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.
5 Colorado Travel Tips for the 2022 Best Ever Conference

5 Colorado Travel Tips for the 2022 Best Ever Conference

Who’s ready for some après ski? Best Ever Conference attendees often use the conference as an opportunity to vacation in Colorado either before or after the conference. It’s truly the perfect winter adventure to get your team together before or after the BEC, or even for inviting your family and friends to join. Let’s face it, this past year has caused us to pause many of our vacation plans, and we’re all eager to get back out and create some exciting experiences. With that in mind, we’ve put together our top Colorado travel tips to help you make the most of your stay.

 

1. Pack your gear.

If you are planning on venturing outside of Denver, don’t forget to pack your snowboard, skiing, or sledding gear. Some of the most popular ski resort towns in the world are located in Colorado such as Aspen, Breckenridge, Keystone, Telluride, and Vail. These ski towns offer incredible resorts located close to town, as well as shopping, restaurants, and other winter activities.

 

2. Book early.

It’s certainly not too early to book your ticket and travel plans for the upcoming BEC. You won’t want to catch a case of travel FOMO by skipping out on your opportunity to secure your spot and travel accommodations. Hotels and vacation rentals start booking in the summer for the upcoming winter season, and since this year is the year of travel, many vacationers are securing their winter lodging already — especially the ski-in/ski-out homes.

 

3. Remember your lift tickets!

In addition to booking your stay, it is highly recommended to book your lift tickets in advance as their prices are expected to increase throughout the year. Those who purchase lift tickets early always receive the best discounts, and they avoid the risk of waiting until the resorts sell out.

 

4. Explore Denver.

Interested in staying local in Denver? There’s plenty to experience in the Mile High City. Did you know Denver brews more beer than any other city? Denver’s downtown area offers a wide variety of brewpubs, eclectic restaurants, and world-class galleries and museums. Another popular location to explore is the artsy hotspot neighborhood River North Art District (RiNo).

 

5. Snag an exclusive resort discount.

The BEC is offering limited exclusive discounted rates at the Gaylord Rockies Resort for attendees. The Gaylord is extremely convenient for travel as it is just minutes from Denver International Airport. The rustic resort is the perfect retreat for a winter vacation — indulge in tranquility at the resort spa, indoor and outdoor water complex, and lazy river, and soak in the picture-perfect views of the nearby Rocky Mountains.

 

There is so much to look forward to this winter at the BEC, and with these Colorado travel tips in your back pocket, you’re sure to have an incredible time both in and outside of the conference. Secure your spot today by visiting besteverconference.com.

 

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The Top 3 Trending Multifamily Amenities Right Now

The Top 3 Trending Multifamily Amenities Right Now

In the multifamily industry, change is constant. Over time, the industry has weathered many a storm, thanks mainly to being on top of the curve in innovation. This tendency has seen a relatively stable sector, even though the industry has faced its fair share of highs and lows. Whatever the economic impact on this sector, it has consistently delivered in customer satisfaction, promoted local businesses, and implemented newer technology and amenities to improve customer experience.

The new generation of renters is tech-savvy and demands the best amenities that provide comfort and enjoyment in multifamily units.

The pandemic has accelerated apartment searches due to the economic downturn. Though the searches have matched the levels that were seen before the pandemic, customer expectations have changed and property managers have to enhance their offered amenities if they expect to convert leads to leasing. 

During the pandemic, precautions have had to be put in place for the common good. Common areas have to be sanitized on a regular basis and on-site staff on duty has to be provided protective gear such as hand sanitizer, protective masks, and, if the situation warrants, PPE kits. In these circumstances, which amenities and services can be provided while keeping operating costs within budget? Learn which amenities are quickly gaining popularity below.

 

Catering to the Work-From-Home Renters

Over the years, many multifamily units have provided co-working spaces to the work-from-home labor force. However, due to the pandemic, more and more people are working from home, so having a co-working space will be a definite attraction to prospective clients looking to lease apartments. Offering improved and updated amenities in co-working spaces will be of prime importance to residents since it has been predicted, even after the pandemic, that this may be the new norm.

Since health and safety have been prime concerns, workspaces should have properly distanced workstations and seamless Wi-Fi connectivity with sufficient charging outlets to prevent crowding. An added attraction like a coffee bar, pool table, etc., can also provide an enhanced ambiance.

 

Attractive Outdoor Spaces

Scientific researchers determined during the pandemic that outdoor, open-air settings were safer than crowded indoor settings. Most people prefer being outdoors to being cooped up indoors anyway, and all the time we’ve spent indoors during the pandemic has reportedly increased anxiety levels.

Providing amenities for physical fitness, tables, and chairs in a well-laid-out garden setting or a play area for children can act as a mood enhancer. Many residents of multifamily units are drawn to amenity-loaded outdoor spaces.

Offering a spacious balcony and patio in residential units is another well-thought strategy for multifamily developers. Additional popular amenities that can be provided include dog walk areas and open-air lounges. All these amenities add to a pleasant living experience, which will attract many prospective residents.

 

Remote Technology

Technology is also a clear front-runner in helping people overcome the effects of the pandemic. Cloud computing and social media apps, for example, are optimizing businesses like never before. This evolution of technology and its incorporation into daily life has allowed a semblance of normality. It has allowed us to connect with family and friends and order food and groceries, plus a host of almost limitless items. Even getting medical advice remotely from a qualified doctor is possible. Multifamily units must offer such amenities, or they will lose prospective clients.

The upheaval caused by this pandemic has affected almost everyone, including the multifamily housing industry; however, challenges can be mitigated by making subtle changes in the current business model. The multifamily unit should offer as many useful amenities as possible in order to become a hot, sought-after living space in the city. Investing in extra amenities may cost money, but in the long term, it is money well spent.

 

 

About the Author:

Veena Jetti is the founding partner of Vive Funds, a unique commercial real estate firm that specializes in curating conservative opportunities for investors.

 

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The First Timer’s Guide to the Best Ever Conference

The First Timer’s Guide to the Best Ever Conference

With a name like “Best Ever,” it’s easy to get excited, and maybe even a little intimidated, about attending your first Best Ever Conference. You might be wondering what makes it the best ever, and how you can get the most out of this conference. And we want to help!

That’s why we’ve developed our First Timer’s Guide for your first Best Ever Conference to ease your mind and help you get the most value out of your time.

 

How the Best Ever Conference Is Designed

The Best Ever Conference, known throughout the commercial real estate industry as the BEC2022, is designed specifically for commercial real estate professionals to focus on relationships and education that will directly impact growth for both you and your portfolio.

 

Our Speakers

Our speaker selection process isn’t about who we know, it’s about what YOU want to know!

Our team listens to and actively engages with commercial real estate investors like you all year round to ensure we stay at the forefront of the commercial real estate investing industry, choosing speakers with expertise and topics that you want to learn about most.

Past speakers have included industry giants such as:

And more importantly, past topics have included:

  • How to Scale Your Syndication Business
  • Lessons in Becoming a Better Leader
  • How to Build a Powerhouse Investing Team, and
  • Multiplying Your Real Estate Portfolio

 

Here are some tips for getting the most out of your time at the BEC2022:

 

Before the Conference

In the weeks leading up to the conference, take some time to create a game plan for your experience. Consider who you want to meet, which services and vendors you might be interested in learning more about, and what topics and insight will be most valuable to you and your goals.

 

Set Your Speaker Session Lineup

First, we encourage you to check out the BEC2022 speaker lineup on our website at besteverconference.com. We will update the conference website regularly as new speakers are confirmed.

Research each of the BEC2022 speakers before the conference. Get to know who they are, what they bring to your table, and the type of information that will be presented. Consider how this information can help you grow your business and portfolio.

It is also a good idea to make note of any questions that come up during your research that you would like to ask the presenters.

Now, break the different speaker sessions into three categories to set your custom speaker session schedule:

  • Must attend
  • Would like to attend
  • Don’t need to attend

 

Shortlist Your Exhibitor Interests

Another good way to make the most of your time at your first Best Ever Conference is to take a look at the exhibitors that will be present. Which exhibitors do you want to learn more about?

Next, go ahead and make a shortlist of the exhibitors you’re most interested in and keep this in your back pocket to make the most of your downtime between sessions at the conference.

 

At the Conference

Balance Your Time

As with most conferences, the top three things you’ll do at the BEC are learn from speakers, network with speakers and other attendees, and browse the exhibitor booths. To get the most out of the Best Ever Conference, you’ll want to strike a balance for the way you spend your time.

Set your speaker schedule into your calendar with locations and reminders so you’re never late to your “must attend” speaker sessions.

During your “don’t need to attend” sessions, try to make your rounds to the exhibitors based on your preparations. Spread these visits out to allow for plenty of time to take care of your basic needs and stay comfortable, fresh, and energized throughout the conference.

And last but certainly not least, plan to spend the rest of your time networking with speakers and other conference attendees.

Most likely, you’ll have questions for the “must attend” speakers — either prepared questions from your pre-conference recon or questions that came up during the presentation. Here is an insider tip: Don’t try to talk to the speaker immediately after their presentation. That’s when everyone is going to want to talk to them and you’ll spend a lot of time waiting in line or look like a weirdo running up to them to get to the front of the line. Instead, talk to them between sessions, at private events, and in the additional group events and parties that will take place at night.

All Work and No Play — Not Us!

Lastly, we’re excited to announce that the BEC2022 will be held at the Gaylord Rockies Resort in Denver, Colorado.

Many BEC attendees use the conference as an opportunity to vacation in Colorado either before or after the conference — skiing and snowboarding are the most popular activities. If this is the case for you, don’t forget to pack your snowboard, skiing, or sledding gear!

 

After the Conference

The value from the BEC doesn’t stop at the end of the conference, it only continues. The relationships you will develop and the knowledge that you take away can be implemented immediately and last a lifetime.

If you haven’t already, check out www.besteverconference.com to learn more about the Best Ever Conference and reserve your ticket today. Check back often for updates, and we’ll see you at the Best Ever Conference in February 2022!

 

 

 

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Managing Up With Jonathan Ghaly

Managing Up With Jonathan Ghaly

As he looked back on his real estate career, Jonathan Ghaly realized that he first worked for a syndicator before he started doing deals with one. In the mid-2000s, Jonathan got hired as a property manager for a 100-unit apartment building. On his first day, he was handed a keychain full of keys and a cell phone that rang non-stop.

Around 2007, the syndicator started to take risky gambles, unbeknownst to the tenants. He began to take on additional investors while subsequently not paying down the mortgage. With the economic crash, the syndicator turned all of the properties into foreclosure, leaving Jonathan to find his next steps.

 

Early Success

“I learned a lot. He introduced me to ‘Rich Dad, Poor Dad,’ and the cash flow game. I saw his mistakes, of course,” Jonathan recalled. “During the crash, I had my real estate license already, and no one was hiring. So I just said, ‘Well, I might as well try to sell real estate.’”

Jonathan’s real estate career started to flourish. He started with two deals his first year and steadily grew upwards. In 2013, he transitioned from only selling properties to buying properties of his own.

“I partnered with a friend because I was just too scared to pull the trigger in the beginning, and we bought eight units together,” Jonathan said. “I bought him out a few years later, and then I just kept buying more.”

 

Coffee Talks

Today, Jonathan’s portfolio consists of 15 rental properties and an assisted living facility, in addition to his investment in multifamily syndications. Reflecting on the community of people who helped elevate him to this place, he said it all started with one friend and a morning coffee session.

“I felt the need to call a friend of mine who I had helped buy his first couple of properties. He was a teacher and he quit to be a fix-and-flipper. I said, ‘I would love to just talk about this stuff — what we’re doing and what to invest in and what not to invest in — with you. Would you have any interest in meeting on Thursday mornings and having coffee at my house?’” Jonathan shared. “He said, ‘Perfect. My kids go to school right near there. I’ll drop them off and come over.’ This beautiful friendship came out of that, and we put everything on the table as far as investment stuff.”

Jonathan’s inner circle of like-minded investors continued to grow larger, with others interested in their open and honest discussion of real estate and real life.

“These investor-mentor meetings or inner circle meetings are amazing, even if it’s once a month. After my experience with it, I would highly recommend it to any investor because you never know what good can come out of it,” Jonathan said.

 

Shifting the Game Plan

Even with a trustworthy network, Jonathan Ghaly believes that the work is never done with self-education and believing in your own intuition on a deal.

“Experience is a big word in the industry. But even with that, a lot of people can have experience but still go through a protocol. So, are you like a machine just going through protocol without common sense? Or do you really understand real estate where you can get creative, and you can see through these blind spots? Because it’s all about shifting the game plan. Keep educating yourself in real estate, and don’t get distracted,” Jonathan shared. “I can get really distracted, but when I do all this research about these other things, I come back and realize it doesn’t beat the real estate return.”

 

The Importance of Trust

Reflecting on his journey to date, Jonathan Ghaly believes that the fundamental element of any successful real estate partnership is similar to that of marriage: trust. While some things are learned the hard way, it’s essential to surround yourself with a team that complements your strengths and can compensate for your weaknesses.

“Find a partner you can trust with your life because it is a marriage. I find myself constantly partnering with people who are exactly like me,” Jonathan said. “We should build our teams up so that the strengths and weaknesses, and skills and non-skills, are really evening out and covering everything across the board.”

 

 

About the Author:

Leslie Chunta is a marketing consultant with nearly 15 years of experience in creating dynamic marketing programs and building brands for startups to enterprise organizations. She has worked agency- and client-side with high-growth companies that include Silicon Valley Bank, JPMorgan Chase, SailPoint, EMC, Spanning Cloud Apps, Ashcroft Capital, Netspend, and Universal Studios. www.thelabcollective.com

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4 Tips to Raise More Money From Passive Investors

4 Tips to Raise More Money From Passive Investors

Have you ever found yourself asking: How could I raise more money from passive investors for real estate investing? If so, you’re definitely not alone. It’s one of the industry’s most common questions.

To help you out, here are four proven strategies for earning more funds from passive investors. If you can incorporate all four of these techniques into your work, your syndicate should keep thriving.

 

1. Launch a Thought Leadership Platform

Your network, also known as a sphere of influence, is one of your most valuable assets. Grow it, and you’ll almost certainly grow your business. You’ll have more leads and more opportunities, and more people will be eager to invest with you.

A thought leadership platform is the best tool for growing your network. Examples of effective platforms include blogs, podcasts, and video channels. Real-life events can work, too. Interview formats are often ideal for these platforms. You can invite experts to share their knowledge, and you’ll attract many of their fans when you talk with them.

Flourishing thought leadership platforms share two qualities. First, they’re consistent; new content gets released at regular intervals.

They also focus on unique topics. They’re not bland, generic, or overly broad. For a marketable topic, try to incorporate an intriguing aspect of your life. For instance, if you are or ever were a schoolteacher, you might focus on how educators can invest on the side and how they can teach real estate lessons in the classroom.

Remember that a thought leadership platform is a long-term proposition. It will almost certainly take time — maybe a year or longer — to see impressive results. A good place to start, though, is with people you already know.

That group could include friends, family members, coworkers, neighbors, classmates, and the people you see at church or the gym. And those individuals might recommend your platform to people they know. Some of these people may even be willing to invest in your syndication projects.

In addition, make sure you’re posting your content on large and popular distribution channels like Facebook, LinkedIn, YouTube, and Bigger Pockets. Such channels make it easier for web searchers to discover you.

 

2. Ask Positive Questions

The words we use impact the way we think and vice versa. Thus, if we often use negative phrasing, we tend to think negatively. And negative thinking limits our options, sometimes on a subconscious level.

Maybe you’ve asked yourself and others questions like these:

• Why aren’t I more successful?
• Why can’t I ever find good leads?
• Why do my syndication attempts always fail?

Because these queries focus on negative concepts, they reinforce in your mind a certain idea: that you won’t ever succeed.

Therefore, if you’re talking with an expert or just doing your own research, it’s much more productive to pose positive questions. Ask about proactive steps you can take, questions like the following:

• What’s the first thing I should do to raise capital for a particular deal?
• Where can I go in my community to find outstanding leads?
• Who in my sphere of influence could help me attract new investors?

When you put forth such questions, you get solid information that you can use right away.

More than that, these questions put you in the frame of mind for business success. Instead of making you feel defeated, they can empower and energize you. They remind you that you are in charge of your destiny and that you have the resources to improve your situation at any time.

 

3. Make Your Own Opportunities

Once you’re asking good questions, you’re ready to create great opportunities. Never sit back and wait for passive investors and deals to come to you. Go out and find them.

If you’re in need of funds, for example, go to as many conferences, meetup groups, Bigger Pockets forums, and other networking events as you can. Contact leading industry bloggers and other online influencers as well. Over time, your network should grow considerably, and your investment income should do likewise.

In the same way, deals are waiting for you. Of course, you can employ old-school methods such as cold calls and direct mail. And, once again, it pays to be an enthusiastic networker. Reach out and build relationships with as many local property owners as possible. You’ll get inside intelligence that way, and those people just might call you first when they’re ready to sell.

 

4. Find Complementary Partners

A business partner can be extremely helpful. When you join forces with someone, your sphere of influence will immediately double. You can accomplish twice as much in a given week or month. You can motivate one another to ever-greater heights. And, if you choose the right person, your weaknesses will no longer hold you back at all.

That’s because the ideal business partner is someone who’s good at what you’re not so good at. As a result, the two of you can both focus on your strengths, leading to a more formidable operation overall. For example, if you’re a whiz at underwriting but not so hot at marketing, seek someone who’s a genius at the latter.

Naturally, finding such a person requires introspection. You have to honestly and objectively assess your past performance to figure out what you do well and less well. Also, never feel bad about any weaknesses. Everyone has professional weaknesses, and being able to recognize them is, well, a strength.

Finally, all of these methods have something in common. They’re not one-offs. Instead, they’re behaviors for the long haul. They’re techniques that can win over passive investors year after year. In that way, investing in success really is a way of life.

 

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How Anthony Chara Scaled His Business From 10 Single-Family Homes to 1600+ Apartment Units

How Anthony Chara Scaled His Business From 10 Single-Family Homes to 1600+ Apartment Units

Anthony Chara impressively increased the size of his business from nearly a decade of looking after single-family homes to overseeing more than 1,600 apartment units spread across the country. Of course, telling Anthony’s story includes sharing investing tips and interesting experiences; however, according to Chara, it all ultimately comes down to one thing: not giving up.

As he mentioned in a recent interview, the most important thing that an investor can do — and the most important thing that people in all walks of life can do —is push past roadblocks and learn from the setbacks we all experience from time to time. The learning that is done during these times is invaluable.

How Did It All Come Together?

Anthony Chara’s housing story started in 1993 when he and his wife moved to a different home but continued owning their former residence and rented it out. That gradually increased to 10 of those types of homes until, eight or nine years later, he started learning and putting into practice new strategies such as fixing and flipping homes and engaging in wholesale deals. He soon realized that doing those things was a combination of hard work and considerable rewards.

He entered the apartment aspect of real estate for the first time in 2003 and quickly discovered that the rent checks that he was receiving from those units were significant, particularly in cumulation but also individually in many cases as compared to single-family homes that he had worked with in the past. In the years that have followed, he has been in business with several 100+ unit complexes with the largest at 410, and this has now become his investing focus.

Working With Insurance Companies

One thing every real estate investor needs to take into account is that it is generally not easy to get insurance companies to pay out what they should when they should — for example, when covered properties are damaged in a hurricane. Anthony Chara learned this firsthand when a hurricane damaged a property that he owned in Panama City, Florida. However, it helped to have a public adjuster looking to ensure that the amount paid out was appropriate given the policy and the incident.

He added that ensuring that you have the right type of coverage prior to events such as these is also a must and, conversely, it can prove to be tremendously damaging from a financial perspective if you do not. He is thankful that he had solid hurricane protection for this property located in a hurricane-prone area.

Benefits and Challenges of HAP and HUD

Anthony Chara has also experienced benefits and challenges from working with the United States Department of Housing and Urban Development (HUD)’s Housing Assistance Program (HAP). One of the most significant benefits that he pointed out is that units that are associated with HAP are ones that he receives steady money from, even if they are empty.

However, many of those who are individual buyers or part of a syndication who want to take advantage of that will need to get a HUD loan; a bridge loan may be part of or a substitute for that process.

Also, consider other issues that could arise when working with HUD. For example, a manager who was working for Chara’s syndicate was blacklisted by HUD for repairs that the individual had overseen at a previous property. That resulted in months being spent on rectifying the situation, on the extensive related paperwork, and on hiring a new manager, a period that was partially extended because HUD must interview and confirm any candidates. In the meantime, HAP-related funds were not being paid.

Chara added that other HAP-related issues can also lead to funding being cut. These issues can include dissatisfaction with the condition of the property or how it is being taken care of. Since this is a relatively unpredictable aspect of the arrangement, it is something that an investor should take into account. As a result, Chara said that a good balance for him is to have about 30% of his units under a HAP contract.

It is also important to consider HAP’s voucher program, which is not as immersive. For example, a renter with a voucher will go to complexes that they like and ask if their voucher will be accepted. Although owners of contracted units have a say in who will live there, HAP employees typically end up making the selections.

What Should Go Into a Pre-Purchase Inspection?

One of the most significant ways to earn more money or, more to the point, not lose more money in the big picture is to inspect properties that are being considered and think of issues that may arise in the years to come. Things to look for, according to Anthony Chara, include the drainage in the area. For example, is there somewhere for rainfall and melting of snow to go? It’s also important to inspect the condition of parking lots, roofs, furnaces, air conditioners, mold, and insects. For example, ensure that asphalt parking lots are regularly sealed and restriped so that they do not turn to gravel and mush as the latter prospect results in a much more significant financial burden than the former one does.

Simply put, being as proactive as possible about things such as these will help investors better scale their real estate business and continue to grow their income.

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How to Provide Value to a Partnership Without Capital

How to Provide Value to a Partnership Without Capital

How does one bring value to a partnership? I was asked this question last week while speaking with a young man who is interested in real estate investing. His conundrum is that he only has a small amount of capital. Thus, he wanted to know how he could provide value to a partnership that would provide him an equity stake in a deal. Unsurprisingly, this exact question is bandied about among new investors and old. Not all partnerships are on equal footing from day one. Within this blog post, I hope to provide some insight into how to provide value, earn equity, and become a partner when there is no money to invest on your end.

 

Bird-Dogging the Deal

The first and most popular way to obtain an equity stake in a deal is to be the one to find the deal. This means that if you are the hopeful investor with no money, your value is in finding the property, seller, or bringing people together. So how does one find the deal or bird-dog? Answering that is not as simple as it sounds. The short answer is that there is a lot of time spent scouring neighborhoods, property listings, tax records, looking over tax dockets at the courthouse, going to those properties, talking with the owners or agents, and becoming familiar with every aspect of the property. Once a property is identified, what is the deal?

Any investor that will bring money to the table will want to know the numbers. The non-money investor needs to have all the numbers crunched and know that deal backward and forwards. Know the value add and how this deal can be a good buy. Is it simply return on investment or is it an appreciation play? What is the value of the deal? Know the goal of the deal. Simply buying a property is not enough; it is important to know how the deal will bring value to the partnership.

Once you have found the property, be it commercial or residential, you then have to be able to show the money investors how they are going to see returns on their investment. There are numerous apps, programs, and websites that can help you prepare a pro forma on the property. Investors want to see numbers. Numbers control the deal. Know your numbers.

 

Finding the Right Partners Once You Have the Deal

Once you have a deal put together, how do you find the right partner? It is simple to say “networking” and shrug, but that is not a genuine answer. Websites like Best Ever Commerical Real Estate, meet-up groups, and talking with your banker, real estate agent, lawyer, accountant, or insurance agent are good places to start. Those points of contact need to be cultivated to grow relationships. Organic relationships will generate more leads than you can possibly imagine. That said, there are plenty of money investors out there that are looking for deals. If you look enough, they will be everywhere. Investors are always on the lookout for new deals.

Once you have found a potential partner, it is paramount that you and they start the vetting process. You need to learn as much as you can about your partner. That does not mean their blood type and mother’s maiden name, it means that you need to make sure that your soon-to-be partner has the capital, has experience in investing, and is willing to be transparent with you — after all, this is a marriage of sorts.

 

Structuring Your Equity Stake

What does all your effort calculate up to in the deal? Is it 5%, 10%, 15%, 20%, or more of the deal? Is there an equity earn-out? Meaning, does your equity in the deal increase once the money investors have recouped their down payment? The answer to this question is that you need to have this number in your head when you create the deal. You need to understand and realistically value your efforts in putting this deal together. In the context of syndication, this is the role of the general partners. The GPs bird-dog the deals and it is the limited partners (the money investors) that bring the cash to the table. However, not every deal is a syndication. Most deals are simply buying a building, house, or multifamily property, but the concepts are the same.

Spend the time with your potential partner in outlining your partnership agreement. It is time well spent. Speak with a lawyer who handles partnerships, LLCs, and does real estate work. Do not cheap out on getting the right advice — these boxed agreements online will do you more harm than good. Get a tailored partnership agreement. Ask questions and understand the agreement as well as you understand your deal. Learn about the new ideas of the lawyer or your partner. Structuring your deal is as much an art as is putting the deal together. Find the right structure for you.

 

Good luck out there!

 

About the Author:

Brian T. Boyd, JD, LLM, www.BoydLegal.co

 

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Boost Your Investment Growth in 2022 With the Best Ever Conference

Boost Your Investment Growth in 2022 With the Best Ever Conference

It’s official — the Best Ever Conference is going to be back in person and better than ever in 2022 in Denver, Colorado.

Attendees will have the opportunity to take full advantage of engaging keynotes, workshops, and networking with top real estate investors and innovators, all while forming long-lasting relationships with other high-quality attendees.

Investors eager to boost their growth in 2022 will want to mark their calendars for this game-changing event.

We asked Hunter Thompson, Managing Principal of Asym Capital, to share his thoughts on the Best Ever Conference. “There’s a part of me that wants to try to say, ‘It isn’t REALLY the best ever!’ but, you know what — it actually is,” he said. “When it comes to the caliber of the speakers, the networking opportunities, and the overall energy of the event, it just might be the ‘Best Ever!’”

Hunter added, “If I’m going to take the time out of my schedule to travel to a conference, it needs to be a five-star experience. Best Ever never fails to deliver on that requirement, which is why I attend every year.”

Purchasing a ticket today will allow attendees access to monthly virtual group discussions known as Mini Masterminds, which have already started. These Mini Masterminds provide the opportunity to immediately begin connecting with other attendees and continuously build relationships prior to meeting in person at the conference.

The BEC three-day agenda is going to be packed with next-level value and opportunities for growth. Not one day will be the same.

Want to elevate the experience? There is a limited amount of VIP tickets available. These tickets include everything in General Admission, plus additional exclusive opportunities to meet conference speakers, attend private social events, and more.

To purchase your ticket today, visit besteverconference.com.

 

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6 Tips to Succeed in Uncertain Times

6 Tips to Succeed in Uncertain Times

These have been uncertain times over the past year-plus, and they have made the act of investing in apartment properties much more unpredictable than before. Although there will always be demand for homes, the value of properties such as these will tend to fluctuate even more during uncertain times.

One of the best things that an active investor can do upon investing in single-family apartments and engaging in multifamily investing is taking a close look at what the competition is doing.

For example, consider all of the ways that you can simplify the renting process for the prospective renter. If you can place the entire process online, from providing basic information about your rentals to the signing of a lease, that would be preferred. However, if that is not possible, whether permanently or temporarily, make as much of it as easy to research and complete as possible.

 

Visuals

Having photographs of the property both inside and out is a must-have. Probably around 25 would be the best balance of not too few and not too many.

In addition, consider offering virtual walkthroughs to allow your virtual visitor to experience their prospective new home more fully without needing to leave their screen. This allows them to either be sold on it on the spot or be intrigued enough to want to learn more or see it in person. This can be done through one or more videos or through a more immersive walkthrough experience.

Of course, these online visuals have become especially important over the past year-plus as so many have felt that it is not in their best interest to actually come on-site unless they must. A lack of a virtual walkthrough or a poorly put-together one can turn off prospective renters, particularly if your competition is offering this feature.

Regardless of what visuals you are providing, keep in mind that prospective renters will also want some visuals of what the neighborhood is like and what is nearby. Is it near a park? What is the view like from its windows? As is commonly known among those involved in apartment investing, location is one of the most important features that renters consider.

You may also want to consider uploading a drone-flyover video.

 

Thorough Listings

Another step that you should take as an active investor in these types of properties is being thorough in the text of the listings for each place you own. Well-written, engaging text that both educates and draws in the visitor is preferred. At a minimum, you want some prose there. Not only is this essential to draw the reader in, but it is also important for SEO-related reasons.

Regardless, make sure to include all of the necessary specifics within the listing, such as its price, location, number of bedrooms, type of flooring, if it includes a balcony, if pets are allowed, how much a security deposit would be, and if utility costs would be included in the rent or paid for separately.

This limits the need for potential renters to contact you with questions, saving time for yourself and your staff. It also removes what could be a mental stumbling block that may cause them to move on and consider different properties to rent.

 

Applying, Being Screened, and Completing a Lease

Active investing at a high level also means that you should make the application, screening, and lease completion process as simple as possible. Group those steps together as part of a procedure on your website or, in lieu of that, otherwise simplify them as much as possible.

One of the benefits of investing in a significant number of apartment properties is that you can have one application take care of the application process for all of them. The same goes for screening; the more places that a prospective renter can be simultaneously screened for, the more apt they will be to ultimately decide to rent one that they have been approved for.

The lease-signing step of the process might be the most difficult one to incorporate into your website, and this may require the prospective renter to instead make a trip to your property, but do consider doing this if you can.

 

Metrics

As you progress in this active investing opportunity, it is important to keep abreast of your metrics. For example, keep up to date on how many of your visits turn into applications and, of those, rental agreements. See how those figures vary from apartment type to apartment type and see how tweaking certain aspects of your listings affect these things.

 

Apartments.com

One of the best examples that you should consider mimicking as an active investor is Apartments.com. See what about its design impresses you when you put yourself in the shoes of a prospective renter. Of course, you could also simply use their services for listing your rentals if that ends up making the most sense financially and otherwise from your end.

 

Non-Apartment Properties

Of course, many of these recommendations can be applied to commercial investing and commercial properties as well. Whether you are taking advantage of a multifamily investing opportunity or a commercial investment opportunity, you want to ensure that your properties are being shown in the most positive, informative light possible and that those who want to take advantage of any commercial properties that you own may do so with ease, from the inquiring stage to agreeing on a rental.

 

 

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The Advantages of Voice Technology in the Multifamily Industry

Not only has the next generation arrived — they have arrived with a loud bang. Businesses have been forced to listen to their voices and needs like never before. Over generations, different aspects of our social lives have been affected by new innovations and have been incorporated as daily necessities. Electricity, machines, automobiles, etc., played a part in revolutionizing society and the way business is conducted. Today, it is voice technology’s turn.

How the voice technology revolution is changing business

No longer do you have to physically input commands into a device. Now almost everything can be voice-activated. Using a simple command, you can switch on your TV, lights, fans, or air conditioner, and the limit is almost endless. How did this voice revolution come about? Other than the obvious reason that it makes life simpler, the subtext lies in the much wider availability of smart devices.

No manufacturer would be stupid enough to market a smart device without voice command capability. Even the employees would not buy such a product. Alexa, Siri, etc., have become ubiquitous at homes and workplaces, so much so that we take them and their capabilities for granted. More than 70% of owners of smart devices say that they use voice commands routinely to activate or deactivate their voice-powered devices.

By incorporating voice technology into all available digital assets, voice searches will become easy and routine. Even though today traditional text search is still popular, it is slowly giving way to voice search as a means to find information on the internet. About half the routine searches conducted on the internet are voice commands, and it is an even larger figure when searching for local businesses. This underscores the importance of voice search features, not only for businesses but also for multifamily units.

 

Some advantages of voice technology in the multifamily industry

The multifamily industry has been quick to realize the advantages of incorporating voice technology into the development of multifamily units. This technology can be leveraged as a selling point since it adds more facilities and other convenient features to be offered to investors and/or renters. The multifamily industry will be positively impacted in many ways on a day-to-day level as well as in the long term.

 

  • Voice technology can be integrated to make marketing the lease easier.
  • Renters’ FAQs can be handled by chatbots, especially during after-office hours.
  • Installing chatbots and using natural language processing will help reduce labor costs while ensuring queries get answered.
  • Apartment residents will benefit from voice-tech-activated smart appliances such as thermostats, lighting, etc.
  • When this technology is incorporated, even mundane things like heating up dinner become simple and convenient.
  • The on-site property manager can utilize voice tech to ensure prompt rent payment, stay on top of maintenance issues in real-time, and more.

 

Incorporating voice technology into your multifamily properties

 

Speak the users’ language.

Developers of multifamily units have been strategizing the needs of the end-user. Voice commands during internet searches tend to be longer than text searches. End-users generally build up a rapport with their smart devices and talk to them like a family member or friend. When introducing voice tech, it is better to incorporate various forms of speech that tend to reflect the type of interaction between friends. It will be informal commands to a large degree and the incorporated voice technology should be able to accept this in stride.

 

Create a more inclusive environment.

Voice tech, being inclusive in nature, will make for an easier and more accessible leasing process. It helps those with impaired vision and motor skills, which is an important advantage. Due to its usefulness, voice tech has become routine and a necessity for most consumers. Such technology, incorporated within the multifamily unit, contributes greatly to ease of living.

 

Optimize your website for voice search technology.

Voice searches in multifamily units also tend to be almost totally local. To ensure the search throws up relevant material, the community details should be accurately and consistently displayed on your website. Since such local searches tend to be reflected in social media platforms, ensure your pages are in total sync with such platforms. Update your profile with relevant and important details, which will ensure that search engines give prominence to your listing. It will score a big plus with consumers.

 

Voice tech is here to stay, and multifamily developers have a very valuable tool in their hands to positively impact their bottom line.

 

 

About the Author:

Veena Jetti is the founding partner of Vive Funds, a unique commercial real estate firm that specializes in curating conservative opportunities for investors.

 

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5 Best Tips for Investor Relations

Over the years, I have had the privilege of serving in investor relations with a number of firms. Starting out, I worked for a brokerage firm that had trillions of dollars in assets under management. I later made a 180-degree turn to a startup real estate syndication firm where I built an investor relations platform and served as Director of Investor Solutions. Currently, I serve as Director of Investor Relations at Ashcroft Capital, a group I have grown with and have been investing with for years.

I have never written a blog or article on the topic of investor relations. My primary focus has been on helping others learn how to invest and create wealth for themselves. Today, I felt compelled to share five tips for investor relations that can help you. Whether you are involved in investor relations yourself, or if you’re hiring for an investor relations role, or even if you’re simply an investor looking to partner with a firm, these five tips will help you create better conversations and awareness. Let’s get right to the point:

 

1. Discuss the Good AND the Bad.

Everyone loves to talk about the positives, best-case scenarios, and strong past performance. The truth is, it can create skepticism among some investors if you fail to mention the risks or the downside scenarios as well. You create more trust and transparency if you do not gloss over the negatives, but instead, proactively put them out in the open.

 

2. Be Visible.

It may not be a great idea to start raising capital or promoting your deals without a network, community, or online presence. Make sure to create content on social media outlets, be a guest on podcasts or host your own, and build a thought leadership platform.

Some firms and/or general partners have thousands of followers on one outlet and post there frequently (on Facebook, for example) but they are missing thousands of potential investors who prefer using LinkedIn or YouTube instead. It is better to post a small amount of content on multiple social media outlets than to go heavy on one outlet. The key is to be visible in as many places as possible when someone Googles your name or firm.

 

3. Professionalism.

Newer syndication groups have reached out over the years and asked me to take a look at their website, slide deck, or deal overview from the perspective of a Limited Partner investor. I always circle back to professionalism. For anything you post or distribute, it is critical to remove typos, glitches, or anything that might suggest your team is unprofessional or simply doesn’t care.

Also, what you say and how you say it is really important, so be aware of your messaging. When I join investor Zoom calls or podcasts (for example) I always wear a clean pressed button-up shirt and/or a sports jacket. It may seem unnecessary while working from home, but impressions go a long way. Always be professional.

 

4. Know Your Target Audience.

Funny story… I gave a speech years ago when I was first trying to network with more accredited investors. I had an investor/realtor friend of mine in Orlando who was wanting to start a local meetup for real estate investors. I decided I would partner with him on one of the first meetups.

I marketed the event, created a PowerPoint, rehearsed my speech, got all dressed up, traveled to the event, and gave it everything I had. When I finished the presentation, the audience applauded, and I remember thinking, “I killed it!” Only one problem: It turned out that nobody in the audience was an accredited investor. Lesson = Know who your target audience is, where they hang out, what they do, and get out in front of the right crowd to avoid wasting time and energy.

 

5. Respond Quickly.

Oftentimes it is not about whether YOU are ready to pitch your deal, it is when YOUR CUSTOMER is ready to invest. If one of your investors decides out of the blue that they are ready to deploy $100K today, and they email, text, or call, you better be ready to help them out ASAP. You can lose an investment simply by not responding quickly enough.

On a personal note, a couple of months ago I was looking to make an investment with an operator. I emailed three quick and easy questions after reading their project overview and never heard back. I placed that capital with another operator a couple of weeks later. We work in a very competitive space — something to keep in mind. Responding is also a form of professionalism.

 

In conclusion, I will leave you with a bonus tip…

 

Be Adaptable.

Things change rapidly in today’s world. New conferences, new social media outlets, COVID — you must be adaptable and open to experimenting to see what works. When one door closes, pivot and look for another. If one strategy stops working, be adaptable. One of my mentors told me years ago: “Double down on what works.”

 

 

To Your Success,

Travis Watts

 

 

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How to Save Your Commercial Real Estate Company From Catastrophe

Real estate is a wonderful way to make lasting relationships, create wealth, and provide society with something it needs in the form of housing.

These are things people say when things are going well, and everyone is making money. However, what happens when things go bad? I am not talking about the kind of small “b” bad. I am talking about the big “B” bad. The kind of bad where you and your partner(s) are saber-rattling and lawyers are being called, big litigation budgets are in the offing, and you can see this very profitable business venture nose diving over things that should have been dealt with on the front end of this venture.

 

The Agreement

I cannot count the number of times I have met with a client who has been sued by a partner or is ready to sue their partner. From a partner refusing to allow access to the books and records, to one partner taking too much money, to cutting off a partner’s distributions, these are the issues that a little pain on the front end with a lawyer would have obviated.

How so? By writing a partnership agreement or operating agreement detailing who will do what, when. The best place to start drafting your problem-solving document is at the end of that document. What does this mean? This means that you draft a partnership agreement or operating agreement by breaking up the company first. It is best to agree on how to close the company and split the assets and profits when you and your partner(s) are getting along and everything is rainbows and butterflies with a pot of gold at the end of that rainbow.

Dissolution agreements or clauses help you construct the front end of the document. It is here that you can find out who is going to put some skin in the game. At the beginning of a venture, it is easier to have everyone agree that they will only get out their pro-rata share of what they put into the company. Thus, when the venture buys that apartment building, everyone knows: 1) how much equity everyone has, 2) how much each person paid for their equity, and 3) how much each person will get back if this venture ends.

 

Discuss the Details

Far too often good friends, business colleagues, and/or family decide it would be a good idea to be business partners and fail to approach business as the transactional matter it is. Not only will this naivete lead to hurt feelings and irreparably damaged relationships, but it will also lead you to the courthouse steps.

A partnership or other business venture that has not had the foresight to discuss the hard issues about its inner workings will ultimately find itself strangled to death by lawyers and the legal system. Notwithstanding the legal fees each party will pay their attorneys, the Judge has the ability to order a receiver to take over the business, wind up its affairs, and sell the assets. This means that your largest investment could go on the market against your wishes, sold for less than you and your partners think the business is worth, and you will only get what you can prove your equity is or was.

 

Understand Your Dynamic

In the context of syndication, it is important to know and understand these issues very well, either as a general partner or a limited partner. What do the documents say? What do those clauses mean? How much do you get if things go sideways?

Typically, a syndication deal is very well papered with documents, and you should be able to know how you get from A to Z. If you do not know your exit strategy or how you get your equity/money out, then you have some homework to do.

Syndication is successful because of the general partners who put the deal together. But those deals cannot work without limited partners who fund the projects. GPs and LPs need to understand their dynamic in a syndication relationship. Take the time to sit down with a pen and go over your partnership agreement. Know what you can expect in good times and bad.

 

 

About the Author:

Brian T. Boyd, JD, LLM, www.BoydLegal.co

 

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10 Tips for Your First Apartment Syndication Deal

Getting into multifamily syndication can be one of the most lucrative areas of commercial real estate, but it can also be quite intimidating. You’re not only responsible for your own money and success, but you also have other investors entrusting you with their finances.

We recently spoke with Mo Bloorian, a 25-year-old investor who has acquired over 100 units in just two years. Mo’s best-ever advice is to just get started. Don’t worry about your age or experience level — if you want to get into syndication, you’ll make it happen. Read on for more of Mo’s best tips for doing your first apartment syndication deal.

 

1. Don’t Wait — Just Get Started

Mo can be an inspiration to everyone. Many of us feel that we’re too young and too unfamiliar with the real estate business to get started. We may make excuses that we’ll invest when we’re a little more secure in our careers and when we’ve taken the time to learn more.

Mo did the opposite. He jumped in and he’s been learning as he goes. He started as a real estate agent and then used some of his equity to buy a duplex. From there, he was hooked, and he’s been taking risks ever since. Mo’s bold attitude has helped him get successful quickly.

 

2. Sometimes You Have to Look Outside Your City…

If you live in an area where multifamily syndication is difficult to turn a profit, you may need to look outside your city. Some cities and regions are just naturally better for multifamily properties. If you, like Mo, live in an area like New York City, it may be too expensive for you to invest.

Instead, Mo started looking in upstate New York. He found the properties to be much more affordable and he did really well on turning a profit. Just start widening your search circle until you find an area that will be profitable.

 

3. …But Stay Within Driving Distance

While some apartment syndicators will work with commercial real estate from all over the country, Mo prefers to stay within driving distance from where he lives. His properties are all only a few hours’ drive for him.

He suggests keeping your properties relatively close, especially if you’re working closely with management or if you’re involved with value-add properties. For active investing, you need to be able to visit the property in person. When there’s an issue, sometimes the best way to handle it is to take care of it yourself. You can have a more hands-on approach if it’s somewhere you can reach in a few hours.

 

4. Look for Hidden Gems

While some properties are an obvious win, there are some that are hidden gems. These properties often seem like they’re in such disrepair that they’d be too much trouble to renovate. However, don’t just overlook a property without giving it a chance.

You may be surprised that some properties that look awful may just need some simple repairs and some changes in management to give you a significant value-add.

 

5. Network and Cultivate Strong Friendships

One of Mo’s biggest accomplishments comes from networking with other young professionals who are passionate about investing. He made it a point to connect with others and learn as much as he could from them. As a result, he was tipped off about some of his best deals.

Investing is difficult to do completely alone. If you are willing to work with others, you’ll often be considered when they have new deals come up. You may even find out about prospects before others if you’re friends with the right people.

 

6. Work With People Whose Skills Complement Your Own

While it’s great to have friends who share your interests, you also want people who can complement you when it comes to active investing. Mo and his partner each handle different parts of their business and each play to their own skills.

You’re not going to be great at every aspect of being an active investor. Instead of trying to do it all, surround yourself with people who excel at the areas where you don’t. You’ll have a much greater chance of success. Focus on what you do best and find talented people to handle the rest.

 

7. Management Skills Are Important

There will be times when the people you’ve hired to manage, maintain, or renovate properties aren’t quite meeting your expectations. If you want your investment to be worth it, you’ll have to step in and manage the situation.

 

8. You Don’t Have to Break the Bank to See a Return on Value-Add Properties

Many investors think that value-add properties involve spending tens of thousands of dollars in order to increase their profit on a property. However, Mo feels that in many situations, you’ll only need to sink a few thousand into each unit to get a really good return.

Focus on the areas that’ll make a big difference, like the kitchen and baths. If you can improve these areas, you can definitely increase the rent.

 

9. Consider Using Local Banks

When you’re just getting started, you may not have a lot of equity. It can be difficult to get larger banks to lend you money. Instead, you can work with local banks. Local banks are much more willing to take risks on a new investor.

 

10. Build Trust With Your Investors

When you’re working in apartment syndication, it’s imperative that your investors trust you. You can gain trust with a proven track record. You can also be upfront about everything. Your investors will appreciate your honesty and will be more likely to work with you in the future.

 

Final Thoughts

As an active investor, getting your first syndication deal can be challenging, but you can be successful. Remember to find the right people and play to your skills. Above all else, follow Mo’s top advice: jump in as soon as possible and start making money.

 

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5 Things to Expect After Investing in First Real Estate Syndication

5 Things to Expect After Investing in Your First Real Estate Syndication

You’ve selected a commercial real estate sponsor and invested in your first deal. Once the due diligence is completed and the deal is closed, what comes next?

Here are some insights into what a passive investor can expect after investing in their first deal.

 

1. Deal Updates

Nearly every syndicator will approach investor communication differently, but most will send some sort of deal update via email. The ideal frequency is every month, but some sponsors elect to send deal updates on a quarterly basis.

The first email will notify you of the closing. Ideally, the email is sent the day of closing and includes a FAQ-style guide that answers common questions, like:

  • When, how, and how much you are paid (first-time and ongoing)
  • Contact info of the point person
  • When you will receive deal updates, and what the updates will entail

Each syndicator’s deal update communication will also be different. Typically, important operational metrics are included, like occupancy rates, preleased occupancy rates, and collections rates. If these metrics are nowhere they are supposed to be (which depends on the investment strategy), then an explanation of the problem and the proposed solution should be communicated.

For value-add opportunities, updates on the number of renovated units and rent demand will be included. The important thing here is how the actual rent premiums compare to the projected rental premiums. If actuals are below projections, an explanation of the problem and the proposed solution should be communicated.

Other information a sponsor may include in a deal update email includes capital expenditure updates, market updates, and resident updates. They may also include details on other investment opportunities available.

 

2. Financial Reports

Another best practice for real estate syndicators is to provide actual financials on the investment. The most common financial report is a profit and loss statement, which breaks down all income and expense line items. This will promote transparency and allow you to see exactly how the investment generates money and where the money is going.

Quarterly financial reports are the most common frequency. However, more and more syndicators are using investor portals to manage their passive investors. If you are investing with such a syndicator, you may be able to access financial reports more frequently.

 

3. Distributions

At some point after closing, you will begin to receive distributions. The amount and frequency of the distributions will vary based on the syndicator and the investment strategy. For example, core or value-add investments may pay out distributions immediately while opportunistic and distressed investments may not pay out distributions for a few years. However, you should know the amount and frequency of distributions prior to closing, and the syndicator should adhere to those terms. If the amount or frequency of distributions does not align with what was originally communicated, the syndicator should provide an explanation in the deal update.

Eventually, once the investment is sold, you will receive your original investment plus any profits, when applicable.

 

4. Schedule K-1

The Schedule K-1 is the report the sponsor sends to you each year for your tax returns. Once a year, you should receive your personalized Schedule K-1 tax report. Oftentimes, sponsors will communicate the timing of the K-1 in the FAQ portion of the original closing email.

 

5. Educational Content

Many real estate syndicators create educational content for their passive investors. This could be in the form of an exclusive newsletter or webinar, a specific section on their website, an eBook, blogs, podcasts, and/or YouTube videos they post to their website, etc. The purpose of this content is to help you learn more about what you are investing in.

 

5 Things to Expect After Investing in Your First Real Estate Syndication

After you have invested in your first real estate syndication, expect to receive deal update emails and financial reports from the syndicator. Based on the timing outlined in the PPM, you will also begin to receive distributions.

Once a year, you will receive a Schedule K-1 report for your tax returns.

If you want to be proactive and learn more about what you are investing in, the syndicator may offer additional educational resources, either by sending out a newsletter or posting information to their website.

Bottom line: you can be as active or as passive as you want. You can do nothing except check your bank account each month, or you can read every deal update email and financial report. My advice is to be active in what you enjoy and passive in what you don’t enjoy.

 

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9 Secrets to Multifamily Asset Management

9 Secrets to Multifamily Asset Management

Have you been thinking about getting into the multifamily asset management space? You may have done a lot of research about the process, but you’ll need more than that if you want to be successful.

We spoke with Ashley Wilson, who runs a successful multifamily syndication business, to get some insider secrets to investing in multifamily properties.

 

Why Get into Multifamily Asset Management?

Multifamily properties are a great place to get your feet wet. These properties often already have some income, so you’re not tying up your money for a long period of time. In some situations, you can make some simple modifications and restructure some management issues to maximize your profit.

If you don’t have a lot of investment capital, it makes financial sense to buy one property with several units instead of buying several properties. It’s often cheaper to do your renovations on units in the same place than in multiple areas. There’s much less risk involved with multifamily spaces.

 

Secret #1: Choose Value-Add Properties

One of the biggest trends in the commercial investing space is to choose value-add properties. You can often find properties that already have a steady cash flow, make improvements to add value, and then either increase your income or flip the property.

There are many types of value-add properties to consider. Some properties will have obvious fixes, but you should carefully consider each property you come across. Some may have value-adds that aren’t as obvious, such as a change in marketing, that can make a huge difference and greatly increase your profit.

 

Secret #2: Always Be Available

If you’re going to be an active investor, you’re never really off the job. Things come up all the time, and time is money. If you’re not willing to put in the hours and deal with issues as they come up, then you may want to look into another type of commercial investing.

 

Secret #3: There’s No One-Size-Fits-All Solution for Every Property

Each property is different and has its own unique set of problems. While it would be nice to completely streamline the renovation, active investing involves evaluating each property in isolation and coming up with an individualized solution so that you can maximize your profits.

Some are properties that are in physical disrepair. These may need structural or cosmetic modification to make them safe and more appealing to buyers and renters. Some properties have been damaged in natural disasters and were left vacant when the owners couldn’t afford to have them repaired. Other properties are simply behind on maintenance and just need some minor repairs and updates.

Other properties have issues that aren’t so obvious. Some have issues within management that prevent the property from bringing in as much profit as it should. An active investor can hire and train new management and turn the property around.

Finally, some properties need to be pivoted. An investor can add amenities and restructure the marketing to target a different demographic.

 

Secret #4: Partner With a Contractor

One of the biggest secrets to successful active investing is to partner with a contractor or make sure someone on your time has a background or extensive knowledge in contracting. Many investors hire a contractor to renovate their commercial properties, which can lead to spending more money.

Independent contractors are out to serve their own business, not yours. Their bottom line is making money for their company, and it doesn’t matter to them if they save you money. When you partner with a contractor, they have a vested interest in being as cost-effective as possible.

If you don’t partner with a contractor, having someone with contracting knowledge on your team is the next best thing. They can meet with contractors and evaluate bids to make sure you’re choosing the most cost-effective repairs and methods.

 

Secret #5: Sometimes Paying More Saves More

Everyone goes into multifamily syndication with two goals: spend as little as possible and make as much as possible. However, many investors don’t realize that sometimes spending as little as possible costs more money in the long run.

When you’re involved in a renovation, you sometimes will have the option between spending less and waiting longer for the job to get done and spending more and getting a job done quickly. When you’re considering whether to spend less or more, always consider time as a factor. If waiting for a project to get finished will cost you in other places, it’s best to pay more and get things finished quickly.

 

Secret #6: Get to Know Everyone You Work With

When you’re investing, you can work with a wide range of people and your team may change from one project to another. It can be difficult to get to know everyone, but it’s worth the time and effort.

The better you know your team (and the better they know you), the better you can work together. If your team knows you well, they can often save time by making decisions and doing things the way you’d want them to.

 

Secret #7: Don’t Let People Take Advantage of You

When you’re working in commercial properties, there will always be people who try to take advantage of you, especially if you’re new to the game. Contractors and others you hire will assume you know very little and try to take advantage of that.

They may try to cut corners or may try to charge you more for a project. Subcontractors will often make a small problem seem like a much larger one to charge you more. When you’re new to multifamily syndication, the best thing you can do is get knowledgeable, experienced, and trustworthy people on your team. Their advice will be invaluable. You should also be thorough. Do your due diligence before agreeing to anything.

 

Secret #8: Everyone on the Team Has to Be on Board

If even one member of your team isn’t invested in the project, you can run into big problems. Everyone — from the GPs all the way down to the subcontractors and property management teams — needs to be working toward the same goal.

It’s up to you to set the tone and be a great leader for the team. You have to have high expectations for everyone, including yourself.

 

Secret #9: Cultivate a Good Reputation

When working with multifamily properties or any type of investing, it’s important to cultivate a good reputation. You want your business to be seen as both professional and a standard of excellence. Not only will people want to work with you, but they’ll think of you first when a project becomes available.

If you establish a great reputation, realtors may contact you when they find properties they know you’ll want. They may even help you to get these properties because your good work reflects well on them.

 

Final Thoughts

When you’re new to active investing, it can seem overwhelming. It’s a lot of work and you may feel like others with more experience are doing it so much better than you are. But if you’re willing to work hard and follow these tips, you can be successful.

 

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5 Reasons Why You Should NOT Become a Commercial Real Estate Syndicator

5 Reasons You Should NOT Become a Syndicator

Becoming a commercial real estate syndicator is a great way to help you and others achieve their financial goals. However, commercial real estate syndications are not for everyone. In this blog post, I will outline some of the reasons why you might decide to forgo becoming a commercial real estate syndicator and pursue a different active real estate investing strategy.

 

What is commercial real estate syndication?

A commercial real estate syndicator raises money from passive investors to acquire and manage a commercial real estate investment. The syndicator (sometimes referred to as the operator, sponsor, and general partner) actively finds, manages, and sells the asset, and the passive investors fund a portion of the project costs. The profits from the commercial real estate investment are split between the active and passive investors.

 

5 Reasons You Should NOT Become a Syndicator

1. You have anxiety over managing and/or losing other people’s money.

Once you enter the realm of commercial real estate syndications, you are managing other people’s money. There are other investment strategies that involve other people’s money. However, for syndications, the other people who invest their capital are entirely passive (i.e., limited partners). They are entrusting you and your team to preserve and grow their capital.

Like all investments, there are no guarantees in commercial real estate syndications. It is unlikely that a passive investor will lose their money, as long as they adequately vet the syndicator, market, and deal. However, it is possible. Therefore, if the thought of managing and potentially losing your passive investors’ money gives you crippling anxiety, commercial real estate syndications may not be for you.

 

2. You have no real estate experience.

There are two main requirements to becoming a commercial real estate syndicator. The first is that you must have real estate experience (more on the second requirement in the next section). You don’t need to have a track record investing in the specific asset type you plan on syndicating or in commercial real estate. However, you must have success investing in some sort of real estate.

You will have a difficult time getting someone to trust you with their capital if you have zero real estate experience or haven’t invested your own capital. Even if you’ve only purchased a handful of single-family rentals, you can leverage that experience to raise capital. If you’ve never done a deal before, or haven’t worked in real estate in some form, you may not be ready for commercial real estate syndications.

 

3. You have no business experience.

In addition to real estate experience, you should also have business experience before you become a commercial real estate syndicator. By business experience, I mean starting your own company (hint: it could be a real estate company) or being promoted within a large corporation.

As I will detail below, a commercial real estate syndicator is running a business. Therefore, they must have adequate business experience. If you haven’t started your own business or haven’t been promoted within a large corporation, you may not be ready to become a commercial real estate syndicator.

 

4. You want to work part-time in real estate.

There are many real estate investment strategies, like buying single-family rentals or small multifamily, wholesaling, or fix-and-flipping, that can be done part-time (although there are people who do these strategies full-time). However, most commercial real estate syndicators are doing it as their full-time job.

Managing other people’s money, a multimillion-dollar commercial real estate portfolio, and a team requires a lot of attention. If you don’t have the time or don’t want to work full-time hours on your business, commercial real estate syndications may not be for you.

 

5. You don’t want to be liable if something bad happens.

A commercial real estate syndicator, as a general partner, can be personally liable in certain situations. For example, if they secure recourse debt and default on the loan, secure non-recourse debt, trigger a carve-out and default on the loan, or if they are sued by a resident, vendor, etc.

Lawsuits and loan defaults are not the norms, but they are possible. Therefore, if you don’t want to be liable if something bad happens at your property, commercial real estate syndications may not be for you.

 

5 Reasons You Should NOT Become a Syndicator

The five reasons above should not be interpreted as black and white. I am sure there are commercial real estate syndicators who are anxious about managing other people’s money or who got started without real estate and/or business experience.

However, if any of these five reasons apply to you, do some reflecting on your goals and preferences before pursuing a career as a commercial real estate syndicator.

 

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7 Ways You Can Lose Money Investing in Commercial Real Estate Syndications

Just like there is no guarantee that you will make an X% return when investing in commercial real estate syndications (or anything), there is no guarantee that your full investment will be preserved. While it is unlikely, it is possible that you lose a portion or all of your investment when investing in commercial real estate syndications.

One of the main goals of the Best Ever brand is to provide passive investors with an education on how to preserve and grow their capital. In this blog post, we will go over 7 ways you could potentially lose money, as well as the solutions to make sure you keep your full investment.

 

1. Bad Operator

One of the three major risk points when investing in syndications is the operator. They are arguably the biggest risk point because they control the two other major risk points (the deal and the market – more on these below). Therefore, the most common way to lose money is to invest with a bad operator.

An operator can be “bad” for many reasons.

  • They lack experience: You invest in one of their first deals and they fail to implement the business plan properly.
  • They have an inexperienced team: They hire a property management company that doesn’t have a track record managing this type of investment, for example.
  • They lack transparency: They don’t provide frequent updates on the investment, including actual financial reports, so you don’t know if or when something has gone wrong for months.
  • They aren’t actually an operator: They are a co-GP or owner of a fund but aren’t actually the operator of the investment. This isn’t always bad but would be a problem if the “operator” misrepresented their involvement in the investment.

These are just a few examples. The point is that their lack of expertise could result in the investment failing and you losing a portion or all of your investment.

The solution: Learn how to properly vet the operator and their team (here is a guide for how to do so). Proper vetting can help you quickly uncover an inexperienced operator.

 

2. Untrustworthy Operator

It is one thing when the operator is bad. An untrustworthy operator is a different story. You could lose a portion or all your money due to fraud. You could invest your capital and the operator disappears. You could invest in a Ponzi scheme. Losing money due to a fraudulent operator is rare, but still possible.

The solution: Review their past performance and track record. Speak with people who have invested with them in the past. Perform a background check using the Better Business Bureau, Google reviews, and the 506 Investor Group.

Also, invest with multiple operators. You could do all the due diligence in the world but still invest with a fraudulent operator. By diversifying your investments, if one operator ends up being a fraud, only a portion of your investments are exposed.

 

3. Bad Deal

The second major risk point when investing in syndications is the deal. You invest because the projections of a deal meet or exceed your return goals, but the actual returns are significantly less. Or, the business plan fails and you lose a portion of your investment.

This typically happens due to poor underwriting assumptions. For example, the operators assume the market will be the same or better at sale. They base their rent growth assumptions on historical rent growth or “expert” forecasts. They expect to cut operating expenses or increase other income without adequate justifications. They vastly underestimate the capital expenditure costs and/or timeline.

Another possibility is that the deal doesn’t actually align with the business plan. For example, the operator expects to raise rents by $150 per unit on a multifamily deal that is completely renovated and already a market leader in rents.

The solution: For each deal, find (or ask for) a sensitivity analysis. A sensitivity analysis is a “stress test” that increases/decreases certain underwriting assumptions to determine how the overall returns are impacted. Usually, there is a base case, which is what the operators expect to happen, as well as a “downside” and “upside” case, which is what happens if the deal fails to meet or exceeds their expectations.

Also, read through the investment summary to confirm that the business plan actually makes sense for the type of property they are buying.

 

4. Bad Market

The third major risk point when investing in syndications is the market. You could invest with a “great” operator and in a “great” deal but still lose money if the investment is in a bad market.

The solution: Learn how to properly qualify an investment market (here is a guide for how to do so). You don’t necessarily need to perform market research on your own. The operators should include their market research in their investment summary package. Just confirm that the data points to a strong market.

 

5. Economic Recession

Each commercial real estate asset class and market is affected differently by economic recessions. For example, during the most recent COVID-induced recession, retail and office space took a massive hit while multifamily and industrial were impacted much less. Rents decreased substantially in large urban markets but rose in the suburbs and secondary markets. Therefore, depending on what you are investing in and when the investment was purchased, you could lose a portion or all your investment during an economic recession.

Another possibility is that you make less money than you would have otherwise. Maybe you were projected to make a 2.0 equity multiple but end up making a 1.5 equity multiple instead.

The solution: Invest with operators who follow the three immutable laws of real estate investing. They buy for cash flow, not appreciation. They secure long-term debt. They have adequate cash reserves.

 

6. Opportunity Costs

Syndications are fairly illiquid. There might be a process by which you can receive your capital back before the end of the business plan. However, it is typically up to the discretion of the operator. Therefore, there are opportunity costs to having your capital tied up for five or so years. Maybe you are forced to pass on an amazing investment opportunity because you lack the capital.

The distribution frequency can also result in opportunity costs. The more frequent the distributions, the faster you can use your profits to reinvest into more deals. For example, if you invested $250,000 and received a 10% annualized return in monthly distributions, you would have $25,000 in cash to invest into a new deal at the end of year 1. However, if you invested $250,000 into a development deal with no cash flow for years, you could end up missing out on one or more investment opportunities.

The solution: By investing in certain types of funds, you can liquidate your investment much easier. Also, invest in opportunities with ongoing distributions to quickly reinvest your profits into more deals.

 

7. Lose Your Passive Investor Protection

Passive investors are not involved in the business of commercial real estate (i.e., finding the deal, underwriting, investor relations, asset management, property management, etc.). The law protects limited partners from bearing any financial responsibility against lawsuits. A passive investor cannot be personally sued, which means their personal assets or other investments are not at risk. The operators, however, are personally exposed to that risk.

If you invest in a syndication and have an active role, you can lose that protection. Therefore, in the event of a lawsuit, your personal assets or other investments may be at risk, which can result in financial catastrophe.

The solution: Either remain a passive investor or have an in-house compliance person to protect the company against lawsuits.

 

How to Lose Money When Investing in Commercial Real Estate Syndications

Losing money when investing in commercial real estate syndications is uncommon but possible.

You could invest with a bad or untrustworthy operator, invest in a bad deal, or invest in a bad market. You could invest with a great operator, in a great deal, and in a great market but lose money because of an economic recession. You could lose money due to opportunity costs from missed investments. You could be exposed to lawsuits if you have an active role in the investment.

Most of the scenarios where you could lose money can be avoided with proper education. For more educational blog posts on how to properly invest in commercial real estate, click here.

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What I Wish I Knew When I Started Investing in Real Estate

It was the kind of day that every working professional fears. The company I worked for, was going through a massive round of layoffs in anticipation of filing for bankruptcy. Supposedly my job was safe, but the blinking red light on my desk phone indicated that might not be the case. After about 15 seconds of imagining the worst, I took a deep breath and listened to the voicemail.

It was the end of 2008 and I was working for General Motors as we prepared to go into a structured bankruptcy. After listening to that voicemail a few thoughts went through my head, but the most important one was that I hated the feeling of unease and panic. I never wanted to be in the position again. After a few moments, I remembered a little purple book I had read years earlier, “Rich Dad, Poor Dad” by Robert Kiyosaki.

In the book, he talks about the importance of creating assets that generate income and the pitfalls of only having a salary. Those words rang true in that moment.

Real estate investing is one of the core philosophies in the book and I had been interested in investing for some time but decided to continue to wait as I wasn’t sure how long I would be in Detroit. A couple of years later I moved to Chicago and finally started investing in real estate.

 

Two things I wish I knew before I started investing.

1. You don’t have to wait and you are not limited to the market where you live.

What I wish I knew then is that I didn’t have to wait to invest and I wasn’t limited to buying in Detroit. I could invest in any city, especially those with strong fundamentals. I was familiar with strong Midwest markets like Indianapolis, Cincinnati, and Columbus, and bustling Southeast markets like Atlanta, Charlotte, and Orlando. Even better, I could invest passively through turnkey rentals or apartment syndications.

Since I was spending most of my time on my corporate career, this would have been an ideal way to begin investing, gain some experience, and remain focused on my priorities. It would have allowed me to ease into real estate and decide if and when I wanted to be more active.

However, the route we actually took led us to do everything on our own. In 2012, my wife and I bought a two-unit building and house-hacked it. That’s when you live in one unit and rent out the other units. This worked well and allowed us to save a significant portion of our paychecks. From there we bought a three-unit building, before eventually acquiring an eight-unit apartment property.

While we were adding to our portfolio, we also were growing our family. With full-time jobs, two young kids, and a 13-unit multifamily portfolio, we found ourselves getting pulled in opposing directions. Instead of generating a passive income to insulate me from a potential job loss, I had created a part-time job in real estate along with additional strain and stress on my family.

Reflecting on my situation, I thought back to the voicemail I received years earlier. It was from a colleague who was laid off during the structured bankruptcy. He was the type that kept his head down and did his job. He had been with the company for over 20 years and was a dedicated and loyal employee. But at that moment, he was bewildered and angry. He was dealing with some medical issues and had no idea how he would pay for his meds and treatments.

I felt empathy for his situation as I was always told to “get a good job” and work it until you retire. Working at the headquarters for General Motors certainly fit that description. And if you’ve been with a company of that magnitude for two decades, you expect to exit through retirement, not a layoff.

I understood those emotions, the sense of betrayal, being misled, and having nothing to show for the years of service and dedication. I was determined to go a different route so I went hard in the other direction and focused on building my real estate portfolio. Except, that portfolio turned into another job and came with a whole other set of challenges.

 

2. Passive investing in real estate IS an option.

I also wish I had known that passive real estate investing was an option for me. At the time, I thought real estate investing meant buying rentals or fixing and flipping properties. I had no idea that you could invest passively in larger properties and get all the benefits of real estate without the headaches of being a landlord.

More than anything, I wish the colleague that left me the voicemail had a portfolio of passive real estate investments that could hold him over in his time of need. It’s one of the reasons we partner with busy professionals to give them an easy option to create passive income. This provides a safety net in case of job loss and can serve as a bridge for a professional or career transition. And unlike other investments, commercial real estate provides a unique blend of cash flow, appreciation, and tax benefits for investors.

Whether you are seeking a safety net, a bridge, or a savings fortress, consider how passive apartment investing can help you reach your goals. In fact, you may wish that you knew about it sooner.

 

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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The Three Types of Commercial Real Estate Funds

When a sponsor is raising a private real estate fund, there are three types of funds that can be raised:

  • Closed-End Fund
  • Open-End Fund
  • Evergreen Fund

 

1. Closed-End Fund

The closed-end fund structure is the most common type of fund. In this structure, the sponsor will raise equity, typically for a fixed period of time or to a set amount. Once the capital is raised, no new equity is able to come into the Fund.

A closed-end fund has a set term on the life of the fund. With real estate, it is typical to be around 10 years but can vary greatly depending on the sponsor and investment thesis.

Additionally, with a closed-end fund, once the portfolio of assets is acquired, it is set. As assets are sold, the proceeds are not reinvested. Most funds will distribute the proceeds at the time of sale, but others may hold all or some of the proceeds back until the completion of the fund.

The benefits of the closed-end fund structure are a set timeline for the Fund and a fixed portfolio. While a closed-end fund is illiquid, like most private real estate offerings, it provides the closest synonym to a single asset offering, but with the diversity of a Fund, in that the returns for the Fund are reliant on the set portfolio of assets, once the fund is fully invested. Those returns are based on the full Net Asset Value of the assets within the Fund.

 

2. Open-End Fund

An open-end fund varies from a Closed-End Fund in that it has no limit on capital raised or set life of the fund. Capital can be raised and repaid throughout the fund, allowing investors liquidity without the need to liquidate the underlying real estate.

The open-end fund structure allows for investors who are seeking more liquidity. However, trade-offs can often exist, such as lower overall returns for investors, due to capital coming in and out of the Fund without an actual sale of assets.

The open-end fund, like a closed-end fund, will still distribute capital to the investors upon disposition of assets.

The largest benefit of an open-end fund is the liquidity it provides the investors. However, because liquidity within the Fund is not directly correlated to asset sales, there is a reliance on valuations not driven by the free market.

 

3. Evergreen Fund

An evergreen fund is very similar to an open-end fund. The primary difference with an evergreen fund is that the evergreen fund can reinvest capital available through the sale of assets into new assets.

The evergreen fund has the benefit of letting capital recycle within the fund upon the sale of assets. The downside to this is that the sponsor may choose to pursue assets that do not align with the investor’s personal thesis. There is the ability to pull out investments, like with the open-end funds, but the liquidation value may be below net asset value.

 

About the author:
Evan is the Investor Relations Manager 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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45 Quarterly Multifamily Market Reports from Marcus and Millichap

Each quarter, the commercial real estate investment brokerage Marcus and Millichap release their analysis of every major metro in the US.

Reviewing national commercial real estate reports is beneficial. For example, Marcus and Millichap also release annual multifamily forecast reports for the upcoming year (here is their forecast for 2021). However, I believe there is more power in reviewing market-specific commercial real estate reports. The national state of the commercial real estate market is, in a sense, an average of all markets. Some markets outperform the national averages. Others underperform. The only way to know which category a market sits in is to analyze that particular market. Marcus and Millichap’s quarterly market reports expedite this process since you can review their research as opposed to pulling the data yourself.

This blog is a one-stop shop for Marcus and Millichap’s quarterly multifamily market reports.

Click on your market below to download the 2021 Q1 report for your market:

  1. Atlanta, GA
  2. Austin, TX
  3. Baltimore, MD
  4. Boston, MA
  5. Charlotte, NC
  6. Chicago, IL
  7. Cincinnati, OH
  8. Cleveland, OH
  9. Columbus, OH
  10. Dallas-Fort Worth, TX
  11. Denver, CO
  12. Detroit, MI
  13. Fort Lauderdale, FL
  14. Houston, TX
  15. Indianapolis, IN
  16. Jacksonville, FL
  17. Kansas City, MO
  18. Las Vegas, NV
  19. Los Angeles, CA
  20. Louisville, KY
  21. Miami-Dade, FL
  22. Minneapolis-St. Paul, MN
  23. Nashville, TN
  24. New Haven-Fairfield County, CT
  25. New York City, NY
  26. Oakland, CA
  27. Orange County, CA
  28. Orlando, FL
  29. Philadelphia, PA
  30. Phoenix, AZ
  31. Pittsburgh, PA
  32. Portland, OR
  33. Raleigh, NC
  34. Riverside-San Bernardino, CA
  35. Sacramento, CA
  36. Salt Lake City, UT
  37. San Antonio, TX
  38. San Diego, CA
  39. San Francisco, CA
  40. San Jose, CA
  41. Seattle-Tacoma, WA
  42. Louis, MO
  43. Tampa-St. Petersburg, FL
  44. Washington, DC
  45. West Palm Beach, FL

Bookmark this page and return each quarter for the most up-to-date multifamily reports from Marcus and Millichap.

 

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Scaling a Commercial Real Estate Company with Other People’s Money

What does it take to become a successful investor? Do you need years of study and decades of practice? Does it require special connections? Well, the story of Collin Schwartz proves you don’t need any of those things.

Collin is a devoted husband, a father of two, an avid reader, and a podcast devotee. And, in the spring of 2017, he launched his career as an active investor in the commercial real estate market. Today, just a few years later, he owns 245 rental units, and he’s already signed contracts to buy 70 more.

How has Collin made such an impact in real estate in so short a period of time? His fascinating journey offers lessons for potential investors everywhere.

A Bit of Collin’s Background

When he was a child, Collin’s family frequently moved. In fact, it wasn’t until he started his MBA program in 2007 that he finally put down roots. He moved to Nebraska, and he’s been based in Omaha ever since.

After college, Collin got married and worked jobs in insurance, marketing, and information technology. However, while those positions supported him, they didn’t fulfill him.

Then, on New Year’s Day 2017, Collin read “Rich Dad, Poor Dad,” the groundbreaking 1997 book about personal finance by Robert Kiyosaki. A mental light bulb went on and he just knew he had to get into the investment game.

Right away, Collin started consuming investment-related books and podcasts — as many as he could. He networked with investors. He joined the educational website Bigger Pockets. On April 24 — not even four months after reading “Rich Dad, Poor Dad” — he closed his first deal.

On that day, Collin and a partner bought a triplex. It was a pocket listing, which means it was sold through the owner’s personal contacts instead of a public listing.

After the purchase, Collin got to work refurbishing the building. He knew that, given the property’s solid location, it could fetch healthy rents after some sprucing up.

In short, Collin was well on his way. Obviously, though, he was still very green and he would learn some important lessons over the next few years.

 

1. Cast a Wide Net

In mid-2017, Collin was still working his regular office job. He figured that, in his spare time, he would contact brokers, collect commercial real estate prospects, and bid on the leads that seemed promising.

This plan soon hit a snag, however. Collin discovered that most brokers aren’t interested in giving leads to newcomers. He had trouble finding new properties.

Fortunately, Collin had no intention of giving up. Instead, he created an account on ListSource, an invaluable website that provides homeowner leads and lists.

With the information on that site, Collin compiled a long list of people who’d owned a multifamily residence for more than five years. Then he went old school. He mailed each person on his list a handwritten letter to introduce himself. Approximately 191 letters went out.

Collin didn’t get many responses, but this project definitely paid off. He was able to buy six properties from those contacts.

On top of that, those six homeowners recommended other commercial properties to Collin, all of which were located nearby. Even better, after he closed those six deals, the sellers talked to the other properties’ owners and endorsed Collin. Thanks to their assistance, he was able to buy even more units.

 

2. Keep Learning, Keep Growing

As time goes by, Collin continues to improve his skills and build his base of knowledge. That growth has taken different forms.

For one thing, Collin always makes time to study. During his first year of investing, he kept practicing his negotiating method. Even today, with all of his success, he still devours books and podcasts about real estate, eager to acquire new techniques and gain new competitive edges. As he once tweeted, “If you’re not constantly learning, you’ll soften a little bit.”

He keeps growing his professional network as well. For example, a few months before the pandemic, he formed a meetup group. Today, it has 500 members, and about 100 people attend each monthly meeting.

 

3. Partner Up

In any field, an experienced partner can be a great help, especially for a newcomer. Indeed, that person can assist in numerous ways, a fact that Collin can attest to.

One of Collin’s crucial early collaborators was a local real estate investor named Steven Sykes. In 2017, he met Steven in a circuitous way. The fiance of Collin’s wife’s cousin was an attorney who knew a good deal about real estate. He told Collin about a real estate agent he knew, and that agent recommended a different agent. Finally, that third person gave him Steve’s contact information.

Collin and Steve hit it off right away, and they had long conversations about their investing goals. When they met, Steve owned and managed about 50 rental units. Collin showed him the triplex opportunity, and they became active investing partners.

Given Steve’s expertise, he was able to explain every aspect of the deal to Collin. And they each contributed half of the money for the purchase.

Steve also provided Collin with a sense of security, promising him that he’d buy out the entire complex in a few months if Collin didn’t like real estate management.

In short, having a seasoned partner like Steve can often mean the difference between success and failure — and between enjoying a project and not enjoying it.

Since that time, Collin has had no problem attracting business partners when he wants to. Part of the reason he’s so appealing to potential allies is his penchant for self-management. Indeed, he describes himself as a “control freak,” and he runs his properties whenever he can.

As such, Collin meets with contractors and personally fills tenant vacancies. Thus, he’s able to handle problems faster and keep his rates of occupancy high. And he has an outstanding reputation within the industry to show for this hard work.

 

4. Get Outside Financing

Collin relied on his own money for the first 18 residential units that he purchased. As he scaled up from 18 to 245 units, however, he had to depend on financing from others. He couldn’t have scaled up without it.

For one thing, Collin found many deals through his own personal leads and not through public listings. Thus, whenever he brought a financing partner on board, he could charge that person an acquisition fee. Those fees definitely added up.

Flipping buildings has been another source of funding for Collin. To date, he’s completed about 12 flips.

In addition, he’s received a number of second-position loans.

One of Collin’s largest sources of funding is the BRRRR strategy. “BRRRR” stands for “buy, rehab, rent, refinance, repeat.” This technique is fairly simple:

  • The active investor purchases a distressed property.
  • He or she beautifies it and, if necessary, brings it up to code.
  • The units are rented out.
  • The investor refinances, typically by receiving cash for equity by way of a larger mortgage.
  • With that infusion of cash, he or she can then look for another distressed property to buy, starting the process all over again.

In a similar vein, Collin has, at times, gone to hard money lenders for cash. Then, after completing a deal, he was able to refinance, pay back the money, and attain ownership of the property.

 

Creative Financing

If you look at the largest of Collin’s commercial properties, a residential complex that has 87 units, you can see how intricate his financing strategies can be. Collin and a partner serve as this property’s managing members, and the two of them brought equity to the deal. Two other partners have contributed funding. Collin also earned an acquisition fee for this complex, and he gets an asset management fee as well. On top of all that, the group received a fixed loan from the lending company Freddie Mac to complete this purchase, one that’s amortized over 30 years.

This property wasn’t a candidate for the BRRRR method because it wasn’t distressed; it was in great shape at the time of sale. Even so, Collin estimates that his group can raise the rents by 25 percent or more. And they’re giving the units a makeover, one that includes new flooring, new colors, and other improvements. Moreover, Collin is planning to refinance in about 18 months, after which his group can take out their cash.

As a final note, Collin keeps the cash reserves from his investments in the bank. He doesn’t try to live off of his cashflows. As a result, he’s well prepared in case of a sharp downturn in the economy, an event he has yet to live through.

 

Scaling a Commercial Real Estate Company with Other People’s Money

In the end, Collin’s example demonstrates that active investing opportunities are out there waiting for you, no matter your age, occupation, or level of experience. If you love learning new things, finding and working with partners, developing creative financing plans, and taking a hands-on approach to asset management, you may enjoy a level of investing success you never realized was possible.

 

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5 More Questions to Ask a Commercial Real Estate Operator Before Passively Investing

In a previous blog post, I outlined the top five questions to ask a commercial real estate syndicator or operator before passively investing. When you are passively investing in commercial real estate, you are placing a lot of trust in the active operator. To ensure your capital is in good hands, here are the top five questions to ask before investing:

  1. Are they responsible for acquiring and selling the investment and implementing the business plan, or do they play a smaller role? Also, is their compensation based on the performance of the deal?
  2. Ask about a time a deal went bad to gauge the experience level, truthfulness, and grit of the operator.
  3. What are their mission, vision, and values, and do they align with yours?
  4. Are they a vertically integrated company that invests in attracting new team members and in the professional development of current team members?
  5. Is their core business model operating commercial real estate?

In addition to these five questions, here are five more questions you should ask a commercial real estate operator before investing in one of their deals.

1. What is your investor communication plan?

As a passive investor, you have no control over the implementation of the business plan. However, one thing you can do (and want to do) is to monitor the performance of the investment. Therefore, you need to understand what type of information the operator discloses to investors, as well as how often they communicate.

In addition to asking them what information they provide to investors and how often this information is provided, ask for their last three investor communications. This will give you a much better understanding of their communication style. The most important thing you want to verify is that you can compare the actual performance of the property to the projections. This means the investor communications should at least include financial documents, like a profit and loss statement, occupancy rates, and rental premiums.

2. What is the performance of your portfolio?

One of the best ways to gauge future success is past success. Therefore, you want to determine the performance of their current holdings. Ideally, information on their portfolio is readily available in their marketing material, like a case studies section in their company presentation or in their investment summaries for new deals.

Focus less on the absolute performance of each deal and more on how the deal performed compared to projections because that will give you context. For example, a deal that resulted in a 10% CoC return but was projected to achieve a 15% CoC return was less successful than a deal that resulted in an 8% CoC return but was projected to achieve a 6% CoC return.

3. Obtain a reference and conduct a background check

Although this isn’t technically a question, make sure you speak with other passive investors who invest with the operator. You can ask the operator for a reference, but finding a reference on your own is more valuable because no one ever gives bad references.

Also, perform a background check on the operator. Utilize websites like the Better Business Bureau, Google Reviews, and the 506 Investor Group to find reviews on the company. Visit the company website to confirm that their values align with yours, too.

4. What types of insurance do you have?

If something bad happens to the operator’s business or to one of their deals, like a lawsuit or extensive damage to the property, you want to make sure they have insurance to cover those expenses. Otherwise, you may lose a portion or all your capital investment.

This starts with property insurance, which is a requirement if the operator is securing financing. However, not all insurance carriers are alike. Ideally, they are working with an A-rated insurance carrier.

From a compliance perspective, ask if they have errors and omissions (E&O) insurance through their securities attorney to cover potential SEC-related lawsuits.

5. How do you decide when to sell?

Since the operators have complete control over the business plan, they also have complete control over when to exit an investment. When they initially underwrite an opportunity, they assume a hold period. However, this doesn’t mean they are obligated to stick to that assumption. They may sell early, or they may elect to hold longer than projected.

As a passive investor, assuming you participate in the upside, the sale is usually when you make the most money. Whether you participate in the upside or not, the sale is usually when you get your money back. Therefore, understanding the operator’s decision-making process surrounding the exit is important.

Understand what would make them sell early. Hopefully, it is because the return is higher. But it is also possible that they will exit early for the opposite reason – because the returns are dropping and will continue to drop unless they exit now. To verify their response, see if they have exited an investment early in the past and how the actual returns compared to the projected returns.

5 Questions to Ask a Commercial Real Estate Operator Before Investing

How do they communicate the performance of the investment with the passive investors?

What is the performance of deals they have sold in the past, as well as the deals they currently hold?

(Not really a question, but) find passive investors who invest with the operator and ask about their experience with the operator. Also, perform a background investigation on the operator and their company.

What type of insurance do they have to cover large expenses if something goes wrong?

What would make them sell the deal early?

 

 

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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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What is NOI and Why is it Important? 

NOI stands for Net Operating Income, and it is a term that is widely used in the property investment and real estate sector. NOI is an indicator used to analyze what the yield of a particular asset will be. It is used to calculate an investment’s profitability and the revenue generated from a property after deducting all operating costs.

Some real estate investors even think of NOI as the most important metric when considering any investment since it directly affects the cash flow for various real estate properties, especially multifamily properties.

One major fact that must be remembered when dealing with NOI is that it comes before operational tax deductions. Some other finance sectors call it an “EBITDA” or “earnings before interest, taxes, depreciation, and amortization” which normally appears on your income and cash flow statement excluding all loans, amortization, capital expenditures, taxes, mortgage payments, interests, and depreciation.

 

NOI in the Multifamily Sector

Since NOI is a valuation tool, it is essential in the multifamily sector. It helps real estate professionals evaluate the exact income that is generated from their property. To do this, the property’s operating cost is deducted from the overall income generated by the property. The major source of income for the property is rental income. Other income sources for the property include revenue from parking lots, laundry facilities, vending machines, and other property owners’ amenities. On the other hand, operating costs include insurance fees, legal fees, utilities, property taxes, the cost for repairs, and cleaning or janitorial expenses.

In multifamily properties and real estate in general, NOI is used in calculating DSCR or debt service coverage ratio. This metric clearly shows if a property or investment can cover all of its debt payments and operational costs. Other metrics in which NOI is used in real estate include the NIM or net income multiplier, total return on investment, and cash return on investment.

 

How Net Operating Income is Calculated

To calculate the net operating income of any real estate property, we use the following formula:

Net Operating Income = Real Estate Revenue (or total income) – Operating Expenses 

To understand the formula very well, let’s use an example. Consider the table below for a multifamily property.

 

Description Real estate Revenue Operating Expenses
Rental income $2,000,000
Parking fees $400,000
Laundry Machines $100,000
Property Management fees $100,000
Property Taxes $500,000
Repairs and maintenance $300,000
Insurance $100,000

 

Total Revenue (RR) = $2,500,000 

Total operating expenses (OE) = $1,000,000

NOI = RR – OE 

NOI = $2,500,000 – $1,000,000 = $1,500,000

 

In the above example, the net operating income is $1,500,000. For instance, If the total income a property pulls in is around $500,000, and the total operating expenses are $800,000, the NOI is negative, by $300,000. This is referred to as Net Operating Loss or NOL. We must also realize that NOI is a key tool in measuring any property’s capitalization rate, as we see below. Other parameters that are dependent on the net operating income include:

  • Lenders use debt service coverage ratios (DSCR) to determine if a property is worth financing. It calculates using both the NOI and the annual mortgage debt service.
  • Cash on cash return – Investors usually use this to evaluate the annual returns on invested cash. It is generally calculated in relation to the initial cash investment put into a particular property.
  • Return on investment (ROI) – This is usually calculated by dividing the NOI by purchasing the desired property and multiplying the result by 100 to get the ROI in percentage. Return on investment is a crucial tool for weighing the potentials a property has.
  • Net cash flow (NCF) – The net cash flow is derived by subtracting both your Capital Expenditures (CapEx) and Debt Services (DS) from your NOI.

 

The Importance of NOI

Real estate investors and lenders are particularly interested in NOI because it represents the cash available to pay mortgages. This means that NOI is critical in many areas of real estate investing, including multifamily investing. NOI is mainly significant when it comes to:

  • Property Market Value
  • Financing Considerations
  • Business Planning
  • Investment Allocation

 

Property Market Value

A vital tool in NOI calculation and real estate investing is the cap rate. Capitalization rate goes a long way in determining the market value of any property. The capitalization rate is calculated by dividing the NOI of a property by the sales price or fair market value.

Capitalization rate = NOI / Sales Price

To calculate the market value, the NOI is divided by the capitalization rate of that property. i.e

Sales Price = NOI / Capitalization rate

 

Financing Consideration

When lenders offer debt services to property owners, the NOI becomes vital in determining if a property would have enough cash flow to offset the debt service. Lenders use the Debt Service Coverage Ratio (DSCR) to determine if a property can cover debt service after the operating expenses are paid.

The debt coverage ratio is calculated by dividing the NOI by the annual loan payment.

Debt Service Coverage Ratio = NOI / Annual Loan Payment

 

Conclusion

Real estate investors can make more informed decisions in evaluating properties by using NOI metrics. Assessing the viability and profitability of any property is paramount in succeeding in multifamily investing. The NOI metric is calculated by deducting all the operating expenses from the real estate income on a property. Higher revenues and lower expenses mean better NOI. Lower revenue and higher expenses represent lower NOI. Anyway is a great way to assess the financial health of an overall investment. It can also be a tool to evaluate if a property has the ability to perform better than it currently is performing.

 

Veena Jetti is the founding partner of Vive Funds, a unique commercial real estate firm that specializes in curating conservative opportunities for investors. Veena brings a dynamic perspective to targeting, acquiring, managing, and operating assets using best practices combined with cutting-edge technologies. Her professional expertise includes driving corporate strategy and business development opportunities.

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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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