Apartment-Multifamily Real Estate Syndication

Apartment syndication is a great way to invest your money, but doing so requires a lot of work and maybe even some expert guidance. If you are new to investing, you probably have a lot of questions about real estate syndication. How do you get a project off the ground? How do you find the right people with whom to do business? What is the difference between active and passive investing, and which option is best for you? Over the years, I have helped curious investors like yourself navigate the world of apartment syndication, and have done so successfully. That’s why I am confident I have the resources you need to thrive, and, as my clients have learned, since I left the world of advertising and immersed myself in real estate, my goal is to help you “do more good.” That means freeing up your time so you can use it as you wish. Today, I am happy to share some of my real estate syndication insights with you for free through my comprehensive blog. Below, you will find many posts that can help you get started with apartment syndication, including where to find great apartment real estate, what it takes to stand apart from other syndicators, and how to close the deal on your first deal. After reading these posts, you may want to schedule a planning session, which can teach you how to buy apartments and how to bring in investors; additionally, you can learn how to start investing with me, which would lead to plenty of passive investment opportunities, provided you are an accredited investor.

Top 10 Ways to Add Value to Apartment Communities

If you are on this blog then it is fair to say you are interested in multifamily or apartments for your portfolio. This particular type of real estate investing is a great choice because it allows you to have greater control over your portfolio’s profitability by adding value to the property. How so?

When you purchase multifamily properties, an efficient way to increase your property’s value is to take action on multiple fronts. Below is a list of the value-add opportunities that will show better returns in months:

 

1. Property Updates

Surprisingly, a fresh coat of paint, landscaping, light fixtures, door handles, and drawer pulls will spark life into a property that would otherwise be humming along. A simple trip to the hardware store may be all you need to put a new perspective on a property that is currently performing fine. It would also be a way to show that you are in control of your property, it has your attention, and to show the tenants you take pride in ownership of the property. It is also a subtle way to telegraph that you may be trying to keep up with the market.

 

2. Repairs

Repairing that running toilet, door hinge, dishwasher, etc. goes far in keeping your properties in good shape and again, signals to your tenants that the property is an asset you care about. Simple everyday fixes go a long way to maintaining value and keeping your property market-ready.

 

3. Management

Having centralized management who is responsive to tenants goes farther than anyone in the real estate game really gives it credit for. With multifamily units, the management is the face of the owner. Thus, when a smiling and responsive manager or management team answers that service call, responds to a question, or just pops by the unit to ask if everything is going well, that leads to tenant satisfaction, which leads to tenants staying longer and your door turnover going down.

 

4. Technology

It’s 2021 and everyone has a smartphone in their pocket, hand, or purse. Installing software to allow tenant interaction for service calls, rent payments, and communication with the property management lends itself to making the rental process more effortless for the tenants and the management. Here is a blog post with more ideas on how to use technology to improve your multifamily investments.

 

5. Parking

Sometimes parking can be a hit or miss endeavor for the tenants and their guests. If there is no space that is another issue, but if you have the space, these simple steps will make everyone’s life easier and lead to better tenant retention.

  • Keep the lot(s) smooth and clean;
  • Keep the striping clear and bright;
  • Have lights for accident prevention and the safety of your tenants;
  • Make sure there is access for the elderly, and those with additional needs; and
  • Provide shade to keep cars cool and safe.

 

6. Laundry

Installing pay-per-use laundry equipment is a hidden gem in the multifamily space. Laundry equipment now can be purchased to accept coins, credit cards, debit cards, or even laundry-specific money cards that can be loaded with cash on-site. Not only does this generate more money for the property, but it also engenders loyalty to the property and the management who are taking care of the needs of the tenants. The washing and drying units are right there, with detergent and fabric softener that can be purchased by the box.

 

7. Pets

I have dogs. I love my dogs. I spend money on my dogs just like the rest of us. I expect to pay pet rent if I am renting. Charging a pet deposit and adding $25 a month is more than acceptable to any pet owner. Also, a dedicated pet area for Fido’s daily droppings, playing fetch, or socializing is greatly appreciated by pet-owning and non-pet-owning tenants alike. These types of value-adds also cut down on the nastiness that can be discovered when a tenant exits the unit if those things are not provided.

 

8. Storage

Extra storage, whether it is a storage facility or an extra closet on the patio, is a value-add most do not think about. So many tenants have no place to keep that Christmas tree they put up every year, among other items. This extra space also makes the property more valuable.

 

9. Submetering

Many multifamily properties pick up the tab each month for water or some other utility. By individually metering the units and billing tenants for their individually measured utility usage, you will SAVE A TON of money.

 

10. Trash Pick-Up

Without overstating the obvious, people produce trash. Make it easier for them to get rid of their trash and have it hauled away. Convenient trash cans, trash shoots to a bigger receptacle, or being able to walk to the driveway’s end with a provided can will keep your property clean and help to invest your tenants in the cleanliness of the property.

 

These simple steps are effective for landlords to control and increase property value. Moreover, these steps help control tenant retention and create a community that is valued in your area and shows value in your monthly returns. Best of Luck out there!

 

About the Author:

Brian T. Boyd is a licensed attorney in Tennessee who handles commercial, real estate, construction, and business issues for clients. He and his wife also invest in real estate. To learn more about Brian, visit www.boydlegal.co.

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6 Things You Must Know When Scaling from Residential to Commercial Investments

6 Things You Must Know When Scaling from Residential to Commercial Investments

Few investors are content with their current portfolio – most want to scale and add more units. This is especially true for residential investors looking to make the leap to commercial apartments. However, there are pitfalls that could derail your goals if you are unaware of the landscape. Many investors begin with residential multifamily (two to four units) with plans to move up to commercial multifamily (five or more units). It’s kind of like trading in those green houses in Monopoly for the red hotel. But unlike the popular board game, it’s not as simple as collecting more rent. There are key differences that investors should be aware of when making the leap from residential to commercial multifamily apartments.

Scaling from residential to multifamily entails managing a different caliber of challenges. Recognizing the key differences allows you to prepare and position yourself accordingly when pursuing larger opportunities. It also allows you to avoid key mistakes when scaling into commercial apartments. Here is a list of differences to note and mistakes to avoid.

1. Predictability

One of the main differences between residential and commercial apartments is the scale. Residential properties are two to four units, while commercial is five units and above. However, the number of units only tells part of the story. The more units you have, the easier it is to anticipate and forecast monthly income and expenses. If you have a two-unit property, you are either 100% occupied, 50% occupied, or 0% occupied. And one major expense can wipe out all the cash flow for a year.

Conversely, if you have a 100-unit property, one resident moving out does not drastically change your occupancy, operations, or projections. In fact, you are anticipating a certain amount of turnover each month for a net occupancy in the 90-95% range. This predictability allows you to make better financial projections, thus reducing the risk of the unknown. With that noted, you want to make sure you accurately forecast expenses because an extra $50 per unit, per month in expenses quickly adds up.

2. Sophistication

In residential real estate, it is common to come across an owner who is motivated to sell due to a lifestyle change, inheritance, or financial distress. You may also come across an inexperienced real estate agent that underpriced or overpriced a deal. And while this is possible in commercial multifamily, don’t get your hopes up.

For starters, factor in that commercial property owners have been successful enough to actually own a commercial property. These properties require more experience and capital than residential properties. Also note that these properties have less volatility than residential, and multifamily has appreciated drastically over the last 10 years, with the price per door shooting up 156% according to a study by Commercial Search.

Consequently, you are less likely to encounter a desperate, motivated seller in the commercial multifamily space. In a seller’s market, owners are actually interviewing you to see if you are worthy of their time. A colleague of mine learned this the hard way when an owner sent her a list of questions to answer before they would even let her tour a building. You’ll need to establish credibility with brokers, owners, and other industry professionals if you want to gain traction with commercial apartments.

3. Valuation

Residential properties are valued based on neighborhood comps, so if your neighbor does not maximize their value or sells at a discount, it will impact your valuation. Most investors of two to four-unit properties are not professional investors, so they may not actively raise rents or employ the strategies and techniques to maximize returns.

Commercial properties are sold based on the profits they generate. In this case, you are not as impacted by your neighbor selling at a discount. You will have more control over the value with the ability to increase revenue and manage expenses. Income is not limited to rent, as you can charge other fees and offer revenue-generating services such as coin-operated laundry, storage, covered parking, and more. All of this additional income boosts cash flow and the overall value of the property.

4. Management

Residential properties are easier to self-manage or find a qualified property manager (PM). Typically, these property managers operate multiple properties at a time. Most charge a fee based on rent collected, with additional fees for services like coming onsite to the property.

Smaller commercial properties (five to 10 units) will operate similarly but require a PM that can dedicate time to maintain the personal touches of a small commercial property. The next size up is 10 to 75 units and many investors struggle to find quality PMs in this range. These properties tend to overwhelm residential PMs and offer little financial upside for seasoned commercial PMs.

This caught me completely off-guard when I bought a 28-unit building and found a sizeable gap between my expectations and realities. Half of the companies we interviewed were not qualified to manage the building and the other half declined because they felt it was too small for their business. We eventually found a good fit, but this was a major eye-opener. If you are looking for deals in the 10-to-75-unit range, spend an ample amount of time finding a quality PM.

Larger apartments (75 units or more) can handle a dedicated onsite staff. This provides a professional solution for residents with business hours to address their needs. It also allows for better attention to details, such as picking up litter, which would be difficult to manage without onsite staff. In addition, you still have the resources of a larger PM firm to help you drive efficiencies and optimize income.

5. Debt

Standard residential debt is a 30-year term, amortized over 30 years so the only factor investors consider is the interest rate. For commercial apartments, the terms range widely from bridge loan products to agency debt. Bridge loans are shorter in nature, usually two or three years, with higher interest rates. Agency loans are usually set for five, seven, 10, 12, or 15 years. The amortization schedule is usually set at 20, 25, or 30 years. And then there is the pre-payment penalty to consider.

Outside of the terms, the loan qualification process differs among the different types of loans. Residential loans examine the borrower closely and want to see a strong work history with W2 income. Lenders rely heavily on your credit history and investigate your source of capital to ensure you have the funds to cover the down payment for the investment.

Commercial lenders look at the borrower, but they are usually more concerned with the property’s current performance and your business plan. They will underwrite the deal and use their own numbers to determine their comfort level. To qualify for a commercial loan, borrowers will need to show the net worth and liquidity equal to the loan amount, along with evidence of some operational experience. If there are gaps with your personal balance sheet or experience, commercial lenders will allow you to bring in partners to help meet these requirements.

6. Equity Structure

When acquiring residential properties, you are typically going to own them yourself or partner with one or two other entities. Typically, all parties will apply and sign on the loan and share the equity according to each member’s contributions. This scenario is called a joint venture or JV.  Commercial apartments present an array of options for stacking the capital. If each investor will be active, a JV is still common. However, if some of the investors will be passive, this is considered a syndication, and typically you will have a class of shares for the active partners and a separate class of shares for all of the passive or limited partners. This can get fairly complex and requires the assistance of a securities attorney to ensure you are in compliance with current regulations.

These six areas certainly are not the only differences worth noting, but they are some of the areas that surprise many investors. Whether you plan on moving into commercial apartments to invest in syndications or just to get more doors under one roof, you will want to understand the key differences between residential and commercial multifamily to make a smooth transition.

 

John Casmon has helped families invest passively in over $90 million worth of apartments. He is also the host of the #1 rated multifamily podcast, Target Market Insights: Multifamily + Marketing. Prior to multifamily, John was a marketing executive overseeing campaigns for Buick, Nike, Coors Light, and Mtn Dew: casmoncapital.com

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In A Real Estate Syndication Deal, What’s A Capital Stack And Why Should I Care

In a Real Estate Syndication Deal, What’s a Capital Stack and Why Should I Care?

If you invest at a Class B level and you find out that other participants in the syndication are receiving distributions first, you would want to know why, wouldn’t you?

The order in which distributions are paid in a real estate syndication investment is called the capital stack and your clarity on this concept is critical because you need to know where you fall in order of priority for returns.

Understanding the order in which returns are paid in a real estate syndication will allow you to choose real estate investment syndication deals that help you toward your financial goals based on how the payout is structured. Your knowledge of the risk and priority at each tier is a vital piece of knowing why and when you’ll receive distributions.

You’re in the right place if you want to know what the capital stack is, why it’s essential, and how it impacts you.

 

The Waterfall

The way the capital stack works is called a waterfall. Imagine a group of investors in a real estate syndication deal listed in order – those with the lowest returns and the highest risk at the top, and those with the highest returns and lowest risk at the bottom. When cash flow is available, it gets distributed like a waterfall, starting at the top and trickling downward.

A waterfall structure is outlined in each deals’ PPM (private placement memorandum) at the beginning of a deal. It explains who, how, and when each partner, whether general or limited, gets paid during the real estate syndication deal.

Some classes receive only cash flow, while others participate recieve cash flow distributions and capital returns profits at a sale or refinance. So, you want to understand where your potential investment is in the waterfall structure and know which pieces apply to you and how they might help you toward your financial goals.

  • Are you solely focused on creating passive income in the form of monthly or quarterly cash flow?
  • Are you mostly interested in appreciation on the property and “winning big” at the sale of the property?
  • Are you desiring a mix of both – a little support in the cash flow department plus some longer-term gains?

As we explore various waterfall structures and capital stack styles, keep in mind that any common equity or preferred equity partner is not in a position of debt. Also, cash flow distributions are always paid out to partners after expenses, fees, and debt on the property.

 

The Impact

The capital stack affects investors in three main ways:

  • Cash on cash
  • IRR (Internal Rate of Return)
  • Velocity

Cash on cash returns is the before-tax earnings an investor makes on their invested capital, also referred to as cash flow or distributions. If you’re in the preferred tier, you may have more significant cash on cash returns because preferred investors have a higher priority, so they get paid first.

IRR means Internal Rate of Return and is a metric to measure the deal’s profitability (cash and equity). It’s a fancy way of calculating your return while accounting for the time value of money, a concept that holds today’s money more valuable to you than the same amount in the future.

Velocity is your ability to invest in more deals at a faster rate. As an example, when a deal gets refinanced, you may get some capital back if you’re participating in a capital returns position (not everyone gets their capital back, more on that below). You can take that returned capital and invest in another project. By flipping your returned capital immediately into another syndication, you’re able to earn returns on two real estate syndication deals at the same time using the same capital.

Having clarity about each of these concepts and how each position in the waterfall or capital stack impacts each class provides you an advantage where you’re able to make better investment decisions to support your personal financial goals and achieve them faster.

 

The Capital Stack

As an investor, you always want to do your own research on the property, vet the sponsor team, and you definitely want to know who gets paid what, and when each payout is supposed to happen. It’s nice to know what to expect and be utterly comfortable upfront so there’s no confusion as to when you’re getting paid, right?

Well, the capital stack in a real estate syndication investment is where debt and equity partners are ranked in order based on an inverse relationship between risk and priority. The highest priority, lowest risk partners are toward the top of the capital stack, while the lower priority, higher-risk partners are toward the bottom.

At the top, you’ll always have what we call senior debt. This includes mortgages and loans to finance the property. Just as you’d never miss a house payment, the senior debt is the highest priority, and they get paid first. Mortgage-type loans typically have a meager rate of return (2-4% for the past several years) in exchange for being top priority.

Next, there are second-level, mezzanine-type loans like second mortgages and bridge loans. These are also debt positions and are ranked as a higher priority and lower risk than our limited and general partner investors.

Continuing down the waterfall, you’ll see preferred equity (limited) partners come next. They are prioritized after debt payments but before the general partners. After the property mortgage, expenses, and fees are paid, preferred investors have “dibs” on distributable cash flow. There may be a higher investment required at this tier, and there are limited positions available at this level. Still, preferred investors often have a higher projected cash flow than other investors down the waterfall.

Following the preferred equity partners are the common equity (general) partners. This tier comes with the highest risk and the lowest priority. These investors are likely participating in capital returns and cashflow distributions but fall after the preferred level, typically with a split of earnings up to a certain percentage of cash flow.

There are two main types of capital stacks – single and dual-tier. Just as you might imagine, the dual-stack is a little more complicated.

 

Single-Tier Stack

In a typical single-tier stack, senior debt is at the top, carrying the lowest risk and ranking highest in priority. A great example of this is a mortgage at an approximate ~70% loan-to-value ratio.

Then you’ll see the common equity – class A preferred return below the senior debt carrying a little higher risk and a slightly less priority. This would likely be the limited partnership level in a single stack, which might be earning a 7-8% preferred return with a 70/30 split beyond that. These limited partners (you) are likely participating in capital returns and would receive a portion of the profit after the sale, too.

The last level in a single-tier stack is common equity – class B. These are likely the general investors who carry the most risk and are last on the priority list. They have no preferred return and only receive their 30% split of the 70/30 distributions if the property cashflows greater than the 7-8% preferred that the class A investors are projected to receive.

 

Dual-Tier Stack

Although more complicated, the dual-tier stack is becoming more popular because this waterfall structure can provide higher cash flow to class A investors with the tradeoff that Class A investors are not participating in capital returns.

First up again is the senior debt and includes any mortgages or loans on the property. After this is where it gets fun!

Next, there’s a preferred equity – class A level. This group receives projected cash flow at a preferred return only. This might be 9-10%, for example, with no payouts beyond that and no capital return. This is perfect for investors who are only looking for consistent cash flow distributions. One caveat might be that this class A preferred equity status likely comes with a more considerable up-front investment with limited shares available. For example, less than 30% of the deals’ shares might be available for a minimum $100,000 capital investment.

After the class A level, you have the common equity – class B investment level, which may include preferred returns, splits beyond the preferred percentage, and capital returns participation. For example, maybe a $50,000 capital investment would earn a projected ~ 7% preferred return, 70% of the 70/30 split, and capital returns at the sale.

Trickling down the waterfall, the last level would be the common equity – class C. These investors carry the highest risk and the lowest returns because they receive cash flow after other tiers. An example of payout at this level might look like 30% of the 70/30 split and capital returns after the sale in exchange for a $50,000 investment.

 

Conclusion

The capital stack and the waterfall schedule are always outlined in the PPM (private placement memorandum) and are available to you as a potential investor before you commit to the deal. But, the PPM details might seem like gibberish if you aren’t clear on the capital stack, how it works, or where you fall in priority for distributions.

Now that you’ve read a solid explanation and a few examples, your confidence in reading any PPM and selecting a real estate syndication deal that is in alignment with your investing goals should be through the roof!

 

Annie Dickerson and her partner Julie Lam are founders of Goodegg Investments – an award-winning real estate private equity firm – and creators of the Real Estate Accelerator Mentorship Program. They are authors of the book Investing For Good and hosts of the popular Life & Money Show podcast: https://goodegginvestments.com/ 

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How to Scale Your Syndication Business

How to Scale Your Syndication Business

Michael Blank, the founder of Nighthawk Equity, was one of the featured speakers at this year’s Best Ever Conference. In his presentation, he explained how a thought leadership platform is the key to raising more capital from passive investors and ultimately scaling your syndication business.

What is a thought leadership platform?

A thought leadership platform offers unique information, insights, and ideas that will position the owner of the platform as a credible and recognized expert in a specific business niche.

A thought leadership platform may take many different forms. Examples that other investors and we have found successful are:

  • Start a YouTube channel – interviewing real estate investors and entrepreneurs and/or providing daily/weekly/monthly insights.
  • Write a book and self-publish in the Amazon store.
  • Create an interview-based podcast and post to iTunes, Soundcloud, and other popular podcast business thought leadership platforms.
  • Create a blog, posting to your own personal site, and leveraging existing platforms like social media sites, LinkedIn, BiggerPockets, etc.
  • Start an in-person meetup group in your local market.
  • Host an annual real estate conference.
  • Create a weekly or monthly newsletter sent via email or mail.
  • Start an exclusive investor club.

What will a thought leadership platform achieve? 

The reason why a thought leadership platform allows you to scale your syndication business is that it automates the money-raising process. Without a thought leadership platform, you need to manually raise capital from family, friends, and others in your circle of influence, one person at a time. With a thought leadership platform, you will build new friendships and business relationships and maintain and grow existing ones. You will stay top-of-mind of prospective passive investors and other real estate entrepreneurs because you are constantly providing valuable, free information. Essentially, you will continuously and automatically network with people on a global level – even while you are asleep.

A thought leadership platform will allow you to attract the right passive investor. I will go into this in more detail in the next section of this blog. But high level, you can attract your “target investor” based on the type of content you create with your thought leadership platform.

Since a thought leadership platform allows you to automatically attract the right investor, you will increase the amount of money you can raise. The more money you raise, the bigger deals you can do. The bigger the deals, the more revenue you can reinvest into your thought leadership platform to attract more investors. Consequently, a thought leadership platform is a key to effortlessly scaling your syndication business and serving your passive investors.

The three pillars of a thought leadership platform

Now that you know the benefits of the thought leadership platform, what are the best practices to create and grow one? Michael finds that there are three pillars to a successful thought leadership platform.

 

1. Attract the right investor

To attract the “right” audience you have to identify your ideal potential investor. Be specific here. What is their demographic (age, occupation, location, income, etc.)? What are their interests?

Step one is attracting the right investor. The second part is capturing their contact information. You need to know who they are and how to reach them in order to convert them to an investor. The best way to capture their contact information is to offer them a “lead magnet” in return for their email address. For example, Michael’s lead magnet on his website is the “Nighthawk Investor Club.” When someone provides their contact information, they receive membership in an exclusive club of other passive investors.

The point is that people aren’t just going to proactively provide you with their contact information. They need an incentive, which is the purpose of the lead magnet.

 

2. Develop the relationship

Once someone has provided you with their contact information, you need to develop the relationship. They most likely aren’t going to invest immediately after signing up for your lead magnet. You’ll first need to earn their trust. This is accomplished by serving them valuable free content that educates them about your investment strategy. The more service you provide through free educational content, the more they will trust you and perceive you as a credible, expert commercial real estate investor.

Lead them on their investing journey with continuous content. Take them from someone with minimal to no knowledge of your investment strategy to having the confidence to invest in their first deal with you.

 

3. Scale your business

After attracting the right investor and developing the relationship, the investor will trust you enough and have enough confidence in their understanding of your investment model to invest in a deal. But this isn’t the end of the strategy. As you convert more and more leads into actual investors, your company will generate more and more revenue.

To benefit the most from a thought leadership platform, you need to reinvest a portion of your revenue back into your brand. Hire team members to help you manage and grow the thought leadership platform. Create additional platforms. Improve the quality of your current thought leadership platforms by hiring a graphic designer or podcast or video editor. Invest in paid advertising on social media to attract more leads. Revamp your website. Etc.

Overall, a thought leadership platform is a great way to efficiently scale your syndication business. The strategy is to attract the right investors with a lead magnet and develop the relationship through providing continuous valuable content. Then, as more leads are converted to investors, reinvest a portion of the revenue back into the thought leadership platform to scale even more.

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10 Markets with Greatest Rent Changes during COVID Year in Review

10 Markets with Greatest Rent Changes During COVID: Year in Review

One year ago, this month, we began to see major changes in the world due to the COVID pandemic. On the 12th of March, the NBA elected to suspend the remainder of the season. In hindsight, this act was the first domino that led to further lockdowns across the country.

The first city to shutdown was San Francisco on March 17th. The first state to shutdown was California on March 19th. By the end of March, 32 out of 50 states had locked down.

These lockdowns, as well as the economic stimulus and eviction moratoriums, have affected multifamily markets to varying degrees. Some markets experienced a large increase in rents while others experienced double-digit drops in rent.

In this blog post, I will outline the five markets with the greatest increase and the five markets with the greatest decrease in rents one year into the coronavirus pandemic lockdowns.

Markets with Greatest Increase in Rents

1. Boise, ID

  • Rent change since March 2020: +16.0%
  • Rent change month-over-month: +3.4%

2. Fresno, CA

  • Rent change since March 2020: +11.9%
  • Rent change month-over-month: +0.6%

3. Greensboro, NC

  • Rent change since March 2020: +9.5%
  • Rent change month-over-month: +0.9%

4. Gilbert, AZ

  • Rent change since March 2020: +9.0%
  • Rent change month-over-month: +0.6%

5. Riverside, CA

  • Rent change since March 2020: +8.9%
  • Rent change month-over-month: +1.3%

Markets with Greatest Decrease in Rents

1. San Francisco, CA

  • Rent change since March 2020: -23.2%
  • Rent change month-over-month: +3.4%

2. New York, NY

  • Rent change since March 2020: -18.7%
  • Rent change month-over-month: +0.9%

3. Seattle, WA

  • Rent change since March 2020: -18.5%
  • Rent change month-over-month: +2.2%

4. Oakland, CA

  • Rent change since March 2020: -15.2%
  • Rent change month-over-month: -0.5%

5. Boston, MA

  • Rent change since March 2020: -14.5%
  • Rent change month-over-month: +2.9%

You can view the YoY and MoM rent changes for all major US markets here.

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6 Lessons Learned with $2.8 Billion of Real Estate During COVID

Six Lessons Learned with $2.8 Billion of Real Estate During COVID

Jillian Helman of RealtyMogul was one of the speakers featured at this year’s Best Ever Conference. RealtyMogul has purchased over $2.8 billion in real estate. In her presentation, she outlined the top lessons she learned managing a massive portfolio of properties during the COVID-induced economic recession.

Lesson #1. Play defense before an economic crisis, not during a crisis

The first lesson is to make the proper preparations before an economic crisis occurs. Investors who are typically affected the most by economic recessions were too aggressive during periods of economic expansion.

The single most important defensive tactic to implement prior to a recession is conservative underwriting. Do not do deals that fail to meet your underwriting criteria. Do not make aggressive revenue growth assumptions based on historical natural appreciation trends or forecast reports. Do not assume a cap rate at exit that is equal to or less than the cap rate at purchase.

Two other defensive tactics Jillian follows prior to economic crises are having a strong property management team in place and having open conversations with lenders to ensure they pick up the phone during a recession.

Lesson #2. The proforma is always wrong

Not only is the proforma provided by the listing broker incorrect, but your yearly income and expense budget is also always wrong. Prior to submitting an offer on an opportunity, you must make a lot of underwriting assumptions. Many of these assumptions are confirmed or adjusted during the due diligence phase. However, there are always unknowns, which means your proforma is never 100% accurate.

Therefore, when creating your proforma for a new investment, Jillian recommends the following:

First, have a minimum contingency budget of at least 10%. For example, if you expect to invest $10,000 per unit, include a contingency budget of at least $1,000 per unit.

Second, scale back the number of units you expect to renovate and lease. Have a conversation with your property management company (or whoever is overseeing the renovations) to set a timeline they can stick to and assume an even more conservative one.

Third, assume an exit cap rate that is 1% greater than the cap rate at purchase. In doing so, you are assuming the market will be worse off at sale than at purchase. If it improves, great. You will exceed your return projections. However, if there is an economic crisis, you have already taken that into consideration in your underwriting.

Last, do a sensitivity analysis. In a sensitivity analysis, you vary certain metrics to determine how it affects the returns. For example, if you increase stabilized vacancy or bad debt (two metrics that change during recessions), does the deal still meet your investment criteria?

Lesson #3. Take a breath and be deliberate

No matter how much preparation and defense you play prior to an economic crisis, it is still a stressful experience once one occurs. That is why it is important to relax, determine what your top priorities are, and focus on those.

During COVID, Jillian’s top priorities have been the health and safety of the residents and her team, keeping occupancy up, and shoring up cash reserves. This involved taking a deep breath and deliberating to determine how to best focus on these priorities. For example, she decided to halt renovations, rent increases, and all nonessential repairs to shore up cash reserves and maintain occupancy.

Lesson #4. Don’t be afraid to innovate

Economic crises almost always require quick changes and adjustments to acquisition and asset management strategies. The COVID-induced crisis is no different.

The greatest change for most investors because of COVID has been the use of technology to show units to prospective residents. For example, Jillian (and many others) began using virtual, self-guided tours. Here is a blog post with a few other uses of technology in multifamily investing that are currently being used.

The point is that oftentimes changing your investing strategy is required during recessions.

Lesson #5. Do experiments and test the market

When innovating and making changes, experiment with different strategies to see what works best.

In the example above where Jillian experimented with virtual tours, the conversion rate was higher than in-person tours with a leasing agent. Since the experiment worked, she doubled down.

Therefore, double down on innovations that work, and quickly stop experiments that don’t.

Lesson #6. Be a stellar communicator

During periods of economic expansion, it is possible that many investors never reach out. If they receive their distributions in the right amount and on-time, they are happy. However, even if the distributions aren’t affected, expect more investors to feel concerned during a recession.

To proactively address these concerns, consistent communication is key. Jillian transitioned from quarterly updates to monthly updates. In these updates, she included steps they were taking to proactively address any operational challenges, like dips in occupancy or collections. She also expressed their availability to investors who had any questions or concerns.

You should strive to be a stellar communicator all the time, but even more so during economic crises.

Lessons Learned During COVID

Most of the work required to survive an economic crisis happens during the previous period of economic expansion. This starts and ends with conservative underwriting.

Once the crisis hits, take a breath and determine your priorities. If change is required, test different strategies and double down on what works. Also, make sure your passive investors are top of mind and keep them in the loop on what you are doing to conserve their capital.

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10 Markets with the Greatest Vacancy Changes During Covid

10 Markets with Greatest Vacancy Changes During COVID

Historically, vacancy rates increase during recessions. According to the US Census, vacancy on renter-occupied properties increased by 0.9%, 0.7%, and 2.4% during the 1990, 2001, and 2007 economic recessions respectively.

The current COVID recession is following a similar trend. According to Marcus and Millichap’s 2021 multifamily forecast report, multifamily vacancy increased by 0.2% – from 4.2% to 4.4%. Even though we are technically still in a recession as of this writing, an overall increase in vacancy is a good assumption, especially since an eviction moratorium has been in place since the onset of the pandemic.

Physical vacancy is an important metric for multifamily investors because it indicates the demand for apartment rentals. The closer to zero percent the vacancy rate is, the more demand for multifamily, and vice versa.

While absolute vacancy rates are relevant, understanding the vacancy trend is even better. Absolute vacancy rates provide a current snapshot of how demand in one market compares to another. However, vacancy trends show if demand is increasing or decreasing, which helps with future investment decisions.

In this blog post, I will outline the markets where vacancy rates decreased and increased the most during the current COVID recession.

 

United States 

  • YoY Change: +0.2%
  • 2019 Physical Vacancy: 4.2%
  • 2020 Physical Vacancy: 4.4%

Markets with Greatest Decrease in Physical Vacancy During COVID

1. Riverside-San Bernardino

  • YoY Change: -1.7%
  • 2019 Physical Vacancy: 3.5%
  • 2020 Physical Vacancy: 1.8%

2. Las Vegas

  • YoY Change: -1.2%
  • 2019 Physical Vacancy: 4.7%
  • 2020 Physical Vacancy: 3.5%

3. Sacramento

  • YoY Change: -0.9%
  • 2019 Physical Vacancy: 3.5%
  • 2020 Physical Vacancy: 2.6%

4. Detroit

  • YoY Change: -0.7%
  • 2019 Physical Vacancy: 3.3%
  • 2020 Physical Vacancy: 2.6%

5. Baltimore

  • YoY Change: -0.7%
  • 2019 Physical Vacancy: 4.8%
  • 2020 Physical Vacancy: 4.1%

Markets with Greatest Increase in Physical Vacancy During COVID

43. Austin

  • YoY Change: +1.6%
  • 2019 Physical Vacancy: 4.6%
  • 2020 Physical Vacancy: 6.2%

44. New York City

  • YoY Change: +1.7%
  • 2019 Physical Vacancy: 2.0%
  • 2020 Physical Vacancy: 3.7%

45. Northern New Jersey

  • YoY Change: +1.7%
  • 2019 Physical Vacancy: 4.4%
  • 2020 Physical Vacancy: 6.1%

46. San Jose

large metropolis from above

  • YoY Change: +2.2%
  • 2019 Physical Vacancy: 3.9%
  • 2020 Physical Vacancy: 6.1%

47. San Francisco

  • YoY Change: +6.6%
  • 2019 Physical Vacancy: 5.1%
  • 2020 Physical Vacancy: 11.7%

The Market Rankings From One to 47

Rank City YoY Change 2019 2020 Rank City YoY Change 2019 2020
1 Riverside-San Bernardino -1.70% 3.50% 1.80% 26 Raleigh 0.20% 4.70% 4.90%
2 Las Vegas -1.20% 4.70% 3.50% 27 Cincinnati 0.30% 3.30% 3.60%
3 Sacramento -0.90% 3.50% 2.60% 28 St. Louis 0.30% 4.40% 4.70%
4 Detroit -0.70% 3.30% 2.60% 29 Kansas City 0.30% 4.60% 4.90%
5 Baltimore -0.70% 4.80% 4.10% 30 Oakland 0.60% 3.90% 4.50%
6 Atlanta -0.60% 5.10% 4.50% 31 Dallas/Fort Worth 0.60% 5.10% 5.70%
7 Indianapolis -0.60% 5.30% 4.70% 32 Houston 0.70% 6.30% 7.00%
8 Orange County -0.40% 3.60% 3.20% 33 Los Angeles 0.80% 3.70% 4.50%
9 New Haven-Fairfield County -0.40% 4.40% 4.00% 34 Orlando 0.90% 4.10% 5.00%
10 Tampa-St. Petersburg -0.40% 4.60% 4.20% 35 Minneapolis-St. Paul 1.00% 3.30% 4.30%
11 Charlotte -0.30% 4.70% 4.40% 36 Chicago 1.00% 4.90% 5.90%
12 San Diego -0.30% 3.60% 3.30% 37 Miami-Dade 1.00% 3.80% 4.80%
13 Philadelphia -0.20% 3.50% 3.30% 38 Seattle-Tacoma 1.00% 4.30% 5.30%
14 Phoenix -0.20% 4.00% 3.80% 39 Washington, D.C. 1.10% 4.00% 5.10%
15 Cleveland -0.20% 3.70% 3.50% 40 Nashville 1.10% 4.50% 5.60%
16 Fort Lauderdale -0.20% 4.40% 4.20% 41 Pittsburgh 1.30% 3.20% 4.50%
17 Columbus -0.10% 4.20% 4.10% 42 Boston 1.50% 3.40% 4.90%
18 Portland -0.10% 4.50% 4.40% 43 Austin 1.60% 4.60% 6.20%
19 West Palm Beach -0.10% 4.70% 4.60% 44 New York City 1.70% 2.00% 3.70%
20 Salt Lake City 0.00% 4.20% 4.20% 45 Northern New Jersey 1.70% 4.40% 6.10%
21 Denver 0.00% 5.10% 5.10% 46 San Jose 2.20% 3.90% 6.10%
23 Louisville 0.10% 4.80% 4.90% 47 San Francisco 6.60% 5.10% 11.70%
24 San Antonio 0.10% 6.20% 6.30%
25 Milwaukee 0.20% 3.50% 3.70% United States 0.20% 4.20% 4.40%
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How to Manage Your Apartment Property Manager

As the asset manager of an apartment investment, one of your main responsibilities is to oversee the property management company.

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

This blog post will address five frequently asked questions about interacting with and managing the property management company after you’ve acquired a deal and assumed your position as the asset manager.

For all of the FAQs, your property management company may or may not be onboard (for example, they may not send you every report that you ask for), which means you must set expectations with them BEFORE finding a deal. You need to ask the right questions based on the FAQs below when conducting property management interviews.

1 – How often do I interact with the property management company?

You should have monthly performance calls with your property management company at minimum. During the stabilization period (i.e., when you are performing renovations), the calls should be on a weekly basis. Once the asset is stabilized, you can continue the weekly calls, change to monthly calls, or have calls on an as-needed basis.

The weekly performance calls should include you and the onsite manager at a minimum, and ideally the regional manager as well.

During the calls, you will review property reports and key metrics (more on these two things below).

2 – What reports should I expect from my property management company?

You will get what you ask for. If you ask for nothing, you will likely receive nothing or just the bare minimum.

The reports you want to receive on a weekly basis are:

  • Box score: summary of leasing activity, including the number of move-ins and move-outs and unit occupancy status (vacant-leased, vacant-not leased, vacant-ready, notice-leased, notice-not leased, model, down, other use)
  • Occupancy: physical occupancy (percentage of total units occupied) and economic occupancy (rate of paying tenants)
  • Occupancy forecast: the projected occupancy based on future occupancy status (i.e., units that are occupied, units with expiring leases that are leased, and vacant units that are leased)
  • Delinquency report: list of resident delinquent (i.e., past due) amounts
  • Leasing reports: summary of leasing activity (traffic information, leasing information, concession information, marketing information, projection information)
  • Accounts payable: summary of money owed to vendors (including to the management company)
  • Cash on hand: the asset’s liquidity

The reports you want to receive on a monthly basis in addition to the weekly reports above are:

  • Income and expense statements: detailed monthly report with all income and expense line items, as well as the dollar and percent variance compare to the budget
  • Deposits: summary of security deposit information (balance, forfeits, returned checks, refunded)
  • General ledger: summary of all financial transactions
  • Balance sheet: summary of assets, liabilities, and capital
  • Trial balance: summary of all debits and credits
  • Rent roll: summary of all unit information (occupancy status, market rent, current rent, move in, lease start and end, other fees, deposit)
  • Expiration reports: summary of expiring leases
  • Maintenance reports: summary of maintenance issues and costs

Again, make sure you set reporting expectations with your management company BEFORE you have a deal.

3 – How do I obtain these reports?

The simplest way to obtain these reports to is to ask your management company to create custom reports using their management software and have them sent to your email on a weekly/monthly basis.

Another option is to ask for access to their management software so that you can have real-time access to these reports.

If your management company doesn’t use a software or if you don’t like the look of their reports, you can create your own custom spreadsheet and ask your management company to update it on a weekly/monthly basis. Click here to download a free Weekly Performance Review tracker.

4 – What metrics should I focus on the most?

The most important metric to track is the cash flow relative to the projections you presented to your investors. Track the forecasted vs. actuals on the income and expense report, focus on the line items with the greatest variance, and create a strategy to bring those line items back on track during your weekly performance calls.

For the value-add business plan, the number of units renovated relative to your forecasted timeline and the rental premiums demanded are important during the first 12 to 24 months because both will have a large impact on your cash flow.

Additionally, certain metrics, like leasing metrics, capital expenditure costs, and total income, may vary from your projections during the value-add portion of your business plan. For example, the total income may be lower than forecasted after owning the asset for 3 months due to a higher number of move-outs than anticipated. Or, you spent a larger percentage of your capital expenditure budget in the first three months because you are ahead of schedule. So, the key metric during the value-add portion of the business plan is the forecasted vs. actual rent premiums for renovated units.

Other metrics to track that may be the cause of a high income and/or expense variance are the turnover rate, economic occupancy, average days to lease, revenue growth, traffic, evictions, leasing ratio and other metrics from the reports outlined above.

Again, the best strategy is to track the variance on the income and expense reports, strategize with your management company to identify the cause by reviewing the other reports and come up with a solution if needed.

5 – What other things do the best asset managers do?

First, look at your property management company as a partner and screen them accordingly. Are they someone you want to work with for a long-time? Does their track record speak for itself? What are the tenants saying about them? How professional are they when speaking with a potential tenant (you can role play as a potential tenant to find out)? Are they willing to change if needed? Do the employees like working at the company? Are they engaged on social media?

Next, the best asset managers always look ahead. You should evaluate the market, evaluate the competition to compare your property to, track and maximize income growth and expense decline, and ensure tenant satisfaction by checking reviews, social media, and hosting community events.

Also, even though the property management company is your partner, you should watch them like a hawk. Most people focus on the front-end activities, like finding deals, sourcing capital, whether they need to form an LLC, etc. Fewer people focus on the back-end activities, like asset management, which take years and decades to do. So much of the asset’s success and your company’s ability to scale is dependent on your property staff and property management company, so you have to watch them like your career depends on it, because it does. If things don’t work out, don’t be afraid to part ways.

Lastly, visit the property at least once a month in-person. If you invest out-of-state, a great strategy is to ask someone local to mount a GoPro on their vehicle and drive the property on your behalf.

How to Manage Your Apartment Property Manager

Set up frequent phone calls with your property management company, starting with weekly calls.

Request the proper weekly and monthly reports to see how well or poorly the property management company is implementing your business plan. Track the most relevant KPIs, like cash flow variance, number of units renovated, rent premiums, etc.

Properly screen the property management company upfront and continuously evaluate their performance.

Visit the property in person to make sure the reports match reality.

 

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How a Passive Apartment Investor Interprets a Schedule K-1 Tax Report

DISCLAIMER: THIS IS FOR YOUR INFORMATION ONLY. SINCE I AM NOT A TAX ADVISORY FIRM, I REFER ALL GENERAL TAX-RELATED REAL ESTATE QUESTIONS FROM PASSIVE INVESTORS BACK TO THEIR ACCOUNTANTS. HOWEVER, I WILL SAY THAT INVESTORS OFTEN SEEK REAL ESTATE OPPORTUNITIES TO INVEST IN DUE TO THE TAX ADVANTAGES THAT MAY COME FROM DEBT WRITE OFF AND LOSS DUE TO DEPRECIATION. BUT I DON’T INCLUDE ANY ASSUMPTIONS ABOUT THESE TAX ADVANTAGES IN OUR PROJECTIONS.

Apartment syndications remain an appealing investment for passive investors due to the myriad of tax benefits—the foremost being depreciation.

Fixed asset items (a long-term tangible piece of property or equipment that is used in operations to generate income and is not expected to be consumed or converted into cash within a year) at an apartment community reduce in value over time due to usage and normal wear and tear.  Depreciation is the amount that can be deducted from income each year to reflect this reduction in value.  The IRS classifies each depreciable item according to the number of years of its useful life.  It is over this period that the fixed asset can be fully depreciated.

A cost segregation study identifies building assets that can be depreciated at an accelerated rate using a shorter depreciation life.  These assets are the interior and exterior components of a building in addition to its structure. They may be part of newly constructed buildings or existing buildings that have been purchased or renovated.  Approximately 20% to 40% of these components can be depreciated at a much faster rate than the building structure itself.  A cost segregation study dissects the purchase/construction price of a property that would normally be depreciated over 27 ½ years—and identifies all property-related costs that can be depreciated over 5, 7, and 15 years.

If the expense of the construction, purchase or renovation was in a previous year, favorable IRS rulings allow taxpayers to complete a cost segregation study on a past acquisition or improvement and take the current year’s deduction for the resulting accelerated depreciation not claimed in prior years.

You can learn more about how depreciation is calculated, as well as the other tax factors when passively investing in apartment syndications, by clicking here.

Each year, the general partner’s accountant creates a Schedule K-1 for the limited partners for each apartment syndicate deal. The passive investors file the K-1 with their tax returns to report their share of the investment’s profits, losses, deductions and credits to the IRS, including any depreciation expense that was passed through to them.

Click here for a sample Schedule K-1.

There are three boxes on the K-1 that passive investors care about the most.

Box 2. Net rental real estate income (loss). This is the net of revenues less expenses, including depreciation expense passed through to the LPs. For most operating properties, the resulting loss is primarily due to accelerated deprecation. On the example K-1, the depreciation deduction passed through to the Limited Partner is $50,507, thereby resulting in an overall loss (negative taxable income).

Box 19. Distributions. This is the amount of equity that was returned to the limited partner. On the example K-1, the limited partner received $1,400 in cash distributions from their preferred return of distribution and profits.

Just because the LP realizes a loss on paper does not mean the property isn’t performing well.  The loss is generally from the accelerated depreciation, not from loss of income or capital.

Section L. Partner’s capital account analysis. On the sample K-1, the ending capital account is $48,093. However, this lower amount doesn’t reflect the capital balance that the limited partner’s preferred return is based on. The $48,094 is a tax basis, not a capital account balance. Thus, this limited partner wouldn’t receive a lowered preferred return distribution based on a capital balance of $48,094. From the operator’s perspective, depreciation doesn’t reduce the passive investor’s capital account balance.

The capital balance is technically reduced by the distribution amount above the preferred return (i.e., the distribution from the profit split), which is a portion of the $1,400 in the “withdrawals & distributions” box. However, operator’s deals are structured in a way so that the LPs continue to receive a preferred return based on their original equity investment amount, with the difference made up at sale.

The majority of the other accounting items on the K-1 are reported on and flow through to your Qualified Business Income worksheet.  The net effect of these items will be unique to each investor based on their specific situation and other holdings.

If you want to learn more about each of the individual sections and boxes, click here to review IRS instructions for the Schedule K-1.

To better understand your own tax implications on any investment, it is important to consult a professional who has an understanding of your overall finances so that they may give full tax advice.  Therefore, always speak with a CPA or financial advisor before making an investment 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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How to Calculate Sales Proceeds to Passive Investors

Congratulations, you have your apartment under contract for sale.

When announcing a sale to your passive investors, the primary metric they will want to know is “how much money will I receive at sale?”

Two of the most common return metrics used in apartment syndications are the equity multiple (EM) and the internal rate of return (IRR). However, these are fairly difficult calculations to make.

Rather than create a blog post with a bunch of formulas, I created a Disposition Calculator. Using the Disposition Calculator, you can determine how much money your passive investors will receive upon the sale of an apartment syndication deal. The model will also output the overall IRR and equity multiple for the project and to your passive investors.

The purpose of this blog post is to outline how to properly fill out the Disposition Calculator. (Only input data into cells highlighted yellow).

Click here to download the free Disposition Calculator.

“Cash From Ops and Escrow Refund” tab

  1. Input the remaining cash from operations at sale in cell B1: This is the cash that remains in the operations account for the asset. Make sure you input a positive number.
  2. Input the fees that still need to come out of the bank account starting in cell B3: These should be inputted as negative numbers. Currently, you can input the final loan payment (debt service), the final asset management fee (AM Fee), and escrow or reserve payment (Escrow/Reserve). If you need to pay additional fees, you can create additional cells, but make sure you adjust the total formula (currently in cell B6) to reflect any added cells. This total number is the cash from operations that is available for distribution upon sale.
  3. Fill out the second data table to calculate any refunds you will receive upon sale: Currently, you can input data for property tax and insurance escrow (for example, if you paid upfront rather than on a monthly basis), your lender reserves balance, and leftover capex refunds. Input the current balance in row 10 as positive numbers and any additional payments that you will need to make but haven’t made yet in row 11 as negative numbers. Create additional cells if needed, making sure to update the total formula, which is currently in cell E14. The total is the escrow refund you will receive at sale.

“Disposition Calculator” tab

  1. Input the sales price in cell C3.
  2. Input the outstanding loan balance in cell C5: This should be inputted as a negative number.
  3. Input consultant costs: If you used any type of consultant or broker to aid you in the sales process, input the cost in cell C6. This should be inputted as a negative number.
  4. Input lender exit fee: If you are required to pay your lender an exit fee or prepayment penalty, input the cost in cell C7. This should be inputted as a negative number.
  5. Input title costs: Input the costs associated with title in cell C8. This should be inputted as a negative number.
  6. Input your disposition fee: If you’re charging a GP disposition fee, input the cost in cell C9. This should be inputted as a negative number.
  7. Input the total closing cost and legal fees in cell C10: This should be inputted as a negative number.
  8. Input prepaid rent and security deposits: At sale, you will need to give the buyer the security deposits and prepaid rents for the month of sale. Input the total prepaid rents and security deposit cost that will be given to the buyer in cell C11. This should be inputted as a negative number.

 Cell C12 and C13 will automatically populate from the “Cash From Ops and Escrow Refund” tab. But if you want, you can perform the calculation offline and input the total refunds amounts in C12 and C13. If this is the approach you use, make sure you are inputting positive numbers.

  1. Input the accounts payable and other accrued expenses that still need to be paid in cell C14: This should be inputted as a negative number.

 Cell C15 will automatically populate once you input the project and LP cash flows in the Distribution Schedule (starting in step 17). This is the final monthly or quarterly distribution that will be paid out to investors.

  1. Input the total cash account balance in cell C16: This should be inputted as a positive number since you will receive this money at closing.
  2. Input any other sales fee or expense that is not listed above in cell C17: If it is an expense, it should be a negative number. If it is a refund, fee, etc., it should be a positive number.

 Cell 18 will calculate the total profits from sale by subtracting the sales fees from the sales price.

  1. Input the total equity investment in cell C19: This is the amount of money invested by the LPs. This should be inputted as a negative number.

 Cell C20 will subtract the equity owed to investors from the total proceeds from sale to calculate the total profits from sale.

Cell C21 will calculate the total cash flow and profits generated by the deal prior to sale from the Distribution Schedule.

  1. Input the percentage of profits that the GP receives in cell C22: From example, if the profit split is 70/30 LP/GP, input 30%.

Cell C24 is the money owed to the GP based on the profit split (i.e., the GP catch up). Cell 23 calculates the GP’s portion of the total cash flow and profits generated by the deal prior to sale based on the profit split in cell C22. The total cash flow and profits actually distributed to GP from the Distribution Schedule is subtracted from this number to determine the GP catch-up such that, for example, 30% of the cash flow and profits thus far go to the GP and 70% goes to the LP.

Cell C25 is the remaining profits after all sales fees, returning LP equity, and distributing the GP catch up. The remaining profits that go to the GP is calculated in cell C26 and the remaining profits that go to the LP is calculated in cell C27.

Lastly, you need to fill out the distribution schedule, which starts in cell F2.

  1. In cell F2, input the purchase date.
  2. Starting in cell G2, input the distribution dates: If you had more than eight distributions, you will need to create additional cells. If you create additional cells, make sure you update the IRR and Equity Multiple formulas to include those added distributions (cells P4, P6, Q4, and Q6)
  3. Starting in cell G4, input the total project cash flow and profits for the project.
  4. Starting in cell G6, input the total cash flow and profits to the LPs.
  5. Starting in cell G10, input the total cash flow and profits to the GP.

Once you’ve completed filling out the calculator, the outputs are the IRR and Equity Multiples for the project and to investors, plus an example of how much money an investor would make if they invested $100,000.

Click here to download the free Disposition Calculator.

 

 

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How to Do a 1031 Exchange on an Apartment Syndication

DISCLAIMER: This blog post is written for educational purposes only. We are not providing tax, legal, or accounting advice. Therefore, we strongly recommend that you speak with a tax advisor, CPA, and/or financial advisor for more details on the federal, state, and local tax consequences associated with doing and/or participating in a 1031 exchange.

Generally, as a real estate syndicator, the two common approaches to a disposition is to either 1) liquidate and distribute the sales proceeds to yourself, other general partners, and the limit partners, or 2) roll the sales proceeds into a new deal.

The latter is referred to as a 1031 exchange.

There are two main, potential benefits to the 1031 exchange. By participating in a 1031 exchange, your passive investors may be able to defer capital gains taxes on the profits from sale. It will also allow your passive investors to continue to collect distributions, and the new preferred return will be based on the higher proceeds from the sale instead of the original investment.

In this blog post, I want to provide an overview of the 1031 exchange process from the perspective of the apartment syndicator.

1031 Exchange Requirements

The requirements for a 1031 exchange are laid out in the United States Internal Revenue Code 26 U.S.C. § 1031.

Here are the current requirements in order to qualify for a 1031 exchange:

  1. The relinquished property (i.e., the property you are selling) must be an investment property
  2. The purchased property must be of “like kind”
  3. The purchase property must be at least the same value as the relinquished property or more
  4. The purchased property must be purchased by the same name or entity that owned the relinquished property
  5. Sales proceeds must be held in an escrow account
  6. Purchased property must be identified within 45 days after closing on the relinquished property
  7. Purchase property must be closed on within 180 days after closing on the relinquished property

We go into more details on these rules in a blog post here.

1031 Exchange Process

If you want to implement a 1031 exchange, you need to work with a 1031 consultant. These are companies who are qualified intermediaries who specialize in the 1031 exchange.

Like most team members, the best way to find a 1031 exchange consultant is through referrals. However, a quick Google search will generate hundreds of potential candidates. The main requirement is that they specialize in 1031 exchanges and in apartments (or whatever asset class you focus on).

Once you’ve selected a company, they will send you a letter of engagement that outlines the 1031 exchange process and will ask the person or entity on the property title to fill out a Form W-9.

In order to start the 1031 exchange process, the consulting firm will also request the following:

  • Name of person(s) or entity in title: If entity, who will sign on behalf of it and what is their title? What type of entity is it? Single member LLC, partnership, corporation?
  • Social security or Tax ID number of person(s) or entity in the title
  • Mailing address
  • Copy of driver’s license or valid ID
  • Copy of the purchase and sale agreement
  • Address of property(ies) being sold
  • Name of purchaser(s)
  • Tentative closing date
  • Name and contact information of title company or closing attorney handling the sale

Notify Investors

After you are under contract on the relinquished property and engaged the 1031 exchange consultant, you will need to notify your passive investors about the disposition. Additionally, you will want to explain the potential benefits of a 1031 exchange and ask whether they want to participate in the 1031 exchange. A simple way to do this is to ask investors to reply to the email with “A” if they want to participate and “B” if they don’t want to participate. Another option is to create a Google Form to collect contact information and responses.

I recommend setting a “let us know by” date that is at least 7 days prior to closing. For example, if the scheduled closing date is May 8th, ask your investors to let you know whether they want to participate in the 1031 exchange by May 1st at the latest. To ensure they reply on time, let them know that if they do not submit a response by that date, their distribution will be delayed.

In general, it is a best practice to set “let us know by” dates. The earlier you have replies, the more efficient the process is for you as a general partner.

As replies come in from your investors, you will create two lists: investors who are participating and investors who are not participating. Send separate email updates to each list.

For the investors who are participating in the 1031 exchange, make sure that you send them status updates after closing. Let them know once you’ve identified the new deal, including the same information that you would include in a new investment offering email (deal information, projected returns, conference call information, etc.), as well as how much their investment will be in the new deal (for example, if you initially invested $100,000 into the first deal, your investment into this deal will be approximately $120,000 – $100,000 initial investment + $20,000 profit from sale). From there, you can add the 1031 exchange investors to the email list for the new deal and send them the regular closing updates.

For the investors who are not participating in the 1031 exchange, make sure the you send them status updates after closing too. In the closing email of the first deal, let them know the process for receiving their final distribution (i.e., when will they receive it, how will they receive it, and what the amount will be). Additionally, like the sale of any deal, the investors that are not participating in the 1031 exchange will need to sign a document that states that they have no further obligations in the original deal. Your attorney can help you prepare this document.

What You Need to Know About Seeing Up a 1031 Exchange

The two potential benefits of the 1031 exchange are deferred taxes and a preferred return based on a higher investment amount.

The IRS regulates who and what qualifies for a 1031 exchange.

When you are selling an apartment, notify your investors about the sales and determine who wants to participate in the 1031 exchange. Send separate updates to investors who do and don’t want to participate. Investors who do want to participate will have their proceeds rolled into a new deal. Investors who do not want to participate will receive their proceeds and have no further obligations.

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Why and When to Bring Apartment Property Management In-House

The property management company that manages your apartment investments is one of your most important team members. Because they are responsible for overseeing the day-to-day operations of your apartment investments and implementing your business plan, they can make or break your business.

Many apartment investors start off by hiring a 3rd party property management company. However, the other option is to bring property management in-house.

Why Bring Property Management In-House

The primary reason to bring property management in-house is to improve the performance of your apartment portfolio. You do not bring property management in-house to make money. In fact, it is possible that your in-house property management company operates at a loss. The purpose of bringing property management in-house is to improve the overall performance of the individual apartment asset and your portfolio as a while. In-house management can result in higher quality customer service for residents, better marketing, faster unit turnover, more training opportunity for staff, top talent, etc. The important word here is “can.” Therefore, If you don’t think you can do it better, don’t do it at all.

Secondly, there are greater alignment of interests with in-house property management. 3rd-party property managers typically make money from a percentage of the collected revenue (referred to as fee-based management). The major issue with fee-based management is that the 3rd-party property management company isn’t incentivized to maximize revenue. Let’s say a 3rd-party property management company charges a 3% management fee. If the property generated $100,000 per month in revenue, they make $3,000 per month. If revenue increased by 25% to $125,000, they make $3,750, or only $750 more per month. An increase in revenue of 25% is huge for you and your investors, but not so much for a 3rd party property management company. However, when property management is in-house, maximizing revenue (or whatever else you decide) will be a top priority.

Lastly, bringing property management in-house improves communication. Since it is your property management company, you decide how often they send you the property’s KPIs. If you want a daily report, no problem. Whereas with 3rd-party property management, they may only agree to send weekly or monthly performance reports. Similarly, since it is your property management company, you can be as involved in the actual operations of the property as you want. In turn, you will have more up-to-date, detailed information to share with investors about the status of your business plan, as well as make faster adjustments if challenges arise.

When to Bring Property Management In-House

There are only two times when apartment investors bring property management in-house: day 1 or when they have achieved scale (i.e., thousands of apartment units). Neither option is objectively better than the other but there are potential pros and cons.

Pros of Bringing Property Management In-House Day 1

Bringing property management in-house day 1 results in zero disruptions. There are a lot of moving parts when transitioning from 3rd party to in-house management. You need to provide notice to the current company, terminate contracts, create the new company, and then move the all the operations over to your company. This may involve all new staff as well. All of this is a major disruption for residents and potentially operations.
Bringing property management in-house day 1 results in smaller overhead. You will not need to build out an entire operation with Executive, Directors, etc., which is expensive and time consuming, especially since the team and infrastructure need to be created before taking over management and generating revenue. Instead, it is likely that it is just you and your site staff. Over time, as needed, you can bring on additional team members and naturally grow to a full-sized business.

Pros of Bringing Property Management In-House When You Have Achieved Scale

Bringing property management in-house when you have achieved scale allows you to attract top talent. Property management and business professionals are eager to bring their expertise to a brand-new company that will manage thousands of units. They cannot wait to be actively involved in implementing a business plan they had a hand in creating. You will have a difficult time attracting the best-of-the-best to your property management company when it only manages one building.
Bringing property management in-house when you have achieved scale can generate a profit. As I mentioned earlier, the purpose of creating a property management company is not to make money. However, waiting to bring management in-house when you have thousands of units may allow you to generate a small profit, or at least breakeven. Having one apartment will not cover the costs of an in-house property management company and you will operate at a loss.
Bringing property management in-house when you have achieved scale allows you to implement best practices. The top talent you attract will also come with the best property management practices. They have years of experience working for the best property management institutions. They will have intimate knowledge of the market. As a result, they will bring their expertise to your portfolio, allowing in your ability to implement the best practices to improve operations. When you do not have a track record and large portfolio of properties, you won’t attract the top talent, meaning you likely won’t be implementing the best practices.

Why and When to Bring Property Management In-House

The main reason why you bring property management in-house is to improve the operations of your apartment portfolio. It will also increase alignment of interests and improve communication.
You can either bring property management in-house day 1 or when you have achieved scale. The benefits of bringing property management in-house day 1 are no disruptions and smaller overhead. The benefits of bringing property management in-house when you have achieved scale is your ability to attract top talent, start with a profit margin, and implement best practices.

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How to Provide Best-In-Class Customer Service to Your Multifamily Residents

Multifamily investing offers the opportunity to profit tremendously when you sell your property, and a well-managed property will also throw off regular income throughout your ownership period. As a commercial real estate investor, you have devoted a tremendous amount of time, energy and money into the purchase of a great property. You want to do what it takes to optimize your return on investment, but successful commercial real estate investing involves more than buying and maintaining properties. Your tenants are the lifeblood of your investment, and they should receive just as much care and attention as property upkeep and number crunching.

Get to Know Your Tenants as People

While your multifamily property is a financial investment to you, it is the place that your tenants call home. Each of your tenants has unique factors to consider related to their lifestyle, finances, interests and goals, and these are often entwined with their living experience in vital ways. When you get to know your tenants as people rather than as names on a lease, you can offer them a higher level of customer service. In the process, you may decrease turnover and improve online reviews. These factors directly feed into a healthy bottom line. How can you serve your property’s residents as customers rather than solely as tenants?

Be More Than a Rent Collector

Your property’s residents will be more likely to renew a lease and to recommend your property to their friends and family members when they feel valued and respected. In many cases, the relationship between a tenant and a landlord is purely financial, and it is entirely dictated by the terms of the lease. You must abide by the terms of the lease, and you must ensure that rents are collected in a timely manner. However, your relationship with your residents should extend beyond the monthly rent collection process. For example, you can send tenants birthday cards or call to check on their unit’s condition periodically. Small gestures like these can go a long way toward developing a positive relationship with your tenants.

Be Proactive

The top brands today stay on top of their customers’ needs, and they anticipate behavior when possible. Your multifamily property is a business, and your tenants are your customers. With this in mind, you need to nurture relationships and proactively anticipate your customers’ needs. For example, reach out to your tenants a few months before their lease expires to give them renewal options. Implement a loyalty program that rewards renewals, transfers and referrals. A high turnover rate at your multifamily property can dramatically erode profits, so creating a reward system that encourages renewals can be cost-effective for your business. At the same time, the benefits of the reward system likely will be appreciated by your customers.

Support Your Residents’ Goals

While some residents may move out of an apartment building that is poorly managed, others will vacate for reasons that are not related to property management at all. For example, they may need a larger space or may be ready to purchase a home. When your tenants decide to vacate, avoid creating stressful and unnecessary roadblocks. Consider collecting moving boxes and other materials from new tenants and offering these to tenants who are vacating as part of your service. Offer to do a walk-through before the tenants vacate so that they can recoup as much of their deposit as possible. You should support your tenants just as much when they are vacating as you did when they were moving in.

Approach Rent Increases Transparently

For the majority of your tenants, their monthly rental payment may be their largest expense. An unexpected increase can create immediate stress and anxiety, and this may be followed by a kneejerk reaction to look for a new and more affordable place to live. From your perspective, maintaining rents at market rates is essential in order to optimize profitability. How can you maintain market rents while also retaining happy tenants? Create a small report for your tenants that shows current market rents in the area. This report should substantiate the rental increase at the time of renewal. If you launch a rewards program for loyal residents, consider outlining any savings that they may enjoy by renewing their lease. This type of detailed and customized report could actually help your tenants to feel positive about renewing their lease at a higher rate.

Be Readily Available

Tenants commonly reach out to their landlord or property manager because they have a complaint or a repair issue that requires prompt attention. In many cases, tenants are provided a single phone number to call for assistance, and landlords may let those calls go to voicemail to screen them for urgency. To tenants, the inability to quickly and easily reach you when they need assistance with their home can be stressful. More than that, it could create the impression that your tenants are a bother to you. To counter this, offer multiple communication channels. In addition to a phone number for verbal communication, offer text communication, an email and a website. Make a point to always answer the phone when a tenant calls and to respond to all other methods of communication promptly.

Cross-Sell with Your Other Properties

Do you own more than one multifamily property? The apartment that a tenant lives in today may no longer meet their needs, but one of your other properties could be a better fit. If you have provided excellent customer service to the tenant throughout his or her residency period, the tenant may be happy to consider relocating to one of your other properties as long as the property meets their current needs. Likewise, consider extending the rewards for your referral program to all of your properties. These practices will help you to maintain higher occupancy rates overall, and the increased options can bolster customer satisfaction.

Ask for Reviews

Your existing tenants will directly impact your bottom line from multifamily investing long after they move out. This is because potential tenants often read online reviews from past tenants to learn about important factors like property management responsiveness, rent increases, property maintenance and more. Because unhappy tenants may be more likely to post reviews than tenants who have loved living in your property, soliciting feedback from satisfied tenants is essential. Consider asking tenants to leave reviews at different stages in their experience. For example, you may ask for feedback about the move-in process after they get settled. You may also ask tenants to leave comments when they renew a lease or after they move out. In addition, use feedback from negative reviews to make improvements.

As is the case with other types of businesses, you will not be able to please all of your tenants at all times. However, because success from multifamily investing is intricately linked to tenant satisfaction, it is essential that you develop a sound customer service policy that touches your tenants throughout their experience. Properly managing tenant relationships may require more time and energy than you initially anticipated. Consider hiring a reputable property management firm if you are challenged in this or other critical areas of commercial real estate investing.

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Obtaining an Insurance Quote – 8 Things to Consider

During the past year or so, the multifamily insurance market has changed. Throughout most of the post-2008 economic expansion, we were in a “soft” insurance market. That is, insurance companies were competing for business. As a result, multifamily operators had access to relatively low insurance premiums. However, according to multifamily insurance specialist Bryan Shimeall, we’ve officially transitioned into a “hard” insurance market.

In a “hard” insurance market, insurers are very picky about the types of properties they will insure and policies they will provide. As an example, Bryan said many insurers no long offer renewable policies. Once the current contract expires, they may elect to not renew the insurance, depending on their updated underwriting standards.

As a result, assuming the property still qualifies for insurance, the premiums will tick higher and higher.

Because of these changes in multifamily insurance, here are the eight things to think about when obtaining an insurance quote.

  1. Setting the insurance assumption when underwriting: The days of assuming the stabilized insurance premium will be equal to the T-12 insurance premium or OM insurance premium are over.The increases in insurance rates depend on the geography, but a double-digit percent increase in the insurance rate is not uncommon in certain markets. When underwriting a multifamily deal, speaking with your insurance provider to get an estimated insurance premium is now more important than ever.
  2. History of losses: To provide you with an accurate quote, your insurance provider will require the history of losses from the current owner’s insurance provider. When they do not have the history of losses, they will create a quote with the assumption that the property has a clean history.However, if they discover a history of losses during the due diligence period, the insurance premium will go up. Depending on the severity of the loss history, the insurer may opt to not provide insurance on the asset at all. Therefore, request the loss history as early as possible.
  3. Deductible vs. Premium: Generally, the deductible and premium have an inverse relationship. The higher the deductible, the lower the premium and vice versa. You want a higher deductible that you are comfortable paying and a lower premium. This will result in a reduced insurance expense and higher cash flow. Ask the insurance provider for multiple quotes with varying deductibles and premiums and select the coverage with the highest deductible you are comfortable paying.
  4. Understanding the deductible: There are two types of deductibles: a deductible per occurrence and a deductible per building. If damage occurs to multiple buildings and the deductible is per building, you will have to pay the deductible multiple times until the insurance coverage kicks in. If damage occurs to multiple buildings and the deductible is per occurrence, you will have to pay one deductible and then the insurance kicks in.
  5. Loss of income coverage: Apartment insurance not only covers the physical building but can cover loss of income as well. You will want to determine if you receive reimbursements for a loss of rent if the property is damaged by a covered loss, like a storm or a fire. If you do, how does the coverage work? Will it cover a certain time frame? Up to a certain amount?
  6. Commercial general liability insurance: Apartment insurance can also protect you against lawsuits from a tenant or visitor being injured. A good rule of thumb is $1 million per occurrence and $2 million overall in general liability coverage.
  7. Replacement insurance: Make sure the replacement cost is what it would cost to replace the property. The replacement cost should be based on the price per foot to rebuild as opposed to some other method of valuation.
  8. Real Estate America Property Association (REAPA): REAPA partners with the best-in-breed industry leaders to provide its members with significant savings on products and services related to real estate. Join REAPA for $250 per year to access their less expensive insurance product.

 

8 Things to Consider When Obtaining Insurance

To avoiding underestimating your insurance costs and to ensure you have adequate coverage when needed, make sure you:

  1. Don’t trust the proforma insurance but rather obtain a new estimate
  2. Request history of losses from seller ASAP
  3. Go with the lower premium and higher deductible policy
  4. Understand the difference between deductible per occurrence and per building
  5. Obtain loss of income coverage
  6. Get general liability coverage
  7. Confirm replacement cost is based on price/sqft approach
  8. Join REAPA for discounted insurance premiums
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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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Raise More Passive Investor Money With This One Simple Trick

If you are looking for ways to make money, don’t overlook this one simple trick. You can make a lot more money by putting yourself in front of high-income individuals. Find creative ways to reach that goal so that you can get the results for which you have been looking.

Why You Need High-Income Individuals

Making money is simple when you know what steps to take. Raising money requires you to follow the right process, and keeping our simple tip in mind helps. Putting yourself near high-income people is a critical part of the process for several reasons. No matter if you do active real estate investing or something else, put yourself around people who can afford what you sell.

You want to spend as much time as possible with those who are interested in what you sell. This lets you make as many sales as possible while boosting your profitability, and learning how to do it is not hard.

How I Approach Conversations

You can use any approach you like, but I have a certain way I approach prospective clients. I used to fly coach to save money. I tried having conversations with the people I met in coach, but many of them were not my ideal prospects. After I gave it some thought, I upgraded to first class to see if I could meet better prospects. Being in first class put me in touch with the right people. I start by making a simple conversation and seeing if they are interested in speaking with me.

Use Other People’s Money

You will now learn how to use other people’s money to enhance your profit. Doing so is not always easy at first, but it gets better as time goes on. You begin by learning to invest in commercial real estate. Once you learn the process, you show your prospects that you know what you are doing so that they trust you.

Once you earn their trust, you offer to invest their money for a share of their profits. You can make a lot of money with commercial real estate if you know what you are doing, and you will be happy with the outcome you achieve. You show your clients what investments to make. In some cases, you manage their portfolio and offer ongoing advice. You get a share of their profits in exchange for your support and guidance.

Explain Your Approach to Investing

When I approach people on the plane, I explain my approach to investing. You don’t want to talk about things that are not important to your prospective customers. If you would like to enjoy the best possible results, refine your approach as much as possible.

Don’t talk about things that distract your prospects from your offer, and you will get better results. Explain how much money you make and the process you use to make it. Give them an overview of what you do and give them reasonable tips they can follow, and you will be on the right track.

Get Their Contact Info and Add Them to Your Email List

After speaking with your prospective clients for a while, find out if they are interested in what you are saying. Talk to them about what you offer and how it can benefit them over the long run. Don’t talk too much about what you achieve unless you relate it to the benefits you can provide them. You want them interested in what you have to offer, and they will want to stay in touch with you.

Watch their expression to see how interested they are in your services and products, and you will know how much they want to listen. Go into the conversation without being too pushy at first because high-income people get approached by marketing teams all the time. Try being as personable as you can until you gain their attention.

The amount of time you spend speaking with them depends on their level of interest. Don’t waste time getting the phone numbers of those who are not interested. However, you have nothing to lose by getting their email address. You add their email address to your email list and stay in touch over time. After you add them to your list, advertise to them after earning their trust. You improve your odds of success and boost your odds of reaching the outcome you hand in mind from the start.

Think of Ways to Put Yourself in Front of More High-Income Individuals

Raising money for your business does not have to be a difficult or challenging task. You must develop a plan and think of creative ways to get the outcome for which you have been searching. Get a pen and sheet of paper to write down additional ways you can put yourself in front of high-income individuals, and you will be on the right path in no time.

You will know your active real estate investing plan is in the best possible shape when you see what you can achieve. Next, go over your ideas and find new ways to make them stand out even more. Enhance your ideas as you move forward so that you can get even better results. You will be glad you did.

Final Thoughts

If you would like to take your commercial real estate investments to the next level, put yourself in front of high-income people. These people know what it takes to build their portfolios, and they have the capital to make it happen.

Putting yourself near them is a powerful way to find prospects on which you can depend. You can put yourself in the first-class section of planes, or you can find other ways to get in touch with the people who are the most likely to help you make a profit.

Remember to have your top selling points on hand if you would like to get the most from your effort. Go into each interaction assuming the sale. Get your prospects interested in your offer if you want to earn the sale, and you will go far.

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Three Ways to Maximize Profits Through Real Estate Crowdfunding

If you want to make more money with real estate, consider the benefits of crowdfunding. Not many real estate investors use crowdfunding to boost their profits. Although not all investors use it, crowdfunding is a powerful way to reach higher levels of success.

Learn about crowdfunding and how it works if you are ready to take your results to a new level. In simple terms, crowdfunding uses investors to get projects off the ground. You are about to discover three tips that maximize your crowdfunding profits. Follow these tips to take your profit to where you have always wanted it. You will soon have everything you need to take your real estate investments to a whole new level.

Benefits of Crowdfunding

Crowdfunding is a powerful way to reach your investment goals. Some people think of it as normal investing, but there is a difference. With normal investing, you have a small group of investors who invest in your active real estate investing program. You can even use crowdfunding for your passive investments if you know what you are doing. With crowdfunding, you use a large group of investors to fund your projects.

This works well if you don’t have enough high-income investors. Crowdfunding is also a great way to establish social proof and get followers. If you are in the early stages of growing your active real estate investing platform, you can enjoy the rewards in no time. The right crowdfunding campaign also serves as a marketing tool. You get your product or service in front of more people while gaining as much traction as possible.

How Crowdfunding Works

Learn how crowdfunding works to get an even better picture of what to expect. With crowdfunding, you use your own platform or build one yourself. You give a description of your investment platform and begin marketing your project.

You want to get as many people to sign up as possible, and make sure they know that even small donations help. You will be on track in no time if you follow the right steps. Get your crowdfunding page on social media for enhanced results, and you should have plenty of interested investors in no time. Setting goals and milestones is another vital part of real estate investing.

If you build a following and let people feel connected to your project, they want you to reach your goals. List the names of those who invest and the amount they invest. People want recognition for what they do, so this approach makes them more likely to invest larger amounts. Let prospective investors know what they gain by investing in your project, and you will see the difference in your bottom line.

Invest Your Own Money

Investing your own money is a huge part of the process. With active real estate investing, you want to show your prospective clients that you also believe in your project. If they don’t know you believe in your own projects, they are less likely to invest. You have to lead by example if you want to enjoy positive results over the long run.

You don’t have to invest a large amount, but you should at least invest as much as your average investor to get the outcome you want. Doing so shows your prospects that you believe in your project and that you are not asking them to put money into something unlikely to provide the outcome for which they are looking.

Create Your Own Crowdfunding Portal

Create your own crowdfunding portal if you are ready to get the outcome you need. Rather than using a popular site, consider creating your own crowdfunding portal. Doing so gives you several benefits you might want to explore. First, having your own crowdfunding portal makes you look more professional.

Anyone can create a crowdfunding page on one of the existing channels, but creating your own portal or website shows dedication. Hire a developer to set up everything, and you will move forward with confidence and peace of mind. Make sure you get a developer who has experience dealing with crowdfunding.

Your developer will learn about your business and help you craft results on which you can depend. When you are ready to launch your portal, make sure you and your developer are on the same page. A good developer asks questions and makes an effort to understand your business model, and you will have no trouble moving forward or reaching your desired outcome.

Hire a Legal Team

If you are learning how to scale a business, consider hiring a legal team. You want to make sure your new crowdfunding project goes as smoothly as possible, and you will be happy with the outcome you get.

Your legal team ensures you are in compliance with the law and that you don’t run into unneeded issues along the way. Having a legal team on retainer gives you confidence and peace of mind. You want to explore your options and find a legal expert who makes sense for you. If any unexpected legal issues come up, you will already have a solution on hand.

Final Thoughts

If you want your real estate crowdfunding project to go well, it’s important you follow the right steps and keep your needs in mind each step of the way. You must keep your goals in mind and make sure you don’t have any issues reaching the outcome you had in mind from the start.

Investing your own money shows you are serious about your project, and having your own portal shows you have dedication. Your legal team will keep everything else on track while you learn how to scale a business. Your business will thrive when you follow the right process and remain focused on your needs and goals.

You take your results to a whole new level in no time and achieve the outcome for which you have been looking. Keep an eye on your crowdfunding project to make sure everything is going according to plan. If you do so, you will have no trouble reaching your desired outcome.

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10 US Cities Where Rents Will Rise the Most in 2021

The COVID-19 pandemic has accelerated the trend of people, especially the millennial generation, moving out of high-cost gateway markets. Pre-COVID, the millennial generation moved to be closer to family and/or start a family. After the onset of the pandemic, even more people began (and continue) fleeing high-cost gateway markets. For example, since many people are working remotely, they prefer the lower rent payments for a larger unit size rather than paying higher rents for a tiny apartment.

Many suburban, tertiary, and tech hub markets benefited from this migration trend in 2020. Markets with the most growth in 2020 include Sacramento (6.1%), Inland Empire (7.3%), Phoenix (4.6%), Tampa (3.9%), and Las Vegas (3.8), Boise (9.5%), and Scranton-Wilkes-Barre (7.8%), according to YardiMatrix.

2021 is a new year, yet many of the challenges from 2020 remain. Overall, YardiMatrix predicts rents will rise by 2.0% nationally in 2021 (compared to -0.8% in 2020). They predict rents will rise the most in Las Vegas (4.8%), followed by Salt Lake City (4.3%), Austin (3.9%), and Indianapolis (3.9%).

Investing in a market where rents exceed the national average is ideal. While you still want to make conservative rent growth assumptions based on a rental comparable analysis, market-driven rent growth allows multifamily investors to exceed their return projections.

Here are the 10 cities where rents are forecasted to increase the most in 2021:

 

 

1. Las Vegas

YardiMatrix 2021 Rent Forecast % Change: 4.8%

2020 Rent % Change: 3.8%

2. Salt Lake City

YardiMatrix 2021 Rent Forecast % Change: 4.3%

2020 Rent % Change: 3.8%

3. Austin

YardiMatrix 2021 Rent Forecast % Change: 3.9%

2020 Rent % Change: -3.6%

4. Indianapolis

YardiMatrix 2021 Rent Forecast % Change: 3.9%

2020 Rent % Change: 3.5%

5. Phoenix

YardiMatrix 2021 Rent Forecast % Change: 3.7%

2020 Rent % Change: 4.6%

6. Winston- Salem

YardiMatrix 2021 Rent Forecast % Change: 3.6%

2020 Rent % Change: 6.6%

7. New Orleans

YardiMatrix 2021 Rent Forecast % Change: 3.5%

2020 Rent % Change: 0.6%

8. Birmingham

YardiMatrix 2021 Rent Forecast % Change: 3.4%

2020 Rent % Change: 2.8%

9. Sacramento

YardiMatrix 2021 Rent Forecast % Change: 3.4%

2020 Rent % Change:6.1%

10. Cincinnati

YardiMatrix 2021 Rent Forecast % Change: 3.3%

2020 Rent % Change: 2.2%

 

Here is a data table summarizing 11 to 20:

Market YardiMatrix 2021 Rent Forecast % Change 2020 Rent % Change
Atlanta 3.3% 3.0%
Columbus 3.3% 2.3%
Louisville 3.3% 1.8%
Raleigh 3.2% 0.0%
Richmond 3.1% 6.5%
Memphis 3.1% 5.9%
Tucson 3.0% 5.9%
Nashville 3.0% -1.5%
Tampa 2.9% 3.9%
Houston 2.8% -1.9%

 

Forecasts are never perfect

Not many people, if anyone, could have predicted that the market with the greatest rent growth in 2020 would have been Boise, Idaho. Therefore, a strong rent growth prediction should not be the only reason why you decide to invest in a market. However, like all forecasts, rent growth predictions are good guides to locating potential investment markets on which you perform a deep dive analysis.

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Where Investors Did (And Didn’t) Buy Multifamily During the COVID-19 Pandemic

Transaction volume up over 50% in Pittsburgh, San Jose and Stamford, CT only other cities with increased volume

Each year, Integra Realty Resources (IRR) releases their “Commercial Real Estate Trends Report.” Based on long-term and short-term historical economic trends, IRR attempts to forecast how each commercial real estate sector will perform in the coming year.

According to the Federal Reserve Bank of St. Louis, which is responsible for dating recessions, the economy entered a recession in February 2020. And as of this writing, FRED has yet to call the end of the recession.

One dataset included in IRR’s annual trends report is the transaction volume during the prior year. Since the market was in a recession most of last year, the 2020 transaction data provides us insights into where commercial real estate investors were buying up multifamily during a down and uncertain economy. Maybe even more insightful are the markets where investors WERE NOT buying multifamily in 2020.

As a baseline, according to the report, the total multifamily transaction volume in 2020 was down 40% year-to-date, although it still had the highest total transaction volume of the other commercial real estate industries. Only three markets experienced an increase in multifamily transactions in 2020 – Pittsburgh, San Jose, and Stamford, CT. The greatest increase was in Pittsburgh with over 50% more transactions in 2020 compared to 2019, making it one of the “hottest” multifamily market in 2020.

Every other market analyzed experienced a decrease in transactions in 2020. However, some markets more than others. In five markets, the transaction volume in 2020 was down by over 50% – Cincinnati, Inland Empire, Hartford, Cleveland, and Philadelphia.

 

Here are the 10 markets with the greatest increase in multifamily transactions in 2020:

1. Pittsburgh, PA

  • YOY Change: 53.8%
  • Total (4Q2019-3Q2020): $855.7M
  • Volume Rank:39

2. San Jose, CA

  • YOY Change: 11.7%
  • Total (4Q2019-3Q2020): $1,913.3M
  • Volume Rank: 22

3. Stamford, CT

  • YOY Change: 10.3%
  • Total (4Q2019-3Q2020): $440.9M
  • Volume Rank: 50

4. Kansas City, MO

  • YOY Change: -4.4%
  • Total (4Q2019-3Q2020): $1,063.6M
  • Volume Rank: 34

5. Memphis, TN

  • YOY Change: -5.6%
  • Total (4Q2019-3Q2020): $509.3M
  • Volume Rank: 48

6. Seattle, WA

  • YOY Change: -6.5%
  • Total (4Q2019-3Q2020): $5,524.9M
  • Volume Rank: 4

7. East Bay, CA

  • YOY Change: -7.8%
  • Total (4Q2019-3Q2020): $2,079.2M
  • Volume Rank: 21

8. Sacramento, CA

  • YOY Change: -8.9%
  • Total (4Q2019-3Q2020): $1,384.2M
  • Volume Rank: 28

9. St. Louis, MO

  • YOY Change: -12.7%
  • Total (4Q2019-3Q2020): $649.6M
  • Volume Rank: 45

10. San Antonio, TX

  • YOY Change: -13.4%
  • Total (4Q2019-3Q2020): $2,139.7M
  • Volume Rank: 20

Here are the 10 markets with the greatest decrease in multifamily transaction in 2020.

City YOY Change Total (4Q2019-3Q2020) Volume Rank
Manhattan, NY -46.6% $3,820M 8
Baltimore, MD -47.3% $1,1775.5M 32
Long Island, NY -48.3% $469.5M 49
NYC Boroughs -49.0% $2,656.5M 15
Washington, DC -49.8% $795.2M 41
Cincinnati, OH -59.3% $272.5M 52
Inland Empire, CA -60.4% $1,035.4M 35
Hartford, CT -63.2% $109.6M 54
Cleveland, OH -66.9% $240.2M 53
Philadelphia, PA 69.4% $1,013.4M 36

 

An interesting takeaway from this data supports something we talk about here a lot on the Best Ever blog: commercial real estate is very submarket and neighborhood dependent. All three top ranking cities are in the same state as a bottom ranking city (Pittsburgh and Philadelphia, San Jose and Inland Empire, Stamford and Hartford). Therefore, before making an investment decision, you need to continue to perform a high level analysis on a submarket and neighborhood level, rather than focusing on city and MSA level data. However, reports such as these can be a guide to determining which cities and MSAs to research further.

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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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Raising Real Estate Capital with Crowdfunding

When raising capital, real estate investors often graduate from personal contacts to complex partnerships or institutions. Another option to consider is crowdfunding. On this Best Ever Show podcast, real estate investor and CEO Chris Rawley explains the power of crowdfunding as a capital source and how to tell if it’s the right option for you.

About Chris Rawley

Chris Rawley has been a professional real estate investor for over 20 years. His portfolio includes single-family, multifamily, and commercial properties. He currently focuses on income-producing agriculture as an opportunity for passive investing. His platform, Harvest Returns, matches quality agriculture deals with investors to raise much-needed capital for U.S. farmers.

Why Crowdfunding?

If you’re doing real estate investing, the conventional funding path usually goes like this. You first use your own money and then approach friends, family, and business contacts for passive investing. When those sources run dry, you may turn to institutional funding or spend considerable time developing partnerships from scratch. Institutions have a high lending threshold and are suited for larger commercial properties such as retail shopping centers. They also come with significant oversight and conditions.

Many individuals engaged in commercial investing have quality deals that don’t meet institutional criteria. Crowdfunding provides a robust, flexible funding alternative. As the deal sponsor, you have access to suitable investors. You also gain legal and regulatory resources that would cost you considerable time and money to build on your own.

Advantages of Crowdfunding

Assembling a syndication deal involves adhering to complex financial regulations and drafting the requisite documents. If you do it yourself, you spend significant time and money on accounting, tax, and legal services. You need to understand the role of the various oversight agencies such as the SEC and hire the right experts. The beauty of crowdfunding is that the platforms handle much of this groundwork for you.

Each platform differs in the type and amount of guidance it provides. For example, Harvest Returns offers its sponsors the benefit of the legwork Chris initially did for his real estate ventures. His business spent considerable money to have securities attorneys put all legal and regulatory requirements in place. As a result, his platform’s listing sponsors benefit directly from this expertise and documentation. They still need to learn the legal environment, but they do not start from scratch and slow the deal.

Another major advantage of crowdfunding is the built-in pool of investors. You don’t have to find and vet your backers. You also have access to a more extensive and diverse group that you would likely discover independently. When the platform accepts your listing, you are guaranteed eyes on your project. You are not guaranteed quick results, but your deal will have the attention of the right audience. This alone is gold for commercial investing.

Crowdfunding may be right for you if:

  • You have exhausted non-institutional resources.
  • You have a successful track record.
  • You have a niche asset class, such as income-producing agriculture.
  • You have a partially funded deal that could benefit from additional investors.

Choose the Right Platform

Crowdfunding investment platforms took off around 2015 and today offer diverse opportunities for various real estate asset classes. You can find platforms tailored to single-family flips, wholesaling, and commercial projects such as retail shopping centers. You can also find options for specialized assets such as specific financial instruments or agriculture.

Chris advises beginning by defining the type of investor you are. Do you fix and flip houses? Do you wholesale apartment buildings? Are you targeting niche real estate markets such as sustainable development? You want to identify the crowdfunding platforms catering to your project niche and research each one to find the best fit.

Most platforms expect sponsors to list exclusively with them rather than attempt to raise funding on several sites. This requirement eases regulatory compliance, and you will likely sign an agreement with the platform you finally choose. A way to feel more comfortable about exclusivity is to speak with other sponsors who have succeeded on that platform. Most sites are happy to provide references. Chris suggests you be wary of any platform that won’t do so.

Your next step is to determine if you qualify for the platforms you’re interested in. They have listing criteria that syndication sponsors must meet. They also differ in the resources they offer, such as regulatory forms. Your best bet is to reach out to them and learn their guidelines and support for sponsors. Most have sales and marketing teams to provide information and perhaps speak with you about your particular situation. Established platforms have more stringent listing criteria, while smaller or newer players often have more flexible requirements.

For their part, investors are looking to mitigate risk. They examine each deal in light of questions such as:

  • Is this project viable?
  • What return can I expect?
  • Can this sponsor deliver results?
  • Can I safeguard capital gains or income?
  • What are the tax implications?

Chris stresses that many investors want to make personal connections and to believe that their capital helps the greater good. If you can demonstrate how your project will benefit the local community or causes such as sustainable farming, your support will grow.

As with any deal, investors look for strong fundamentals. Platforms differ in their due diligence procedures, but you always want to prepare a solid business case and be ready to speak to it.

Build Your Team and Track Record

Investors want to see that a sponsor has a successful track record. As Chris puts it, they don’t want to invest in a newbie’s mistakes. You are best off trying crowdfunding after you have done at least a few successful deals.

For investors, a sponsor’s experience is often the differentiator between two similar offerings. Even a short track record builds credibility. Before attempting crowdfunding, do one or two syndications on your own, either with personal contacts or an established partner.

A credible sponsor has a strong team as well as a track record as an active investor. Investors want to see that you have accounting and legal experts as well as any other business advisers appropriate for your asset class. This shows that you have some experience, are serious, and run your active investing as a business.

Present a Winning Deal

Many platforms conduct a thorough background check on potential sponsors before moving forward with them. They examine the deal’s structure and numbers to determine if it is a viable investment.

Each platform has requirements for putting your listing in front of investors. Your listing needs to differentiate itself from other concurrent offerings. At a minimum, it should include essential details about your project, such as location and asset type. Also, your platform may ask you to provide supplementary information for investors such as a business plan or pitch deck.

Once the raise is underway for your project, potential investors want a thorough understanding of the deal and expected return. Some platforms handle all of the interfacing for you and cater more to passive investing. Others treat the process more as active investing. You might host a webinar or answer questions in a formal round table for the active investor who wants a voice in your project.

Chris has found that people respond well to webinars, as they can interact with the sponsor and ask live questions. They can also meet the members of the sponsor’s team, such as the attorney or CPA. In Chris’s words, the process lends tangibility to the deal and builds trust.

Crowdfunding for Agriculture Investing

The food supply and related issues are hot topics today, and many investors are curious about agriculture opportunities. Crowdfunding is a good option because the platforms present you with curated projects appropriate for your goals. Chris’s platform structures agriculture deals similarly to the real estate deals he’s done for years. They have debt offerings from 7% to 12% and equity deals in the teens. They also offer opportunities in AgTech, which is the application of computer technology to farming. These offerings are higher risk but offer potentially greater returns as much as 40%.

Unlike most real estate, agricultural properties are unique. Each farm is distinctive and should be evaluated on its own merits. Indoor projects have gained momentum and include vertical and hydroponic farms. These options allow more locally grown produce and some refuge from climate and transportation infrastructure impacts. Successful investments enjoy a high rate of return.

Chris keeps the minimum investment in his projects as low as $5,000. This threshold allows more investors to participate and to diversify their portfolios. As for farmers interested in funding sources other than banks, Chris urges them to reach out to his team.

Crowdfunding for syndication is a relatively new and evolving space with numerous platforms catering to all asset classes. If you’re ready to move beyond personal capital, take a look at what it has to offer. Not only might you fund your next deal, but you might also find lucrative investment opportunities you never knew existed.

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Interest-Only Commercial Real Estate Loans – Potential Pros and Cons

As the name implies, when you secure an interest-only commercial real estate loan, the monthly debt service is equal to the interest on the principal loan balance. For example, on a $10 million loan amortized over 30 years with a 5% interest rate, the interest-only payment is $41,666.67. Whereas the debt service on a non-interest-only loan would be $54,486.03 (principal plus interest).

Generally, when securing a bridge loan, the debt service will automatically be interest-only. However, when securing an agency loan from Fannie Mae or Freddie Mac, you may have the option to receive one or more years of interest-only payments (even up to the full hold period for the most experienced borrowers).

When securing an agency loan and deciding whether to pay interest-only or pay principal plus interest from day one, here are some things to think about:

Potential Benefits of Interest-Only Payments

There are two main potential benefits to securing an interest-only period for a commercial real estate loan.

First is the higher cash flow during the interest-only period. When implementing a value-add business plan, you are forcing appreciation by improving the physical property and the operations to increase the net operating income. Typically, this process takes at least a year to complete. So, during this value-add period, the net operating income (and therefore, the cash flow) is lower. When you secure an interest-only loan, the lowered net operating income may be offset by the reduced debt service. As a result, you can use the extra cash flow to either reinvest in the property or, more likely, distribute returns to your investors. In fact, one of the best ways to achieve the preferred return during the renovation period is to secure an interest-only loan.

The second potential benefit of the interest-only loan is that you and your investors can receive cash sooner rather than later. The additional cash flow received during the interest-only period helps increase the IRR compared to receiving that cash at sale. Back to the $10 million loan example in the introduction, the difference between the interest-only payment and the principal plus interest payment is $12,819.36. Technically, all payments above the interest amount reduces the loan balance. So, rather than receiving that additional payment during the business plan, you would receive it at sale. Due to the time value of money, that $12,819.36 is worth more when received during the hold period than it would be worth in the future, say once the property is sold in 5 years. In addition, in the event of a massive reduction in property value, you and your investors will be much happier if you were able to receive those additional cash payments, especially if the value of the property is lower than the loan balance that would have otherwise been paid down.

Potential Drawbacks of Interest-Only Payments

There are three potential drawbacks to securing an interest-only loan.

First is that there is no principal paydown. As I mentioned above, this is also a potential benefit due to the time value of money. However, if the plan is to refinance or secure a supplemental loan after implementing the value-add business plan, the proceeds will be lower due to the fact that no principal was paid down during that period. Or, if the market cap rate increases and the value of the property decreases, you may become “underwater” on the mortgage and have to actually pay to sell the asset.

Secondly, once the interest-only period expires, the debt service increases. If you are not implementing a value-add business plan, unless the rental rates increase naturally, your cash flow will take a major hit once your debt service increases. If you are implementing a value-add business plan, you will need to increase the cash flow by an amount that is equal to or greater than the increase in debt service once the interest-only period expires. If you are unable to increase the cash flow as quickly or as high as projected, you may not be able to achieve your projected returns once the interest-only period expires.

Lastly, you may convince yourself to do a bad deal because of the lowered debt service during the interest-only period. For example, you may underwrite standard principal plus interest debt and the deal doesn’t meet your return projections. But if you underwrite three years of interest-only, the deal does meet your return projections. This isn’t a problem as long as you are conservatively underwriting the deal. Since you know the deal doesn’t make sense with a standard principal plus interest loan at the current net operating income, you need to be confident in your ability to increase that net operating income amount before the interest-only period expires.

Conclusion

Overall, interest-only loans are best when you are implementing a value-add business plan. As long as you are conservatively underwriting your deals and are confident in your rent premium assumptions, interest-only loans are a great way to distribute the preferred return to your investors while you are repositioning the asset.

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