making investments once you are happy with the money you make.

No matter your situation, always keep an eye on future investment opportunities to keep your options open. Even when you are done buying properties, you can still find deals worth making. Never overlook a good investment opportunity when it presents itself, and you will make the most profit possible for your situation.

Your wealth plan depends on you having the right strategy for the situation. Your wealth building strategy works much better when you keep an eye on the future, and you will know you did the right thing.

Final Thoughts

Look at different passive income plans to understand what path is right for you. Your passive income plan takes your results to another level and empowers you to reach a level of success you never thought possible. Make sure you know what you are doing and that you have a plan.

The right plan will take your real-estate investments to a whole new level, and you will be happy with the outcome you get. Learn as much as possible about active and passive investing as you can to boost your profitability. You will soon have a steady source of income that keeps working for years to come.

Vacation rentals are a powerful investment when you want to earn money passively. The amount you earn depends on many factors you must consider. When you put a plan into action, you will be thrilled by the outcome you achieve. Being a wise investor takes your profit to where you have always wanted it to go.

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5 Risk Profiles of Real Estate

Real estate can generally be broken down into five risk profiles. But what do these categories mean?

  • Core
  • Core Plus
  • Value-add
  • Opportunistic
  • Development

Core

Core assets are generally the A quality asset in the A market.  These are viewed as the lowest risk because of their age, condition and market dynamics.  Because of the low risk, they often also generate the lowest returns.

The returns from these assets are typically from cash flow and long term, market driven appreciation.  The buyers of these assets tend to be institutional and carry low leverage with the intent of holding 10+ years.

 

Core Plus

The next tranche in risk is Core Plus. Compared to Core, these assets are older and/or in a less desirable market, although still in strong markets and sub-markets with strong population growth, low crime, and good schools.

For simplicity, these assets will be fully renovated assets with little or no deferred maintenance. When talking about apartments, the units will be recently renovated and achieving full market rents. In regard to market risk, these assets will typically fall into Class A or B submarkets, within major primary and secondary MSAs.

The returns of these assets are, like Core, derived primarily from cash flow with long-term, market-driven appreciation. Leverage is still fairly low, but slightly higher than Core.

 

Value-Add

Value-Add assets, like the name suggests, are existing, cash-flowing assets that have the opportunity to increase the value. The business plan can vary but will always boil down to increasing the income of the asset.  Most commonly in multi-family, the income increase is created through unit renovations.  These assets tend to fall in the B to C range, and can be found in, most frequently, in A, B and C markets.

These assets will frequently have some deferred maintenance that needs addressed, and often times are outdated aesthetically or operationally.  These assets will often require a capital investment to be brought to market standards.

In connection with the large amount of work and capital infusion, the returns in this class jump pretty significantly from Core Plus.  The returns often come from cash flow and forced appreciation but skew more heavily to appreciation.

 

Opportunistic

Opportunistic assets are the riskiest of the EXISTING asset class. These assets often have severe deferred maintenance, high vacancy, and very little, if any, existing cash flow. Most commonly, significant construction is performed to cure the deferred maintenance and bring the property to market standards to begin backfilling the vacancies. Many times, the property is repurposed within its existing structure; for example, converting a vacant warehouse store to self-storage, or a hotel to apartments.

Relative to the purchase price, leverage is often high for Opportunistic assets. The returns are generated through forced appreciation.

 

Development

Development is the riskiest of all asset classes. Typically, developers are buying vacant land, but may also buy existing properties with the intent to demolish the existing structure and build something new.

Returns for developments are created through forced appreciation.

In the cyclical nature of all things, it is interesting to note that many Core buyers are buying newly constructed assets from developers.

In the follow-up blog, I will be diving into the risks of each profile.

About the author:
Evan is the Investor Relations Consultant for Ashcroft Capital.  As such, he spends his days working with investors to better understand their investment goals and background.  With over 13 years in real estate, he has seen all sides of real estate from acquisitions, to capital raising on the equity and debt side, to operations, and actively invests himself.  Please feel free to connect with Evan here.

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Investing in Apartments Has Been Life-Changing

Investing in Apartments Has Been Life-Changing

In my opinion, multifamily real estate (apartment investing) can be one of the best ways to grow your wealth. So much so, that my wife and I decided to sell our primary residence years ago and put 100% of our equity into apartments, along with the majority of our investment portfolio.

For those of you who follow Robert Kiyosaki and the Rich Dad Poor Dad philosophy, you know that Kiyosaki is famously quoted for saying “your house is not an asset” meaning your primary residence is not an investment, because it doesn’t produce cash flow each month — quite the opposite in fact as you pay for expenses, taxes and upkeep. That is, unless you house hack, which is topic for another day.

Not only does an owner-occupied home leave you less mobile, it also ties up your money so you can’t use it for investments. In other words, the more you pay down your mortgage, the more you trap your investable cash.

 

A few thoughts on multifamily real estate in 2021: 

  • 75 million+ Baby Boomers are retiring
  • Many of today’s apartment complexes can be converted to retirement communities
  • A large number of millennials aren’t buying homes
  • Institutional and main street investors are searching for yield in today’s low interest rate environment

Multifamily investing can be a great way to build wealth, while helping fill the need for affordable housing, senior living and millennials choosing to rent by lifestyle choice.

 

 

HOW WE INVEST

My wife and I partner with experienced multifamily firms and invest in what’s called a real estate “syndication” or a real estate private placement. This means we, along with other investors, “pool” our money together to purchase large assets that we otherwise would not be able to afford on our own; a 300-unit apartment complex for example. The general partner (or multifamily firm) and their teams will manage the property and renovate the building by adding modern updates and improved amenities such as, in-wall USB ports, smart thermostats, storage lockers, improved landscaping, updating the clubhouse, gym, pool, or covered parking spots; depending on what the property is needing. The goal is to modernize the apartment building to today’s standards and increase the rents to the market level throughout the process.

The value or price of an apartment building is primarily derived from the NOI (net operating income), which is the total collected rents and income minus expenses to operate the property. When the net operating income increases, the value of the complex increases at a multiplier of this number. For example, let’s say you increase the annual net operating income on a property by $100,000 a year and a property in that market sells around a 10x multiple of the NOI. A $100,000 rent increase can bump the purchase price up by approximately one million dollars. This could be higher or lower depending on the market.

 

EXAMPLE

Let’s take a 300-unit apartment building as an example. Rents increase by $28 a month, per unit x 300 units ($28 x 300 = $8,400 monthly x 12 months = $100,800). For resale purposes, these $28 rent increases implemented across all units, could result in the property value increasing by nearly one million dollars. This type of value-add is much more scalable compared to a single-family home renovation.

Whether you invest individually in multi-family or with reputable firms, it can be a great way to generate cash flow, while helping improve communities along the way. My wife and I have dedicated the past 6 years to investing primarily in this asset class for these reasons. Cash flow investing can provide the ability to focus more on what you love and the freedom to focus less on what you don’t enjoy. At the end of the day, we all deserve to focus our time and energy on what makes us happiest.

 

To Your Success,

Travis Watts

 

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Beth Azor on Thriving Today with Retail Centers

These unprecedented times have hit retailers hard, but the news rarely highlights the fallout for smaller landlords. Retail shopping center investor Beth Azor shares the inside story on a Joe Fairless Best Ever Show podcast. Investing in commercial properties catering to retail is ideal for the active investor who enjoys hands-on management.

About Beth Azor

Beth owns Azor Advisory Services, a retail real estate development, management, and education company. She has over 30 years in commercial investing and currently manages a portfolio of retail shopping centers worth $80 million. Based in Fort Lauderdale, Florida, Beth owns six local shopping centers. She has adapted to competition from online selling and the current pandemic and has tips on thriving in this market.

Why Retail Shopping Centers?

Beth enjoys active investing and the variety of working with different types of businesses in this challenging sector. She also appreciates that managing commercial properties means dealing with companies instead of individuals as tenants. Beth prefers not to be responsible for an individual or family losing their home because they could not afford rent. Though evicting anyone is always uncomfortable, she finds it a little easier when it’s a business and not, as she puts it, a person losing a bed.

When asked about the perk of receiving discounts from her retail tenants, Beth stresses she forbids the practice. Accepting a concession or freebie means the retailer might leverage a quid pro quo situation and not pay full rent on time. Though tenants often try to offer breaks to Beth’s employees and family, the potential fallout is not worth it.

Manage the Rent Rollercoaster

Like many other landlords during COVID-19, Beth spends considerable energy on obtaining rents from distressed tenants. She learned the hard way that the time and emotion involved could overtake her week. She also discovered that small business owners behaved differently than national retailers and needed a different approach.

As a result of these insights, Beth started blocking off set times each week to work with both types of tenant. She reserved Tuesdays and Thursdays for small businesses and Mondays and Wednesdays for national companies.

Mom and Pop Struggle to Survive

The pandemic has shut down many smaller stores reliant on in-person traffic for sales. Beth has her share of these tenants and tries to work with them to persevere for mutual benefit. She finds that these businesses are often unable to pay full rent due to being effectively closed. The owners are understandably upset but eager to discuss options.

When evaluating the best recourse for a distressed tenant, including payment programs, Beth considers several variables. One factor is how easily she expects to lease the space if vacated or when the lease is up for renewal. Other considerations are whether the tenant has significant infrastructure installed or exclusive rights to sell a specific service, such as nail care. Sometimes a business will retain the rights to services but not offer them. If the tenant leaves, the landlord can recruit another retailer in that same popular niche.

Beth notes that she and many retail landlords prefer to grant rent deferrals rather than outright waivers. For example, a struggling tenant might pay half rent for two months and allow the landlord to take the difference out of the security deposit. The tenant agrees to pay any remainder the following year when in-person shopping presumably recovers. Beth avoids moving the balance to the end of the lease as she wants to encourage the tenant to renew at the market rate.

As part of giving back to her local community, Beth interviews small businesses for her YouTube channel and website. The increased exposure raises their profiles and helps bring in more customers. Beth does this marketing work gratis and finds it very rewarding.

National Tenants Play Hardball

Working with national retailers presents different challenges. These tenants quickly adapted to pandemic conditions by offering online, pickup, or delivery services and associated customer incentives. Though their revenues have fallen, deep corporate pockets will keep most of these businesses solvent and able to pay rent.

However, Beth finds many of her national tenants demand forbearance and aren’t always polite about it. Their message is, “I can pay this month’s rent, but I’m not going to.” The nationals often have representatives tasked with delivering the harsh news to landlords and other business partners.

Beth has dealt with real estate managers, lawyers, and CFOs in her quest for resolution. Perhaps because they feel ambivalent pushing for potentially unfair concessions, some representatives communicate unprofessionally. Negotiating with them is time-consuming and often unpleasant, and so Beth siloes time each week to do so.

To illustrate, Beth notes the national coffee retailer that sent well-publicized letters to landlords demanding rent deferrals for a year. What observers may not realize is that many commercial landlords are small investors such as Beth. These owners have far less financial backing than the nationals, and a drastic cut in rents could prove catastrophic.

Hold ‘Em: A Retail Portfolio Strategy

Beth favors a hold strategy for her portfolio. She bought her oldest holding in 2008 and has averaged an acquisition every two years. She then focuses on developing the new center, sometimes from scratch. As one example, Beth bought and demolished a vacant former strip club and built a shopping center in its place. The new center has five tenants, including Starbucks, Verizon, and Blaze Pizza.

In another transformative move, Beth bought a dated office building from the 1970s, razed it, and built a shopping center featuring a Starbucks on one side of the land. She is holding the other half to develop when the opportunity is right.

Beth’s holdings are a mix of anchored and unanchored developments. Anchored shopping centers are those with a well-known tenant to drive traffic, such as a supermarket. The anchor tenant typically pays less rent while the smaller tenants pay more to benefit from proximity to the anchor.

Unanchored shopping centers feature tenants of similar size where no one business draws significantly more customers than the others. For example, one of Beth’s developments boasts Verizon, Starbucks, Blaze Pizza, Select Comfort, and an ice cream store.

Prospect on Social Media

When prospecting for tenants, Beth has found that smaller businesses respond well to social media outreach. Unlike national retailers with marketing departments, small business owners usually monitor online channels to keep tabs on customer satisfaction. Beth has had particular success with high response rates on Facebook and Instagram.

For example, Beth might direct message business owners on Facebook and receive a 40 percent response rate within a day. Out of that pool, about 10 percent will express interest in her properties. This return is excellent compared to the old world of knocking daily on numerous company doors.

Prospecting national retailers requires a different approach that relies on networking. These large companies work through exclusive tenant representatives, local market experts who broker deals between landlords and tenants. The landlord pays the broker for a successful match.

If Beth has a vacancy and a tenant in mind, she reaches out to that company’s rep about doing a deal. She likely would not even meet the corporate real estate manager until a property walk-through.

Fund Managable Deals

Beth chooses to focus on smaller deals that she can personally fund. Her sources include income from other properties, personal assets, or funds from friends and family open to passive investing.

As is common in commercial investing, Beth used to work with institutions. She stopped this practice after a major deal funded by BlackRock went south.

Beth cautions not to let one stellar success blind you into overconfidence. Giddy investors can quickly become wedded to one perspective at their financial peril. In her case, she and a partner were doing a BlackRock-funded deal and leased one space to Staples for a pricey $20 per square foot. Emboldened, she and her partner decided to hold out for $15 for the remaining space, even though Walmart expressed strong interest at a lower rate. They ended up losing the property and $5 million.

How to Get Started in Retail Investing

You may be wondering how to break into the business of retail shopping centers, especially if your background is in passive investing. First, keep in mind that this niche is best suited for the active investor who enjoys operations and social interaction. Your best bet, says Beth, is to shadow a property owner to learn the ropes.

Beth started as a leasing agent with a real estate license, a path she recommends for those interested in active investing. Owners are looking to fill vacant suites, so be the person who can deliver the tenants. If done well, this role is gold.

Beth cautions against starting at a brokerage as you must obtain your own listings, which is extremely difficult. If you shadow an owner, you may land an internship and possibly a paid position. The upside of this apprentice approach is that you can trial the work while maintaining your current activities. Even if you are a seasoned real estate investor, a firsthand look at the dynamic retail world is well worth your time.

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Commercial Real Estate For Sale | 9 Ways to Find More Deals

Need help generating more commercial real estate leads?

You have come to the right place. From basic strategies like using a commercial real estate broker to generating leads through the landscapers (yes, that is correct!), this blog post is an ultimate guide for finding commercial real estate for sale.

Let us get started by first talking about the two different types of commercial real estate for sale – on-market and off-market.

On-market vs. off-market commercial real estate for sale

The tactics for finding commercial real estate for sale are simple. You don’t need a Ph.D. in commercial real estate or a 160IQ to find commercial real estate for sale. However, uncovering the best deals – that is, the deals with the most “meat on the bone”, upside potential and built in equity – require will a higher time investment.

In general, of the two types of commercial real estate, on-market deals are easier to find.

On-market commercial real estate for sale are deals that are listed by commercial real estate brokers. These are the easiest deals to find because they are heavily marketed by brokers. Consequently, there typically isn’t as much “meat on the bone” compared to off-market deals (of course, there are exemptions).

In fact, an on-market deal selling above market value is not uncommon. Since the on-market commercial real estate for sale is heavily marketed, many more commercial real estate investors will submit offers, which can result in a bidding war and an increase purchase price.

Also, on-market commercial real estate for sale may take longer to close on. Generally, the offer process for on-market deals includes a touring period, a call-to-offers date, a time range for the seller to review all of the offers, a best-and-final offers round, and a best-and-final sellers call before the deal is even placed under contract.

However, these potential drawbacks can be minimized or avoided entirely by a commercial real estate investor who has a strong track record of closing on similar deals in the past and/or has a pre-existing relationship with the listing broker. At the end of the day, the seller’s main motivation is closing. Therefore, on-market commercial real estate for sale can be advantageous for commercial real estate investors who are (rightly) perceived as closers. They will get awarded more on-market deals, even if they don’t submit the highest purchase price.

Off-market deals is the other category of commercial real estate for sale. Off-market deals are not listed by commercial real estate brokers. However, commercial real estate brokers can be good sources for off-market leads (more on this later in the blog post). Therefore, generating off-market commercial real estate leads requires more proactive effort.

Experienced and reputable commercial real estate investors will close more off-market deals because this isn’t their first rodeo. The sellers know they are operating a well-oiled machine and the likelihood of the deal closing is high.

Who would you rather have perform open-heart surgery on a loved one? A freshly minted medical school graduate, or the top heart surgeon in the state who has complete thousands of successful procedures? (Rhetorical question). Therefore, a seller is more confident signing a contract with an experienced commercial real estate investor who has a history of closing rather than a brand-new investor with no deals under their belt.

The main benefit of off-market commercial real estate for sale is the potential for the juiciest piece of “meat on the bone” at closing. It is common for commercial real estate investors to secure a contract on an off-market deal at a purchase price that is 1%, 5%, 10%, or more below the appraised value. This means that at closing, the investor has instantly generated 1%, 5%, 10%, or more in free equity. The reason is because there is less, or no competition. Usually, there is only one buyer, so bidding wars are avoided.

Also, if the seller is highly motivated, the closing process can be fast. However, it is also possible to have an extremely long closing horizon. A negotiation period lasting multiple months – even up to a year or longer – isn’t uncommon with off-market commercial real estate deals.

As I mentioned previously, a commercial real estate investor can secure the deal at a better price because there is less competition. However, this is not always the case for large commercial real estate deals. Larger commercial real estate for sale is likely owned by a sophisticated investor. They will know the market value of their asset and will not accept a lowball offer (unless they are motivated to sell because they are distressed – more on this later in the blog post). In fact, it is possible to pay above market value for an off-market deal. Since the seller isn’t receiving multiple offers, the market won’t set the price. Therefore, unsophisticated commercial real estate investors may get a sucker price.

Lastly, the commercial real estate investor can work directly with the owner in order to determine their unique needs for selling, which means that there is more opportunity for creative financing.

Overall, both on-market and off-market commercial real estate for sale have their pros and cons. Therefore, the best approach is to pursue on-market and off-market deals.

So, how do you find on-market and off-market commercial real estate for sale?

Let’s start with how to find on-market commercial real estate for sale.

How to find on-market commercial real estate for sale

On-market deals are always widely marketed by commercial real estate brokers. Therefore, they are very easy to find.

1. Commercial Real Estate Brokerages: Most of the larger commercial real estate brokerages list their deals for sale on their websites. If you simply Google “commercial real estate brokers in (city)”, you will be presented with a long list of commercial real state brokerage. However, I recommend being more specific by searching for commercial real estate brokers who focus on your niche. For example, if you are looking to find apartments for sale, Google “commercial apartment brokers in (city)” or “commercial multifamily brokers in (city)”.

Each commercial real estate brokerage’s website will have a section where they list commercial real estate for sale.

For example, when I search “commercial apartment brokerages in Chicago”, SVN Chicago Commercial is a top result. On their website, they have a property search function with a list of all their commercial real estate for sale:

 

One approach is to visit the commercial real estate brokerage’s website each week to look for new opportunities. The more efficient method is to subscribe so that new offerings are sent to your email inbox automatically. Locate the “subscribe” function on the brokerage’s website and input your contact information.

Repeat this process for as many commercial real estate brokerages as you want, and you will receive commercial real estate for sale in your email inbox every day.

2. LoopNet: Another way to find on-market commercial real estate for sale is on LoopNet. LoopNet is an online listing platform where commercial real estate brokers can list commercial real estate for sale.

Every large commercial real estate brokerage in a market should have a website where they list commercial real estate for sale. But some of the smaller commercial real estate brokerages may not have a website, or their website isn’t easily found on Google. Smaller brokerages do, however, list commercial real estate for sale on LoopNet.

LoopNet is also very easy to use. Simply select a property type and market, and you will be presented with a list of all the commercial real estate for sale.

Usually, most of the commercial real estate for sale on LoopNet are a repeat of deals listed on commercial real estate brokerage’s websites. However, others will be brand new deals you’ve never seen before (listed by smaller brokers who lists you aren’t subscribed to).

How to find more off-market commercial real estate for sale.

Finding off-market commercial real estate for sale generally requires more effort compared to on-market. Unlike on-market, there isn’t a website with a list of off-market commercial real estate for sale.

The overall idea behind off-market deals is to find an owner who is motivated to sell their commercial real estate before that owner has enlisted the services of a commercial real estate broker.

There are three main ways an owner can be motivated to sell their commercial real estate.

The most common reason why an owner is motivated to sell is because they are “distressed” in some form or fashion. There are literally countless ways an owner of commercial real estate can be distressed. Here a few examples:

  • Delinquent on taxes
  • Delinquent on mortgage
  • Building code violations
  • Health code violations
  • Liens
  • Facing foreclosure
  • Natural disaster damaged the property (i.e., fire, hurricane, tornado)
  • High vacancy, usually due to evictions
  • Recently experienced a large increase in taxes
  • Mismanaged by their property management company
  • Lots of deferred maintenance
  • Falling out with business partner
  • Personal reasons (i.e., divorce, death in family, divorce, illness, etc.)

A second common reason why an owner would be motivated to sell is if they are at the end of their business plan. For example, the typical hold period on a value-add apartment deal is 5 to 10 years. The apartment is acquired, renovations are performed over 12 to 24 months, the property is held for cash flow for another 3 to 9 years and is sold. The motivation is to sell so that they and their investors can realize the gain in equity and reinvest into a new opportunity.

The third common reason why an owner would be motivated to sell is because they are tired of being a landlord. They’ve owned the commercial real estate for 10, 20, 30 or more years and are ready to cash out to retire.

As I mentioned previously, the overall idea is to implement market strategies that target these types of motivated sellers, or people who know these types of motivated seller. I have previously created a detailed blog post that outlines how to create a list of motivated sellers – 7 free and paid online services to generate off-market apartment deals.

Now what do you do with this list?

3. Direct mail: Probably the most common strategy for finding off-market commercial real estate for sale is direct mail. A direct mail campaign consists of sending out a batch of letters to a list of motivated commercial real estate owners with the purpose of sparking a conversation that results in the acquisition of their property.

I have previously written a blog post that outline how to use direct mail to find off-market commercial real estate for sale – the ultimate guide to a successful direct mailing campaign. Overall, the strategy includes creating a list of motivated commercial real estate owners, creating a marketing piece to send to the owners, screening incoming calls and qualifying deals, and ultimately negotiating an offer price.

Direct mailing campaigns can be used to target all three types of motivated sellers – distress, at the end of the business plan, and tired of being a landlord.

4. Cold calling/cold texting: An iteration of the direct mail approach is cold calling and cold texting. After a list of motivated commercial real estate owners is created, rather than sending a marketing piece, pick up the phone and call and/or text the owner.

For example, click here for a story about an investor who was able to find two apartment communities totaling 340 units by texting motivated apartment owners.

The extra step required for this strategy, depending on the service used to generate the motivated seller list, is skip tracing. Most of the free and inexpensive list generating services only output an owner’s mailing address. Therefore, to acquire the owners phone number, you must “skip trace” the list. Here is a list of skip tracing services investors who have been interviewed on my podcast use:

Like direct mail, cold calling/texting can be used to target all three types of motivated sellers.

5. Thought leadership platform: A more creative and indirect approach to is to use a thought leadership platform to find commercial real estate for sale. A thought leadership platform offers unique information, insights, and ideas that will position you as a credible and recognized expert in your industry.

Common examples of thought leadership platforms are podcasts, blogs, YouTube channels, newsletter, publishing books, hosting conferences, and meetup groups.

Click here for an in-depth blog post on the process for how to create a thought leadership platform.

With a thought leadership platform, you will build new friendships and business relationships. It allows you to stay top of mind of commercial real estate entrepreneurs and professionals because you are constantly providing valuable, free information. Essentially, you can continuously network with people on a global level 24/7.

Now, what did I write earlier about how to find off-market deals? You must communicate with motivated owners and people who know motivated owners.

Well, with a thought leadership platform, your following (readers, listeners, views, etc.) will consist of both parties. Some aspect of your thought leadership platform should let your following know what types of deals you are looking to purchase. This can be as direct as saying “send me deals” or as indirect saying “I am a value-add apartment syndicator.” Assuming you have a website and a “contact us” function, your followers can reach out if they or something they know are motivated to sell their commercial real estate.

Something I also mentioned earlier about both on-market and off-market deals is that the stronger your track record, the more likely you will be awarded a deal. The main weight of your track record is your previous commercial real estate experience. However, having an established thought leadership platform will also increase your credibility in the eyes of owners and commercial real estate brokers.

“This guy/girl has a massive following on YouTube. He they must know what they are doing!”

Therefore, not only is a thought leadership platform a great way to find off-market commercial real estate for sale, but it will also help you get awarded more deals.

Unlike direct mail and cold calling, a thought leadership platform isn’t typically a direct approach to finding commercial real estate for sale. The exception would be if you created a meetup group to find commercial real estate for sale. Click here for a blog post I wrote about real estate investors who directly sourced deals through a meetup group. Therefore, I do not recommend using a thought leadership platform as your only approach to finding commercial real estate for sale. It should be used in tandem with other strategies on this list.

6. Call “for rent” ads: Another creative approach to finding commercial real estate for sale is to calling “for rent” and “for lease” ads.

As I mentioned previously, an owner may be motivated to sell their commercial real estate because of vacancies. Therefore, when you see a “for rent” or “for lease” ad, you know that they are experiencing some level of vacancy at their commercial real estate. You have immediately identified a potential pain point.

Depending on the number of vacancies or length of the vacancy, they may be at the point where they are willing to sell.

This strategy works better for smaller commercial real estate. It is unlikely that an owner of a 300-unit property, for example, will sell based on 10 vacant unit. Whereas an owner of a 10-unit property would be motivated to sell if all 10 units were vacant.

Additionally, with larger commercial real estate, the contact information provided in the “for rent” or “for lease” ad is likely a leasing agent and not the owner.

However, don’t let that stop you from trying this strategy on large commercial real estate. Maybe, once they are ready to sell, they remember you (especially if you consistently follow up) and give you a first look at the deal before going to market.

7. Nearby apartments: For every on-market commercial real estate for sale you come across, reach out to the owner of surrounding properties and attempt to purchase two deals: the on-market deal and an off-market deal.

This is an approach I used in the past to find commercial real estate for sale. Click here for the full story on this strategy in action. In short, our commercial real estate broker reached out to the owner of an apartment across the street from an on-market deal. The owner happened to be interested in selling, so we put both deals under contract.

At the time, the market was very competitive, and the on-market deal entered into a bidding war. However, because of the economies of scale and complementary nature of the off-market opportunity, we were able to pay a little bit more for the on-market opportunity, ultimately coming out as the victor of the bidding war.

8. Commercial real estate brokerages: As I mentioned at the beginning of this blog post, commercial real estate brokerages can also be one of the best ways to find off-market commercial real estate for sale. However, there is a caveat.

Before commercial real estate brokers bring a property to market, they may send the opportunity to commercial real estate investors who they know can close on the deal. This is either to give them a chance to actually purchase the deal prior to going to market or to, at minimum, give them a head start.

The key phrase above is “who they know can close on the deal”. Therefore, unless you have the established track record I’ve mentioned multiple times in this blog post, you likely won’t have access to off-market deals from commercial real estate brokers.

When a commercial real estate investor first speaks with a commercial real estate broker, the broker will ask questions to gauge how serious the investor is.

“Are they able to close on a deal or are they a tire kicker who is wasting my time?”

If they don’t think you are capable of closing on a deal, there is zero percent chance they will send you off-market commercial real estate for sale.

I interviewed a top commercial real estate broker in Washington, DC, and he provided me with the five questions he asks investors to determine if they are serious and capable of closing. You can read the full blog post by clicking here, but the five questions are:

  • Have you completed a deal before?
  • Can you send me examples of what you’ve done?
  • Do you understand the market?
  • How would you finance a potential deal?
  • What are your goals?

If you haven’t completed a deal, cannot answer simple questions about the market, don’t have the cash and/or financing capabilities, and don’t have a vision, no broker is going to send you off-market commercial real estate for sale. However, the exception would be if someone else on the team does have the required track record. When that is the case, your reply to each question would be “well, my business partner has…” or “my property management company has…”

9. Commercial Real Estate Vendors

Anyone involved in the rendering their services to commercial real estate, like electricians, carpet installers, roofers, plumbers, HVAC professionals, pool repairman, lawn mowing companies, landscapers, etc. can be your own personal “birddoggers”, generating motivated seller commercial real estate leads with zero competition.

One of Joe’s family members owns a lawn mowing company. One of their clients was behind on their payments. They asked Joe, “do you know why a property management company wouldn’t pay a contractor for services?” Joe replied, “well, it’s not the property management company but the owner who is the problem. They likely have liquidity issues and cannot pay the bills.”

Just like a commercial real estate owner who isn’t paying their taxes or mortgages, one that isn’t paying their contractors may indicate motivation to sell. Therefore, to generate potential commercial real estate for sale, form relationships with local commercial real estate vendors and ask for a list of clients who are in arrears.

Simply calling up random lawn mowing companies may not be the best use of your time (although it might work). The better approach is to use a vendor’s service first and then ask them to notify you of local apartments who are behind on their payments.

Conclusion – How to Find Commercial Real Estate For Sale

These are eight ways to find more commercial real estate for sale.

Which strategies should you pursue?

I recommend everyone who is interested in finding more commercial real estate for sale to implement to the two on-market strategies – subscribing to commercial real estate brokerage’s listings and searching on LoopNet.

Next, I recommend starting a thought leadership platform, for both the credibility and networking benefits.

Then, of the remaining off-market commercial real estate lead generation strategies, I recommend starting with one. Test is out for six months and analyze the results. If it works, great – keep doing it. If it isn’t working, select a different strategy to test for another six months.

Unfortunately, there isn’t a one-sized fits all approach to finding commercial real estate for sale. The strategy or strategies that work best depend on the market, the overall economy, your business plan, and your level of experience.

However, a commercial real estate investor somewhere out there has been able to find commercial real estate for sale using each of the eight strategies in this blog post.

The key is consistency!

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BEC 2021 Goes Virtual During Pandemic

Well folks, we have to acknowledge that COVID-19 isn’t going anywhere…at least not anytime soon. As a result (and as you may have noticed), BEC 2021 will be held virtually, for the first time, due to COVID-19. And, while we are disappointed not to be together in person, we are excited to funnel all our efforts into a virtual networking experience like no other. Seriously. As soon as you sign up, you will start reaping the benefits.

What do I mean? We really had to think out of the box on this one. The big question was: How can we make a networking event successful in a virtual environment? The Best Ever Real Estate Conferences are great because they provide attendees with the opportunity to network with fellow investors and industry influencers from around the world. That is it’s greatest benefit and we know how critical that is to you and your business.

In order to offer all attendees the opportunity to share business strategies, meet high net-worth individuals, and learn something new, we came up with a solution, several in fact, that I think you will love.

We’ll have video conferencing and chat rooms dedicated to hundreds of different networking topics. If you want to meet like-minded folks from around the country, if you want to find a partner, deal, or money from the comfort of your home office, or if you just want some good old fashioned new conversations in a world devoid of connections, then this virtual event is a can’t miss.

Exclusive to this year’s virtual event, when you sign up you will be thoughtfully placed into a Mini Mastermind group with your fellow attendees of groups no bigger than 8 people. No other conference provides you the opportunity to connect so intimately and learn as thoughtfully from your fellow attendees this far in advance from the actual date of the event. We’re making the virtual networking easy for you this year. The Mini Mastermind groups start as soon as you sign up, so make it count and register now.

Additionally, in the months leading up the conference, we’re offering all of our ticket buyers free access to exclusive monthly webinars discussing topics such as the current political climate and how the incoming Biden administration‘s decisions on a range of issues could impact the commercial real estate market and industry directly.

So, while 2021 has presented us with challenges from uniting in person, we are going to continue building the essential dialogues and connections in the world of real estate. We are looking at this as an opportunity to expand our network to include those that normally would be unable to attend and offer exciting new elements made possible by the virtual environment.

To find out more about BEC2021, visit www.bec2021.com.

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Kevin Riordan Shares Bold Insights on Institutional Investing

You may face a day when the funding needed for your target real estate deal merits an institutional investor. Though this is a sign of success, it can be daunting if you are unfamiliar with raising institutional equity. Real estate investor and longtime pension fund executive Kevin Riordan explains how to begin. As a guest on the Joe Fairless Best Ever Show podcast, he summarizes institutional raising and what entrepreneurs seeking equity can expect.

About Kevin Riordan

Kevin has deep institutional expertise stemming from extensive business and Wall Street experience. He took a commercial mortgage REIT, Crexus Investment Corp., public in 2009 and knows the process firsthand. A full-time professor of real estate at Montclair State University, Kevin grounds his investing in accounting and finance mastery.

Kevin’s career spans 30 years of institutional investing, focusing on raising capital for commercial real estate. As a young CPA, he moved from the accounting group to real estate at work after hands-on experience making transactions. At age 30, he moved to TIAA CREF, a pension fund for educational institutions, and broadened his investment analysis and real estate deals experience. Kevin leveraged 20 years there to create initiatives merging public capital with commercial real estate.

Kevin sees two sides to the business of providing institutional capital for equity. One side is through joint ventures with property developers handling the operations. The other aspect is funding entrepreneurs planning to buy or develop properties.

We Are the Money: The Equity Side

During his tenure at TIAA CREF, Kevin formed many joint ventures with real estate operators. The total project costs ranged from $12 million to $30 million, and the institution would cover up to 100 percent of the funding.

A typical partnership structure has the equity investor receiving a preferred return until reaching a hurdle rate. A hurdle rate is the minimum acceptable rate of return that an investor expects. At this point, the property developer receives a promote, which is an amount above the developer’s contribution. The contract should contain the exact terms agreed to.

Project costs vary with the type of property built. Kevin recalls one apartment building with 210 units in a quaint northern town that cost about $14 million. In contrast, a downtown Atlanta development with some construction challenges ran closer to $29 million.

The project begins with a construction loan to start operations. The institution uses its capital to pay off the loan and shares ownership with the developer. This arrangement grants the institution a preferred return on investment and access to the property’s initial cash flow.

Kevin provides an example of how these transactions typically work. If you put up capital of $1 million at a 6 percent return, your preferred return would be $60,000. The property’s first $60,000 return goes to you, and you and the developer split subsequent gains.

Funding Entrepreneurs: The Buy Side

What if you are a multifamily property investor seeking additional funding and not a real estate developer? Kevin speaks to this situation, too. Many investors start by using their financial resources and then raise funds from friends, family, and professional networks. They may top out and need to raise more capital to pursue their target transaction. Individuals often reach this point when they’ve rolled proceeds from multifamily properties into larger projects and face steeper equity requirements to continue growth.

When institutions invest in these types of projects, the funding is typically in the form of a mortgage instrument that allows the entrepreneur to buy a property or begin development. In return, the investor acquires a coupon or share of the mortgage debt.

If you plan on approaching an institution for capital, you want to present yourself and your business plan in the best possible light. Serious potential investors will conduct due diligence on you as a candidate and on your proposed projects. Kevin shares tips on how to prepare.

Document Your Track Record

A potential investor will first ask you, “What have you done?” The institution’s top concern is that you have a successful track record. Document and quantify your achievements and be prepared to discuss them.

Here are some foundational questions to be ready for:

  • Which transactions have you done?
  • What was your role in each?
  • How did each investment perform?
  • How were the deals structured?
  • Who were the other partners?

As in a job interview, expect to walk a serious investor through your process on at least one deal.

Create a Detailed Plan

Kevin describes his experience taking Crexus Investment public and meeting with major institutional investors for the first time. He had worked for a large pension fund and was now on the other side, taking his first company public. When visiting Fidelity Investments, BlackRock, and other large players, he found their concerns shared a common thread. In addition to his track record, they wanted to see a detailed and thorough plan.

Kevin stresses that despite differences in scale, multifamily property buyers and institutions must perform similarly to succeed. Nonetheless, the transaction must meet a minimum equity threshold for institutions to consider it. He notes that a $500,000 deal, a hefty commitment for most individuals, is too small for institutions.

Approach Investors at the Right Time

If you are considering institutional equity for your next project, should you approach investors before or after entering a transaction? Kevin suggests working with investors first to secure funding. At this point, they will evaluate you based on your track record and business plan. Ideally, you’re proposing adding one or two zeros to a solidly performing portfolio.

The alternative is to proceed with a deal on a contingency basis. One drawback of this strategy is that you may sacrifice some credibility with partners who prefer to have funding locked first. Another potential issue is not obtaining equity in time or being denied altogether. Lining up institutional financing first is a cleaner strategy.

Prepare for Due Diligence

Let’s assume you have passed an institutional investor’s due diligence, and you have the green light to put together a deal. The institution will draft a profile of your project, and funding is contingent upon meeting the requirements. Your job is to find or develop a suitable property and to check all the associated boxes, as Kevin puts it.

The institution will expect your project to satisfy given criteria such as:

  • Property location
  • Asset type
  • Expected rate of return
  • Deal structure

After analyzing the target project in depth, you should be prepared to meet the checklist. However, institutional investors also vet your company’s suitability for executing the project and managing it for the long haul.

Kevin emphasizes that investors assess a company holistically, looking for breadth as well as a compelling investment story. They want to understand how your business’s core people and operations will drive the project’s success. To do this, they look at history as well as current circumstances. For example, did your company triumph over a setback, such as a regional downturn or sudden loss?

Kevin suggests preparing for an evaluation of your past and present operations and any principals besides yourself.

Areas of scrutiny include:

  • Accounting systems
  • Reporting
  • Operating agreement or articles of incorporation
  • Other company principals
  • Financial history
  • Response to adverse conditions
  • Plan for operating the new property

How to Find Institutional Investors

Suppose you have your CV, company, and investment plan in place but have no institutional contacts. How do you reach out to these large equity investors?

Kevin suggests you partner with an intermediary such as a real estate consultant or mortgage broker. Many of these professionals arrange equity as well as debt and can facilitate the right introductions. When contacting mortgage brokers, for example, ask whether they work with institutional equity.

You and the institution will benefit from an intermediary’s services. Institutions prefer this approach because it weeds out the deluge of nonstarters and helps identify quality prospects. As an entrepreneur new to the process, you will gain valuable guidance from a high-caliber consultant or broker.

Make Your Bold Move

What is Kevin’s best advice for real estate investors new to institutional equity? Paradoxically, it is to act boldly while sensibly mitigating risk.

Kevin refers to a personal lesson learned. Following the Great Recession, he could have purchased $2 billion of Barclays Bank mortgage debt. Instead, Kevin bought only $750 million and left a significant profit on the table. He attributes the decision to caution over boldness.

If you haven’t already, you will eventually encounter a deal that seems like a fortune-changer. You will probably need to move quickly and irrevocably. According to Kevin, the key is to balance bold action with a clear understanding of the risks in a given investment opportunity. These decisions are always challenging, but isn’t that the fun?

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Real Estate Investing Advice from 7 US Military Veterans – Happy Veteran’s Day

Many former US military service members become real estate investors after transitioning to civilian life.

Discipline, a strong work ethic, loyalty, collaboration, leadership, effective communication, problem solving and many more skills obtained in the military are also beneficial to growing a real estate business.

Additionally, because of their background, they bring a different perspective to real estate investing – things that civilians like me may not have thought of. Fortunately for you and me, many veterans have come on the podcast to share these unique insights.

In honor of Veteran’s Day, here is the Best Real Estate Investing Advice Ever from 7 US military veterans interviewed on the podcast.

1. Think Big, Act Small

Seth Wilson: Founder and Managing Director of Clarity Equity Group

Military experience: Four-time combat veteran of 14 years, and currently serves in the Missouri Air National Guard as a pilot of the C-130 tactical airlift aircraft

Episode: JF2208 Veteran To Founder

Best Ever Advice: Thing big but act small. When setting goals, always aim high. But make sure that you paying attention to the details and taking massive intelligent action every single day in pursuit of your goal.

2. Get Out There and Take Risks (That Won’t Destroy You)

David Pere: Founder of From Military to Millionaire

Military experience: US Marine Corps since 2008

Episode: JF2102 From Military to Millionaire

Best Ever Advice: Just get out there, do it, and take risks. Having a safety net (in David’s case, his job in the military) can give you more confidence to take greater risks. But, David did put a ceiling to the level of risk one should take – if you take a risk and fail, it shouldn’t utterly break you. That is, you should be able to mentally and financially dust yourself off, recover, and get back in the game. The greater risks you can take, the larger the payoff.

3. Find Your Own Unique Niche to Reduce Competition

Phil Capron: Multifamily investors and Senior Mentor with Michal Blank

Military experience: Naval Special Warfare Combatant Craft Crewman

Episode: JF1984 From the Military to Multifamily

Best Ever Advice: When in the military, Phil’s smaller special ops unit did the missions other crews weren’t able to. The other, bigger units lacked the tactics, training, equipment, or personnel. Similarly, Phil pursues deals and strategies that other, large operators aren’t willing or able to do.

Whatever the big operator’s investment criteria is his is the opposite. As a result, he has access to deals that they don’t have access to, which has allowed him to do deals in competitive markets.

Therefore, if you are having a hard time finding a deal, ask yourself what you can do differently to create a niche for yourself with minimal to no competition.

4. House Hacking and the Real Formula to Success

Eric Upchurch: COO and Co-Founder of Active Duty Passive Income and Senior Managing Partner at ADPI Capital

Military experience: Army Special Operations

Episode: JF1890 From Military Life to Civilian Work & Real Estate Investing

Best Ever Advice: First is to use the VA loan if possible (the similar option for civilians is the FHA loan). Zero (or minimal) money out of pocket for a cash flowing asset. Target a four-plex, live in one unit for at least one year and one day, and repeat. You will live rent free(ish) and/or generate cash flow each month.

Second was Eric’s real formula to success: “Learn, network, add value, take action. If you do those things over and over again, success will hunt you down.”

5. Always Follow Through with Commitments

Jamie Bateman: Founder of Labrador Lending

Military experience: Captain in Army Reserves

Episode: JF2224 Note Investing Strategies

Best Ever Advice: Jamie’s best ever advice was three-fold. First is to focus on your strengths and outsource your weakness to others. Second is to consistently think about how you can add value and contribute to something bigger than yourself – both in business and your personal life. Third is to just do what you say you are going to do. Keeping your word is very important. There are many people who make a commitment to do something and then disappear, never follow-up, or follow-up too late.

6. Set 10X Goals Based on Your Potential, Not Current Abilities

Vincent Gethings: Co-Founder and COO of Tri-City Equity Group

Military experience: 14 years in Air Force

Episode: JF2204 Investing While Overseas

Best Ever Advice: Set goals based off of your potential and not your abilities. Many people have limiting beliefs, which force them to set goals based on what they think they can accomplish based on their current experience, education level, relationships, etc. As a result, they set the bar extremely low. They use the SMART (specific, measurable, achievable, realistic, and time-based); Vincent hates SMART goals because of the R, realistic.

Instead, Vincent is more of an adherent to Grant Cardone’s 10X rule. Set big, scary, audacious goals, and then take massive action toward them. Don’t be realistic, because that doesn’t give you any chance to grow.

7. SHUT UP!

Bill Kurzeja: Owner and Founder of Professional Success South

Military experience: 8 years of service as a Sergeant

Episode: JF2155 sales Skills to Improve Your Business

Best Ever Advice: Shut up and listen. We have two ears and one month, so use them accordingly. In sales, most of the time people will tell us exactly what they want and how to win them over. We just need to listen, use the information, and apply it back. This starts by setting the table – that is, proper preparation beforehand, which includes research and practice.

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Passively Investing in Apartments – Fund or Individual Deals?

There are many ways to passively invest in apartment syndications. Knowledge of these different strategies is important to understand which is the best wealth generating vehicle for you.

In this blog post, I want to educate you on the differences between investing in individual apartment syndications and investing in an apartment syndication fund.

But first, we need to distinguish between the type types of passive apartment investments.

Passive apartment investments are either debt investments or equity investments.

For debt investments, the passive investor is acting as a lender to the apartment or the apartment syndicator. The loan is secured by the property and the passive investor receives a fixed interest rate as a return.

For equity investments, the passive investor is a shareholder in the entity that owns the apartment. Depending on the equity structure, the passive investment receives a preferred return and/or a share of the total profits.

Click here to learn more about the differences between debt and equity investing.

Passive investors who prefer equity investments over debt investments will chose to invest in individual deals or into a fund.

The first option is to invest in a single deal at a time. One deal. One business plan. One market.

A fund (i.e., a private real estate fund) is a private partnership that owns more than one piece of real estate. For apartment investing, numerous passive investors commit an amount to invest and the apartment syndicator use the passive investors’ capital to purchase multiple apartment communities.

The apartment syndicator of the fund will either execute one or multiple of the apartment syndication business plans: value-add, turnkey, or distressed. And they may focus on investments in a single or in multiple markets.

What are the different types of funds?

Close-ended fund: For a closed-ended fund, you would commit to invest a certain amount of capital when the apartment syndicator is accepting investor capital. Usually when the apartment syndicator commences a fund, they will continue to accept commitments until they’ve achieved their desired funding goal. Then, the apartment syndicator will begin purchasing apartments over a specific period of time – usually 3 to 4 years after the start of the fund. The apartments are held for a specific period of time – generally 3 to 7 years, depending on the business plan. Therefore, most close-ended funds are 10 years. But apartment syndicators may have the option to extend a close-ended fund by one or more years. 

Typically, your initial equity investment is not returned until the end of the fund. However, some close-ended funds will distribute lumpsum profits once an apartment is sold or refinanced. The apartment syndicator may also have the option to recycle proceeds from sales or refinances back into the fund if, for example, the apartment is sold or refinanced a certain number of years after acquisition or less.

Open-ended evergreen fund: The other fund option is an open-ended, or evergreen, fund. The main difference between evergreen and close-ended funds is that evergreen funds do not have a specific end date. Therefore, the apartment syndicator is continuously accepting investor commitments. To exit an evergreen fund, you would need to sell your shares in the partnership rather than having to wait until the end of a close-ended fund.

How does close-ended and open-ended funds compare to individual deal investing?

When passive investor money is due: When investing in individual deals, once you have committed to investing, funds are typically due in full shortly thereafter. Once you commit, you sign the deal documents and submit your funds.

When investing in a fund, once you have committed to investing, your funds may or may not be due shortly thereafter. The committed amount is submitted at a capital call. A capital call occurs when the apartment syndicator of the fund has identified an acquisition and requires a portion or all your committed capital to cover the purchase costs. 

When the apartment syndicator sends a formal capital call notification, you are legally obligated to fulfill their call based on your committed capital investment amount. Typically, a capital call will only require a portion of your capital investment, but it is possible that they request the full committed amount. If you fail to meet the capital call, the apartment may force you into default and to forfeit your entire ownership share.

Compensation structure: The compensation structure for funds and individual deals are the similar. You are offered a preferred return and/or profit split. Oftentimes, the profit split will change and become more favorable to the apartment syndicator once a certain return threshold, like IRR, is passed. 

The timing of the ongoing distributions after you’ve submitted funds are similar since you are actually submitting your capital once a deal/deals are identified. 

However, the time from commitment to receiving your first distribution is longer when investing in a fund because of the gap between commitment and the first capital call. Additionally, you may not submit your full investment amount until one, two, three, or more years after committing, depending on the length of time over which apartment syndicators plan on acquiring apartments. Since you receive a return based on submitted funds and not committed funds, the ongoing distributions will be lower at first.

Return of Capital: When investing in individual deals, you will not receive your initial equity back until the asset is sold. When investing in a fund, you will not receive your initial equity back until the fund is closed. The exception would be an evergreen fund, where you can sell your shares at any time (or after a lock-out period).

The apartment syndicator of both approaches will provide you with a projected hold period (for individual deal) or fund length (for funds). Assuming you were to invest with apartment syndicators who follow the same business plan, you will typically receive your initial capital back sooner when investing in individual deals. 

Profit upside: The overall return upside is lower for funds compared to individual deals. If you are investing in an individual deal that performs exceptionally well, your return increases in the same proportion. However, your return on investment in a fund is based on the average return of the entire portfolio. Therefore, if one or a few apartments perform exceptionally well, the performance of the other average or below average deals will flatten the overall return.

Risk: On the flip side, since by investing in a fund you are investing in multiple deals, the probability of losing a portion or all your initial capital investment is lower. If one or a few apartments perform poorly, the performance of the other apartments in the fund will cover (or at least reduce) your losses.

However, when investing in a fund, you place more trust in the apartment syndicator, especially early on in the fund when there are zero or a few apartments. When investing in an individual deal, you can qualify the GP and the deal. If you don’t like the syndicator, you can pass. If you don’t like the deal, you can pass. If you really like the deal, you can invest as much as you want.

When investing in a fund, you can only qualify the apartment syndicator. If you don’t like thm, you can pass. But at a capital call, if you don’t like the deal (if you even get to see the deal), you have no choice but to invest. Conversely, if you really like the deal, you cannot go all in. Therefore, qualifying the apartment syndicator is even more important prior to investing in a fund to minimize risk.

Taxes: From a tax perspective, distributions from an individual investment and a fund are the same. Ongoing cash flow payments are considered income and are subject to the income tax. Taxable income may be reduced if depreciation is passed on to the passive investors. Profit at the conclusion of the partnership are considered gains and are subject to capital gains tax.

Feasibility: Only accredited investors are qualified to invest in funds whereas sophisticated investors can invest in certain individual deals.

Another minor advantage of funds to individual deals is the paperwork. When investing in a fund, you complete once set of documents at the beginning of the fund and then are invested into multiple apartments. Each individual deal you invest in outside of a fund come with its own set of paperwork.

Which is the ideal passive investment?

First, you need to determine if you are an accredited investor.

Assuming you are an accredited investor, all other things being equal (the GPs, market, and business plan) the only major differences between the two options are return and risk. 

Investing in individual deals come with a higher level of risk, meaning both the profit upside and profit downside is greater.

Investing in funds diversifies your investment into multiple apartments and markets, reducing the risks and resulting in a more stable return.

If you want to maximize the chances of preserving your capital in return of a lower return, investing in a fund is the ideal option for you.

If you are more focused on growing your capital and potentially receiving a higher return, investing in individual deals is the ideal option for you. 

 

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The Best Shortcut to Getting Started in Multifamily Investing

You know what one of my favorite things is about interviewing multiple people each week for the Best Real Estate Investing Advice Ever Show? Occasionally, I will come across an investor with a mind-blowing amount of creativity and hustle.

They were in a bad financial spot, having no money to invest and no real estate experience. Yet, through massive effort and ingenuity, they were able to get started in real estate investing. 

Usually, they identified a unique, unconventional path – dare I say, a short cut – to success. 

One recent guest I interviewed that fit the above description was Chris Thomas. In fact, before interviewing him, I read his biography and was perplexed. It said he was a short-term rental investor with only two and a half years of experience, yet he had somehow amassed a portfolio of over 250 rentals (at the time of the interview).

“How is this possible?” I asked myself. Once the interview began, I was even more confused. Chris was in the backyard at one of his rentals, wearing a t-shirt covered in sweat (which I was actually kind of jealous of because it was around 30 degrees in Chicago) and holding his iPhone as the camera and microphone. He tells me that before he got started in real estate, he was a high school dropout on welfare (and was maybe even without a home for a period of time).  

After telling me more about his background, he begins to explain his investment strategy. To be honest, even 10 minutes into the interview, I was still uncertain as to how he built his portfolio. All I knew was he somehow began quickly amassing short-term rentals.

It wasn’t until I asked Chris, “how did you buy over 20 rentals in 8 months with no money and no experience? I don’t understand” that I finally realized what he was doing. And the reason for my confusion is that I had never heard of someone implementing that kind of strategy before. I didn’t realize it was possible (or even legal).

Now that I understand what he did, I’m here to convey his strategy to you. 

Here is how Chris went from welfare to controlling over 250 units, without prior real estate experience.

Overall, Chris uses over people’s money to lease and furnish individual units in large multifamily buildings. Then, he manages the unit as a short-term rental on AirBnB.

The first thing Chris needed to do was secure private equity from investors. The problem was that he didn’t know anyone with money. So, he told me that for two days in a row, with little sleep, we sent 500 messages on LinkedIn. The reason it took so long is because he had to manually type each message since LinkedIn marks copy-and-pasted direct messages as junk.

Chris found LinkedIn profiles with the word “investor” in their tagline. Then, he reviewed their profile and sent a custom message based on their interests or an article they recently liked. He said the was completely transparent in the message. He explained what he was doing (rent, furnishing, and AirBnBing apartments), that he was new to this but was working with someone who currently managed one AirBnB, and asked if they would be interested.

Of the 500 messages, 40 responded. After further conversations over the phone, 11 agreed to invest.

Next, Chris needed to find units to rent, which also required massive effort. He reached out to many property managers and apartment owners, asking if he could rent, furnish and AirBnB their unit. Countless managers and owners declined. However, enough agreed to allow Chris’s new investors to pick up 3 to 5 units each.

After the investors submited their funds, Chris was responsible for furnishing the unit and managing the AirBnB process in its entirety. The investor is only responsible for signing on the lease and setting up a direct deposit for the monthly rent.

Each investor invests $7,500 to cover the first month’s rent, security deposit, furniture, and Chris’s $1500 to $2000 fulfillment fee. Each month, the investors receive the cash flow left over at paying expenses and Chris’s $500 to $750 management fee, which is approximately $2,000.

When Chris and I spoke, he was managing 70 units for other investors. That means he made between $105,000 to $140,000 in fulfilment fees and was generating between $35,000 and $52,500 each month in income. 

Once he had proof of concept with his investors’ investments, he began investing in the units in the same buildings. At the time of our conversation, Chris was personally invested in 187 units. 

He said the units generate ~$2,700 per month in income. Based on a $5,000 ($7,500 minus the fulfillment fee) investment per unit, the annual ROI is nearly 650%. 

Now, I didn’t write this blog post with the intention of convincing someone to execute Chris’s strategy, because I am uncertain whether it can work in every market (or if it is unique to California Chris’s market) or if it adheres to securities law regarding raising capital. 

However, I think we can use Chris’s story as an example of how hard work and imagination can allow you to overcome whatever obstacle is keeping you from getting started or scaling. If a high school drop out on welfare can create a seven-figure real estate business in less than three years without any money or experience, what is your excuse?

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Accredited Investor Status – What It Means For You

Let’s take a look into the term “accredited investor”. Every week I have the privilege to speak with investors who are excited to start investing in multifamily syndications or real estate “private placements”. These investors are usually on the search to find access to deals. Since I am a full-time passive multifamily investor myself, I’m always happy to lend a hand, however, it is important to note that many operators and general partners in this space require an accredited investor status to participate in their offerings.

What does accredited investor mean anyway? Besides a designation that gives a person access to private placement investment opportunities.

According to www.investor.gov the SEC (Securities and Exchange Commission) definition of an accredited investor, in the context of a natural person, includes anyone who:

  • Earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
  • Has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence). 

 

There are other ways to qualify which can be found on www.sec.gov but for the purposes of this blog, I’m going to assume most of the audience falls under the individual accredited investor status.

 

Why Accreditation Exists

The SEC created this definition to identity investors and entities who are considered “sophisticated” and are able to absorb a potential financial loss. Essentially, the criteria was created as a protective measurement to protect inexperienced investors from getting into riskier projects; especially because they may not have the financial means to cover a loss. Additionally, the SEC uses this label to regulate investment companies against advertising to or soliciting investments from non-accredited investors. 

The Advantages to Being Accredited

In short, the advantage to being an accredited investor is that you have an opportunity to hear about more deals, gain access to them, and ultimately invest in those deals if you choose. A few examples of accredited investor opportunities may include:

  • Real Estate Syndications (Private Placements) 
  • Angel Investing / Venture Capital
  • Hedge Funds

Becoming an Accredited Investor

It’s really quite simple to “claim” accredited investor status. In fact, some private placements only require self-qualification. Essentially, you check a box as part of the legal documents process that certifies you are an accredited investor and by which method you meet the qualification requirements. There are of course, additional disclaimers and fields where you confirm that you understand the implications involved. 

In other types of private placement offerings, such as a 506(c), you may be required to submit a letter of verification from a CPA, attorney, broker-dealer or a third party verification service such as www.verifyinvestor.com. In any case, you should only certify that you are an accredited investor if you actually are. If you falsely claim that you are accredited, it could cause some legal ramifications down the road for you and the company you invest with.

Summary

Ultimately, being an accredited investor allows you access to additional investment offerings and opportunities that most do not have access to. If you are actively looking for deals and talking to investment firms in the industry, it is likely that you will come across opportunities for accredited investors only. Keep in mind that this is for compliance and regulation purposes. If you are not and accredited investor, don’t worry, there are plenty of investment opportunities available that you may be able to participate in as a non-accredited but “sophisticated” investor. I will cover this topic with more detail in an upcoming post. 

To Your Success

 

Travis Watts 

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Rich Fettke on Supercharging Remote Teams

Real estate is a high-touch business that must now adapt to working remotely. If you want a more effective team or professional network, real estate investor Rich Fettke has actionable insight for you. Rich is co-CEO of Real Wealth Network and took his company completely virtual almost ten years ago. As a guest on the Joe Fairless Best Ever Show podcast, Rich offers tips on building a happy and motivated remote team.

About Rich Fettke and Real Wealth Network

Rich Fettke is co-CEO of Real Wealth Network, an educational and referral service for the passive investor in single and multifamily properties and other opportunities. He brings a strong track record in business and personal coaching helping entrepreneurs grow their businesses.

A turning point came when Rich was diagnosed with terminal cancer. He and his wife, Kathy, scrambled to plan their children’s futures should the worst happen. After much research, Kathy determined that real estate investing was the path to financial security.

The diagnosis was overly dire, and Rich survived cancer. Inspired by Kathy’s research on income generation, the couple founded Real Wealth Network to help friends learn to invest in multifamily and other real estate. The company has grown to include brokerage and syndications operations that offer opportunities for passive investing.

Rich develops teams and systems for his 25 employees, all currently working remotely. Here are his must-haves for a dynamic remote team.

Define Your Culture

Some business areas need pruning during tough times, but your company culture is not one of them. If Rich Fettke has one key takeaway for you, it’s this: “Be sure to determine your core values and use them as hiring criteria.”

Know Your Core Values

Almost every company lists impressive-sounding values and claims to honor them. But when pandemic constraints or other hardships test a business, the truth reveals itself. You must commit to executing on your values every day and holding yourself and the rest of your team accountable.

Here are some of Real Wealth Network’s values that translate directly into actionable tips for remote work.

  • Integrity
  • Transparency
  • Connection
  • Accountability

Get your team’s input and buy-in on the company core values. Employees are more dedicated and self-directed when they feel some cultural ownership.

Hire to Your Core Values

An employee or partner is either adding or subtracting value. No matter how alluring a candidate’s profile, he or she will compromise your team if core principles are misaligned. Even a passive investor can impact your network’s wellbeing.

Rich suggests including core values in your interview questions. Tell candidates one of your values and ask them to walk you through a scenario when they had to act upon that value under pressure. What was at stake, and how did they handle it?

To help vet leaders, Rich also asks prospective employees how they would manage others in light of those values. If your team member fails to deliver, how do you address that? If your ordinarily effective peer is dropping the ball, how do you intervene? These spontaneous answers can reveal a lot about a candidate’s values, strengths, and fit for your unique team.

Lead with Values

After you document your core values and refine your hiring process, the hard work begins. Each day, your remote team has to show up and live those values virtually. Unlike when working onsite, the in-person feedback and social cues that help keep us on our toes are lacking. Subtle employee behaviors or oversights are also easier to miss. Your remote team must understand behavioral expectations and the exact consequences of falling short.

Expect Integrity

You’ve probably known quality employees who were let go with seemingly no warning, or perhaps experienced this yourself. Rich explains how Real Wealth implements the three-strikes rule transparently so that everyone is clear on accountability. This approach avoids the murkiness that often surrounds many companies’ evaluation process, especially in remote environments.

As a manager, you hold a one-on-one with the employee having the issue, advise this is strike one, and explain why. You make sure the employee understands and can repeat it back. You reiterate the three-strikes rule and that a third strike means termination. If employees gain a third strike and are terminated, they almost always admit responsibility and a lack of enthusiasm for the job.

In contrast to giving three chances, don’t be afraid to jettison employees who consistently violate integrity standards. Everyone has an occasional off day, but people who don’t meet your company’s ethical standards need to move on.

Show Transparency

You want to set up transparent systems and processes and encourage open, honest communication. It’s essential to let your team know the metrics evaluating their behavior. Rich shares that at Real Wealth, flagrant integrity violations merit instant dismissal. Breaking the core value of connection by being rude, on the other hand, might call for three strikes.

Gossip and complaining might be a little tougher on a remote team but still occur. Rich and Kathy decided that transparency meant no behind-the-back talk, however seemingly innocent. When you don’t interact in person, it’s easy to blindside employees with poor feedback after it’s too late for them to correct deficits.

In a rush to execute under pressure, businesses sometimes skip transparency basics such as creating an organization chart and job roles. Even a real estate investor with a small team will benefit from organizational clarity. It’s especially important to document in a remote environment, as the days of yelling a question over the cube wall are over.

The documentation should be concise, visual, and stored in an accessible central location. Your team members need to know:

  • What’s expected of them
  • The performance metrics
  • How to get help
  • How much problem-solving ownership they have
  • Who the managers and experts are

In a unique spin on visioning, Rich suggests creating an org chart for your business as it will be in five years. As your company grows and you fill positions, you’ll be encouraged to replace your photo with those of hires who can do their roles better than you can.

Build Connection

Effective systems encourage people to connect in productive and enjoyable ways. You want to avoid typical group time wasters, such as unnecessary meetings.

Rich and Kathy hold quarterly all-hands meetings to communicate important news. This “state of the company” address covers accomplishments, financial performance, profit sharing, and upcoming changes.

When conditions permit, Rich believes in the old-fashioned company retreat for much-needed team bonding. At the yearly three-day event, team members focus on what went well and not so well, what they learned, and the roadmap ahead. They also celebrate each other’s accomplishments. This in-person time builds relationships that help power the group through the rest of the remote year.

Accountability: Rock Your Team Mindset

If you work remotely, it’s easy to fall prey to distractions or a sense of disconnection from the company mission. Real Wealth met this head-on by implementing the Entrepreneurial Operating System®, or EOS, a holistic operations toolkit for smaller businesses. This method sets specific expectations for employees, helps them focus on the bottom line, and gives them ownership of results.

If you’re wondering which system Rich uses to track employee progress, his answer is rocks. Each team member has three to five “rocks” that represent quarterly targets. Rather than micromanaging employees, managers tell them, “Here’s your rock.” The employees own delivering results.

To make quarterly targets more tangible, people can place actual rocks in jars on their desks. That visual reminder of what’s essential helps them prioritize work and minimize distractions.

Another strategy is to partition teams under leads who can work closely with the smaller group. This model promotes individual accountability and open communication.

Run Lean on Tech

The right platforms for your business enable remote collaboration without intruding. How do you balance tech need and overhead?

For starters, Real Wealth doesn’t always meet over video. Skipping the virtual face time cuts down on complexity and that angst of having to look good on camera. The company holds a monthly all-hands meeting, and teams hold weekly meetings. Most video calls involve screen sharing but no distracting faces, allowing attendees to focus on the well-structured agenda. The monthly meeting is an opportunity for people to see each other and connect visually.

After grappling early on with tech overkill, Real Wealth now leverages a few platforms with high returns. For project and portfolio management, Rich and his team use the tried-and-true Basecamp. To help manage meetings and follow-up items, they use Ninety, which implements EOS principles. GoToMeeting and Zoom are favorites for video calls.

Your Turn

Remote teams are the new social business climate. Even if passive investing, you want to mind your business relationships actively. Use Rich Fettke’s experience to help you hone your professional core values and processes. You will enrich your team or network on all levels.

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Investing in Apartments as a Limited Partner

Why Apartments Are “The Asset of Choice” 

Large multifamily properties have historically been owned by institutional investors such as mutual funds, REITs, insurance companies, and pension plans because of the stability and yield that apartments offer. 


Being a Limited Partner investor allows an accredited investor and in some cases, a sophisticated investor an opportunity to buy a passive ownership stake and participate in these same large real estate acquisitions; a 400-unit apartment building, as an example. The Limited Partners (individual passive investors) can experience the same buying power, leverage, and potential tax benefits, just as institutional investors do. 

 

The individual passive investor has the benefit of owning a percentage of an apartment community without the day-to-day management obligations. Additional benefits may include monthly or quarterly cash flow distributions, potential income sheltering through depreciation and tax benefits, debt leverage, principal pay-down, and potential appreciation in value.

Predictable Income


An apartment building’s revenue is derived from rents paid by the residents for leased units and other income-generating items such as covered parking spaces, fenced-in yards, coin laundry facilities, on-site storage facilities, to name a few. A strong property management team will focus on attracting qualified residents to the property and carefully have lease agreements executed, often with contracts lasting 12 months or longer. These practices in turn, generate long-term, consistent cash flow for the Limited Partner investors. 

 

Forced Appreciation


By making improvements to an existing property (known as a value-add business plan), the property’s value can increase through this repositioning process. By increasing rents and occupancy, higher levels of revenue are generated. Since multifamily apartments are primarily valued based on the income they produce, a value-add business model can in-a-sense, “force” the property to appreciate in value rather than relying on market conditions or annual inflation. When the property is refinanced or sold, the proceeds can be returned to the Limited Partners or in some cases, can be rolled into another “like-kind” investment property using a 1031-exchange to defer the taxes.

 

Steady Cash Flow


One of the greatest advantages of real estate investing is the steady, and often tax-sheltered, monthly cash flow. Few investments can be bought with the same kind of steady cash flow return combined with the appreciation potential.

 

Tax Benefits


Distributions made to the Limited Partners are treated more favorably than most other types of investments because a significant portion of the distributions are often not considered income according to the tax code. This is due to the flow-through of expenses and depreciation. Additionally, the capital appreciation is deferred from taxation until the assets are sold and may be further deferred from taxation if a 1031-exchange is implemented. 

 

Total Returns


An apartment’s combination of stable cash flow (primarily derived from rents), capital gains (resulting from increased property value upon sale), principal paydown (from residents paying down the loan balance over time) and tax savings (due to the current IRS rules and the additional benefits from the Tax Cuts and Jobs Act passed in 2017) provide returns that can be quite impressive given the current state of the stock market and the lack of yield offered by banks, money markets, CDs, and bonds. 

 

A Hedge Against Inflation
Historically speaking, rents, property values, and the replacement cost of real estate improvements rise with inflation. This makes real estate a particularly effective hedge against inflation, and might be an asset class to help you balance your investment portfolio, especially in the low yield environment we are in today. 

 

Ownership of Real Estate
Passive investors desiring steady income with a balance between risk and reward, may consider multifamily apartment investing as a Limited Partner to provide a solid foundation for building lasting wealth. Additionally, the ability to use a “hands-off” investing approach can be useful in building passive income streams that, in turn, free up time to spend on what matters most to the individual investor. 

 

To Your Success

Travis Watts 

 

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People Are Fleeing Urban Centers for the Suburbs – What This Means for Apartment Investors

One of the main metrics I look at when analyzing a prospective market to invest in is the population growth. 

The thought process behind this is simple: if the population is increasing, the demand for real estate is increasing, and vice versa. 

Of course, there are other relevant factors like the supply side of the equation. However, there are some investors I’ve met who ONLY select markets based on the net migration. If more people are moving out of the market than are moving in, it is automatically disqualified.  

U-Haul is actually a top source for migration data, which they release annually. you can view their migration reports here.

When you understand where people are moving to and moving from, you can adjust your apartment business plan accordingly. If you are in a market with a positive net migration, you are sitting pretty. However, if you are in a market with a negative net migration, there may be trouble on the horizon.

One of the biggest migration trends resulting in part due to the coronavirus pandemic is the urban-to-suburban pipeline

Not only are more people interested in leaving urban markets, but in some states, such as New York, the exodus has already begun.

The Hill, in their article “Americans leave large cities for suburban areas and rural towns”, says that approximately 250,000 residents plan on moving out of New York City while another two million consider moving out of the state altogether. Also, more than 16,000 New Yorkers already moved to suburban Connecticut. 

And this trend isn’t unique to New York. 

“A record 27.4% of Redfin.com users looked to move to another metro area in the second quarter of 2020,” reads a Redfin analysis performed in July 2020

The most popular destinations are Phoenix, Sacramento, Las Vegas, Austin, and Atlanta. Here is a breakdown of the top 10 metros by net inflow of Redfin users and their top origin.

 

The locations with the large outflows were New York City, San Francisco, Los Angeles, Washington DC, and Chicago. Here is a breakdown of the top 10 metros by net inflow of Redfin users and their top origins.

 

Are any of your investment markets on either one of these lists?

There is also an increase in demand for rural markets. For example, according to US News, 57% of realtors who responded to their survey said they’ve seen an increase in interest in rural Montana. The main reasons were because of its low coronavirus infection rate, as well as because they grew up and had family there. The same The Hill article cited above said real estate sales in Montana were 10% higher year-over-year, and that rural Colorado, Oregon, and Maine experienced similar increases in sales.

So why are people leaving the urban centers? 

Another telling article was written in NASDAQ entitled “The Urban-to-Suburban Exodus May Be The Biggest in 50 Years.” This article provided more data on the reasons why New Yorkers were fleeing urban centers. The top 5 reasons were cost of living, crime, looking for a non-urban lifestyle, concern over the spread of the coronavirus and the ability to work from home.

One of the major COVID-related changes that is driving more people out of urban centers is working from home

According to MARKINBLOG, 88% of companies are encouraging or requiring employees to work from home due to COVID and 99% of people prefer to work remotely. Compare this to just 3.4% of the US population working remotely pre-COVID, this has the possibility to massively disrupt real estate, especially the type of real estate that will be demanded.

Since employees aren’t required to go to the office, they are choosing to live in areas that are more affordable, closer to family, and closer to local amenities while still having direct access to a downtown. Hence, they are leaving urban areas for the suburbs. 

However, they are also choosing to head to the suburbs due to the type of homes that are offered. For example, people are looking for more outdoor spaces (whether that is a private yard or nearby greenspaces and parks) and homes with an extra room to convert into a home office. Greenspace is universally nonexistent in a lot of urban areas, and the cost of an extra bedroom in urban areas is also financially unrealistic for many would be buyers and renters. Therefore, if they want to see real green grass and trees, as well as have a home office, the suburbs or rural areas are their only options.

What this means for you?

As a multifamily real estate investor, you need to understand the population and migration trends in your investment market.

If you are heavily invested in major urban centers, it may be time to consider a pivot and diversify into suburban areas.

This is great news for those already invested in suburban areas, as you should benefit from both an increase in rents as well as an increase in value due to falling cap rates.

Newer investors can take advantage of the low barrier of entry since real estate is generally more affordable in suburban and rural markets.

No one knows for certain what the future holds for real estate post-COVID. However, due to other factors leading up to the pandemic (which I outline in my article about why I am confident in multifamily) combined with the migration trend outlined in this article, I believe multifamily real estate in suburban areas will thrive in the years to come.

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