Blog
We produce a bi-monthly newsletter for our investors and potential investors, and it usually includes some educational content. We strongly believe that the best investor is a well-educated one and so this page features a collection of our recent educational articles for easy reference by anyone who is even considering investing in multifamily real estate.
Considering Different 'Share Classes'
June 2021
In this month’s Always Learning we’ll discuss the different Share Classes sometimes offered to investors in multifamily deals and the pros and cons of each share class.
It is becoming increasingly common for deal sponsors to offer investors a choice in how they participate in the investment and this is done by creating several Share Classes. While each class of share offered has the same protections and tax benefits always afforded to Limited Partners these classes differ in the risk and return profiles they provide. A typical structure is below:
Class A shares – generally offer a higher Preferred Return but with Total Returns that are fixed and don’t include participation in any upside beyond the stated return. While NOT a debt instrument, you can think of the characteristics of Class A shares as closer to a bond or fixed income asset. Class A shares are senior to Class B shares and therefore get “first dibs” on the asset’s cashflows before Class B shares are paid out.
Class B shares – generally offer a lower Preferred Return than Class A shares receive but include participation in the asset’s upside via an equity split and thus typically feature a materially higher projected overall return. Class B is paid out after Class A so if the asset’s cashflows are lighter than expected distributions may be deferred until such a time as cash flows support them.
For example:
Class A:
Preferred Return – 10%
Projected Total Return – 10%
Cashflow Position – 1st
Class B:
Preferred Return – 7%
Projected Total Return – 16%
Cashflow Position – 2nd
So, in summary, Class A might be preferred by an investor looking for stable cash flows with a somewhat lower risk profile (since Class A is paid first) while Class B might be preferred by an investor less concerned with cashflow during the hold period and more interested in maximizing overall returns. Not all investment offerings will include multiple Share Classes for Limited Partners but it is becoming increasingly common so it’s worth understanding!
Single Family vs. Apartment Investing
February 2021
In this month’s “Always Learning” we’ll discuss the pros and cons of investing passively in apartment complexes versus investing more actively in single family homes. Many investors seeking the diversification and tax advantages provided by real estate start by purchasing single family homes but this approach isn’t right for everyone. We’ll break down a few major factors to consider.
Time Requirements – Being a landlord is time consuming. From the managing the actual purchase to marketing, leasing, maintenance, rent collection, and dealing with tenants the time requirement for single family is high (and gets higher with each additional investment). Passive apartment investing requires little more than the time needed up front to decide whether to invest – it definitely gets the advantage in this category.
Liability – If you own and operate a property you are liable for what happens on that property. If you’re a landlord the question isn’t if you’ll eventually get sued but really just ‘when’, and your liability may not be limited to just your capital in that investment. As a Limited Partner in an apartment deal your liability is LIMITED. If the worst were to happen on a property your assets cannot be targeted. Another check for apartments.
Return Potential – If well purchased and held for the long term single family investments have the potential to deliver higher cashflow than the typical 7%-8% distributions common to apartment investments. While overall returns including sale of the properties tend to be pretty comparable we’ll give a nod to single family investing here.
Risk – Owning single family has material risks. Mortgages are full recourse so should things go south landlords are on the hook personally for covering the mortgage. If a major expense (roof, HVAC, any number of others) crops up it can negate returns for years, and even a couple months of vacancy (having only a single tenant to rely on) can turn a year negative. Apartments are self-diversified by virtue of their scale and can much more easily absorb vacancy and expenses, and Limited Partners have no obligation to the property’s loan. One more for apartments.
Control – Owners of single family investments have complete control over the asset – when to buy, renovate, sell, and all other decisions are up to you. When investing passively in apartments, by contrast, you surrender virtually all control (this is part of the liability shield). If you prefer to be in control, this one goes to single family.
Tax Treatment – Many investors incorrectly believe you have to own a property entirely yourself (i.e. a single family home) to obtain the tax advantages offered by real estate but the same benefits are available to apartment investors as well. This one is a tie.
Scalability – Scaling up single family investments is extremely challenging. There are next to no economies of scale and each acquisition adds on just a much work as the prior property requires. Additionally, for those wanting substantial scale, there is typically a limit of 10 standard mortgages which you can hold. Apartments, by contrast, give the investor the ability to efficiently add tens, hundreds, or even thousands of units to their portfolio.
Predictability – The market for single family homes can be volatile (see: 2009 and many other crashes) and improper timing of a purchase or sale is a real concern. Cash flow is also much less predictable as a sudden vacancy can put landlords in the red in very short order. Apartments have much more stable cash flows and valuations, and since they’re valued as businesses (and not based on comps like single family homes) appreciation can be forced thus far more confidence can be had regarding the value at time of sale. One last one for apartments.
As you can see there are pros and cons to both approaches but we certainly believe that if more people had access to institutional grade apartment investments they would think twice before jumping into single family properties. Being an investor and being a landlord can be two very different things!
The Finer Points of Asset Management
December 2020
In this month’s “Always Learning” we’ll discuss the finer points of asset management, which is a discipline separate from property management and one that is critical to optimize investment performance. As mentioned in the introduction this is also a discipline which has been the central focus of ours this past year. Key facets include:
- Driving the Repositioning Strategy – ensuring the right level of interior and exterior features and finishes to optimize achievable rents in a given sub-market without over-spending
- Identifying Value-Adds – determining which features and services can be added to the property to best drive up Net Operating Income
- Establishing a Realistic Proforma – creating a plan, based on market dynamics and which can deliver on expected returns, against which both management team and asset performance will be measured
- Aligning Management Incentives – designing and implementing incentives, both formal and informal, which ensure that maximizing the performance of our asset is also in the property management team’s own best interest
- Managing Capital Reserves – ensuring that enough capital is held in reserve to provide a cushion of safety against downturns or unexpected expenses while avoiding creating a drag on returns by sequestering too much capital on the sidelines
- Responding to Market Changes – executing changes in strategy (rent levels, marketing plans, concessions, repositioning plans, value-add options, reserve levels, and many more) as realities on the ground shift – and believe it or not this does occasionally happen!
- Determining When to Refi or Sell – potentially the most important decision of all, and heavily dependent on both market factors and asset performance – timing certainly matters
We routinely hone our practices across these areas to ensure that we’re optimizing the value of our shared investment as best as possible.
Our Due Diligence Process
October 2020
In this month’s “Always Learning” we’ll share a bit more detail about our due diligence process and the screening process we employ in determining which deals to present to you for consideration. Our process looks at five factors – the Sponsorship Team, the Market, the Asset, the Underwriting, and the Business Plan – and we’ll share more detail on each below.
The Sponsorship Team – We enter into joint ventures with other experienced operators in acquiring our assets and the identification of only the most credible groups is the very first step in our process. We look at track record, integrity, alignment of strategy, and team structure in making determinations, and we rely on referrals from our existing trusted relationships.
The Market – This analysis is far more quantitative than the vetting of Sponsorship Teams as we have a specific set of criteria which we can objectively measure for every market and sub-market we evaluate. We look at specific thresholds for population growth, job growth, crime, unemployment, median income levels, school ratings, age, average property values, rental rate trajectory, supply, and a host of other variables.
The Asset – Only once the first two steps have been cleared do we look into the asset itself. We carefully consider aspects such as its construction, physical condition, age, unit mix, level of finishes, and in-place tenant base.
The Underwriting – This is where the rubber meets the road and a substantial majority of deals we consider fall out at this stage. When underwriting the asset we ensure that only actual, truly in-place numbers are represented and assess every assumption made – things like projected rent and expense growth rates, occupancy, concessions, bad debt, ancillary sources of income, and expected renovation rent premiums. We also subject the underwriting to a rigorous stress test to validate that the asset could continue to perform under a series of adverse conditions such as an economic downturn.
The Business Plan – Lastly, once all of our other criteria has been satisfied, we evaluate the feasibility of the business plan. We consider the renovation and repositioning plan and its associated cost and timeline, evaluate the expected rent premiums against area comps, and scrutinize the projections of other income sources. We also evaluate the risk mitigation strategy, including the terms and duration of the debt, planned insurance coverage, and contingency plans with regard to management and other key vendors. Lastly, we assess the capital structure and the projected returns for investors and ensure they reflect the reality of the underwriting.
Only when a deal satisfactorily passes each of these screening steps do we bring it our investors for consideration. We pride ourselves in the rigor of our screening process, and it is one of the main reasons why we don’t present opportunities more frequently – only a few match up with all of our criteria. Sometimes the best deals are the ones you don’t do!
Start the New Year Off Right - Recenter on Your "Why"
February 2020
Near the start of last year we published an article on “finding your why” and the importance of having clarity on your personal mission and purpose, and we’d like to revisit the topic now given the vital importance of this concept.
Everyone needs purpose to function at their highest level. Purpose motivates, focuses, and drive us to achieve. Just knowing what needs to be done is insufficient – it can be brittle and can leave you vulnerable to losing focus if you face resistance – a “why” is an anchor which creates the intensity that is proven to lead to the desired outcome. It has also been well documented that having a strong sense of purpose leads to higher overall levels of happiness and a healthier outlook on life, and can even make you more resilient to stress.
After conducting a careful examination of my own “why” recently I was please to find that it remained largely consistent year over year – to gain (and maintain) control of my time – and that as I developed a deeper understanding of this “why” that some additional specificity had emerged. I now know that I want to be in control of my time AND to architect my personal finances in a way that let’s me enjoy life to the fullest while doing so. Fortunately, most of the steps I’ve been taking toward the first portion this mission were largely consistent with the second and only minor adjustments to my course are warranted. These adjustments are, of course, a natural part and progression of having defined your purpose.
So now, as we ramp up into a new decade, I encourage you to revisit your own “why”. What is it that is really motivating you to do the things that you do? What do you aspire to? Remember that the answers to these questions do change so revisiting them on some regular interval is valuable. You may find that increasing clarity here leads to the sustainable, deliberate action needed to create success on your terms.
Our "Workforce Housing" Strategy
November 2019
In this month’s “Always Learning” we’ll discuss some great validation of our focus on workforce housing that we received via a research article published by CBRE.
CBRE’s research strongly supported that which has been at the center of our multifamily investment thesis for the past few years – that there are a series of market forces at play right now which make workforce housing one of the best performing sub-classes of asset available in today’s market.
A brief summary of their findings is below:
- There is an extreme lack of new supply with the vast majority of new construction coming via higher end units and many older units also being demolished
- Only one third of the workforce housing population is spending 30% or more of their income on housing, demonstrating the potential rent upside available in the remaining two thirds of the market
- Wage growth has not kept pace with overall economic expansion, limiting the options for renters and leading to historically high occupancy rates
- Approximately 13.5 million households live in workforce housing and the vast majority of these households are ‘renters by necessity’
- The redevelopment of outdated workforce housing units (what we do!) has proven both of vital importance to maintaining the supply of affordable units as well as an very attractive proposition for investors
These were just the points made specific to workforce housing, and a number of other factors (such as the continuation of low interest rates) continue to increase the attractiveness of multifamily overall as an asset class. It is always nice to see an institution such as CBRE validating what we already held at the center of our investing strategy – and so our plan is to keep doing what we’ve been doing!
*Article Reference: “The Case for Workforce Housing” – CBRE Research
Reasons to NOT Invest in Multifamily
September 2019
In this month’s ‘Always Learning’ we’re taking a slightly different direction and discussing the reasons someone would NOT want to invest passively in commercial multifamily. You know by now that we’re big fans of the asset class, but these are a few things to consider in making your own decision. This might be the wrong investment for you if:
1. You want to have complete control.
These are passive investments which allow investors to enjoy freedom from responsibility with the asset under the management of a team of experts, but some investors prefer to call the shots and stay active in the management of their own assets.
2. You prefer assets which can be easily liquidated.
Real estate isn’t like a stock which can be easily bought and sold. Typical hold periods are 3-5 years so investors need to be committed and should have some additional cash in more liquid assets should they need it.
3. You prefer investments with a higher risk/return profile.
Cash flowing real estate is one of the most predictable and effective wealth building vehicles available, but it is a “get very wealthy over time” and NOT a “get rich quick” tool. If you prefer the big-hit-or-big-miss of small cap equities, options, crypto currency, or other high risk / high return assets then commercial multifamily may not be for you.
Cash-on-Cash & Internal Rate of Return
August 2019
When evaluating an opportunity two of the first numbers an investor should look at are the deal’s Cash-on-Cash (CoC) return and it’s Internal Rate of Return (IRR). In this month’s ‘Always Learning’ we’ll discuss these two key numbers and why they’re complementary when assessing a deal.
What is the Cash-on-Cash (COC) Return?
CoC is a reflection of the relationship between the property’s cash flow and the initial equity investment, and is calculated by dividing the equity amount by the cash flow (profit remaining after expenses and debt service). It is frequently calculated on an annual basis and is a good reflection of the return an investor can expect in a given year through distributions. When a deal offers a “pref” or Preferred Rate of Return it applies to the CoC.
What is the Internal Rate of Return (IRR)?
IRR is similar to CoC in that it is a measure of expected return, but unlike CoC this calculation takes into account the timing of the cash flows and the time-value of money. It is a good measure of the deal’s overall expected return over the entire hold period and takes into account both distributions and the gain/loss at the time of sale. If two deals produced the exact same amount of cash but one paid it out sooner (via distributions) than the other (more at the end) then the former would have a higher IRR.
In summary, the main difference between the metrics is time. If an investment is held for a single year then they are interchangeable but if it will be held for longer than a year then the IRR becomes a more accurate measure. Savvy investors will take both metrics into consideration when assessing an opportunity.
Accredited vs. Non-Accredited Investors
July 2019
In this month’s ‘Always Learning’ we’ll briefly discuss the difference between Accredited and Non-Accredited investors. When it comes to investing in commercial multifamily assets it does matter which classification you fall into, so we’ll briefly review the qualifications of each so you can determine your classification and then discuss the implications for you – the investor.
The Accredited/Non-Accredited designation was created by the SEC to protect individuals who are deemed to be more at-risk or less-sophisticated investors and it does this by proxy of income or net worth. The SEC’s rationale is, quite simply, if you’re wealthy you probably know what you’re doing and if you’re not wealthy you may not. Really, that’s it. To qualify as an Accredited investor you must have net worth in excess of $1M (excluding your residence) OR annual net income of over $200K (single) or $300K (married). If you don’t meet that threshold you’re considered a Non-Accredited investor.
You may be asking yourself “so what?”. Well, the investment options available to the Accredited and Non-Accredited investor are different and so it pays to know what’s available to you. If you’re Accredited, the world is your oyster. You can invest in any advertised deal even if you’ve never met the sponsorship group before (we don’t recommend this, but you’re allowed). If you’re Non-Accredited, however, the rules are considerably more strict. In essence you’re only allowed to work with Sponsors with which you have a meaningful pre-existing relationship AND who have opted to structure their deal in such a way that allows participation by Non-Accredited investors (you’ll hear the term “506b offering” used).
Blue Sun strives to partner with operators who do allow Non-Accredited investors in most of their deals, and by virtue of your pre-existing relationship with us you are legally allowed to invest in these deals. There’s some inside baseball for you!
Recent Case Study: A Declined Deal
June 2019
I’d like to take a slightly different direction in this month’s ‘Always Learning’. Instead of discussing a specific part of the business in somewhat academic terms as this segment usually does, this month we’ll take a closer look at a real deal that I examined recently but ultimately decided not to bring to you – my fellow investors – and explore the reasons why I passed on the deal.
On the surface this deal looked like a good one. The returns were on the higher end of what should be reasonably expected, the business case was strong, the asset’s submarket is up-and-coming, and the asset didn’t appear to have a substantial amount of deferred maintenance or other physical issues. So why pass on it? Well, in getting deeper in my due diligence I discovered three risk factors which I felt cumulatively raised the deal’s risk to an unacceptable level.
1) Preferred Equity Partner. In addition to the two typical tiers of partners in a transaction – Sponsor (General Partner) and Investors (Limited Partners), this deal also had a Preferred Equity Partner involved. This partner brought a substantial portion of the equity required for the deal and as such was entitled to be in ‘second position’ to lay claim to the cashflow and assets of the deal (with the bank in first position). The Limited Partners still had a Preferred Rate of Return as in other deals but if things went south and there was a shortage of cash then we, the investors, would have to stand in line behind both the bank AND this Preferred Equity Partner before getting paid. In my view this adds a material amount of downside risk.
2) Bridge Debt. The sponsorship group decided to leverage a bridge loan to acquire this asset, presumably to achieve higher leverage than a conventional loan would allow. The use of bridge debt itself isn’t a bad thing if the asset has been distressed (low occupancy or high deferred maintenance), but that wasn’t really the case here. At this stage of the economic cycle, IF we experience a tightening of the capital markets and conventional loans aren’t readily available or terms are poor then groups with bridge debt which comes due may be in trouble when they’re forced to refinance out.
3) Split Partnership. Virtually every deal I look at will involve a partnership of some sort – usually between the lead sponsorship group and one or more junior partners like myself, but this deal involved a split of the primary sponsorship responsibility between a sponsor which I know and trust and one with which I am not familiar. This adds additional ‘sponsorship risk’ in my view, because if these two lead sponsors should ever have a dispute then investors like you and me can be caught in the middle of a nasty ‘divorce’ (so to speak). I believe it is more prudent to work directly with one lead sponsor that has control.
I share this case study as a reminder that not all the deals out there which look like good ones on the surface necessarily are. Our goal as investors is to achieve the highest RISK ADJUSTED returns, and so if the risk is elevated too much then the returns aren’t worth it. Multifamily real estate is an outstanding investment – when acquired correctly!
Common Passive Investor Mistakes
April 2019
In this month’s ‘Always Learning’, we’ll discuss some of the most common mistakes that passive investors (especially those new to commercial real estate investing) make and how to avoid them.
Unfortunately, not all the information being put out there by deal sponsors is entirely factual and in investors’ best interests. It always pays to know some fundamentals to help make smart decisions.
Using Funds From a Self-Directed IRA
One of the biggest pieces of misinformation out there right now revolves around the use of self-directed IRAs to invest in real estate. The pitch goes like this: “did you know you can access all that money locked up in your retirement account to invest in real estate through the use of a self-directed IRA?”. While that’s true, it isn’t usually followed by the “BUT”. Many (dare I say most) investors do not realize that if you invest in real estate (a tax-advantaged asset) using a retirement account (a tax-advantaged vehicle) you will actually create a tax LIABILITY for yourself. It’s true. Without going into technical detail, it follows the principle of (-1)*(-1)=1. One of the main advantages of real estate is its tax efficiency, so why would you invest in it through a vehicle that’s actually going to reverse those advantages!? Feel free to Google “UBIT” and “UDFI” to learn more, and I’d strongly recommend using funds from outside a retirement account for your real estate investments.
Trusting an Overly-Optimistic Proforma
It can be tempting to trust a sponsor’s proforma, after all they’ve been doing this for a while and should know what they’re doing…plus the numbers seem to add up. Always, always examine the underlying assumptions driving the proforma. What growth rate are they assuming? Do revenues and costs grow at different rates? Have that budgeted at least 50% for operating expenses? Is there a substantial “fudge factor” built into their renovation budget? What cap rate are the assuming at resale? There are a few key levers which can greatly influence the CoC and IRR numbers in a proforma – know what they are!
Investing with Unfamiliar Sponsors
At the end of the day commercial multifamily assets provide some of the best risk-adjusted returns available. One of the key risks for a passive investor is the deal sponsor him/herself. Are they competent? Trustworthy? Do they come recommended by someone you trust? Too often new investors jump in with a sponsor they don’t know because they’re eager to access the asset class and the returns on the proforma look attractive – only to be disappointed later by under-performance or worse. The first item on any investor’s diligence list should be the sponsor.
Deeper Dive on Tax Advantages
March 2019
Since we’re in the midst of tax season it felt appropriate to dedicate this month’s ‘Always Learning’ to the Tax Advantages of Multifamily Investing.
Too many investors ignore the effects of taxes when selecting their investments and look at returns exclusively on a pre-tax basis. This can be a big mistake since taxes are often the largest expense which will be associated with the investment.
For such investors, tax time is a time of apprehension. For many real estate investors, however, it is a time to be especially grateful to be invested in multifamily. The tax advantages of real estate investments are superior to just about every other passive investment vehicle out there and we know many high net-worth individuals who began investing in multifamily to solve their tax problems.
Four Major Advantages:
Depreciation: The cost of the building and all its contents can be written off over the course of time and these write-offs dramatically reduce the taxes paid on cash distributions. These write-offs are passed directly through to investors in proportion with their ownership of the asset. Most other types of passive investments, even REITs, cannot offer this benefit.
Accelerated / Bonus Depreciation: Most of the depreciation benefits which are otherwise spread across the ‘useful life’ of the asset (~27 years) can be legally accelerated into the first few years of ownership through a cost segregation study. Front-loading these write-offs allows investors to realize the maximum possible tax advantage. These depreciation benefits can also offset the income from other investments thus further increasing the value added to your portfolio of a multifamily investment.
1031 Exchanges: Having written off most of the asset’s value, investors could be required to pay a capital gains tax at the time of sale – if not for the 1031 exchange. This process allows investors to sell an asset and reinvest the proceeds in another real estate asset (of any kind) without paying any tax on capital gains.
QBI Deduction: This byproduct of the most recent tax legislation allows many investors (depending on personal situations) to take an additional 20% deduction on any income from multifamily investments that might still be taxable after depreciation is written off.
A Real-Life Example:
Suppose you have $100k to invest and you’re considering whether to put it in a stock or in real estate. Say the stock returns 10% before tax and the real estate returns 7% before tax. If you invest in the stock your $100k will return $10k before tax in that first year, and after paying State and Federal capital gains taxes of around 20% you will be left with $8k. If you invest that $100k in real estate by purchasing a $500k property ($100k of your money + $400k from the bank) you will have $7k before taxes – and thanks to the magic of depreciation your after-tax return is that same $7k. But that’s still lower than the $8k from the stock market, so where’s the real benefit? Well, an asset of that size would produce around $27k in depreciation write-offs and only $7k of that was used to offset the investment’s cash flow. You can deduct the other $20k against other income and assuming you’re in an average 25% tax bracket that deduction is worth $5k. Add that $5k in incremental tax benefits to the $7k return and now you’re comparing $12k from the real estate to $8k from the stock. THAT is the value of including tax planning in your investment strategy.
As you can see, multifamily’s tax advantages are powerful and are a principal reason that many high net worth investors regard it as an asset class of choice. It also goes without saying, but always make sure to consult with a qualified CPA for preparing your tax returns and developing your own tax strategy!
Value-Add Strategies
January 2019
In this month’s ‘Always Learning, we’ll identify and discuss some Value-Add Strategies. There are three main types of properties to invest in when it comes to commercial multifamily: distressed (in big trouble, riskiest assets), stablized (cruising right along, lowest returns), and value-add (not optimized but not upside-down, best risk-adjusted returns).
That last one is the type of investing we’re focused on, and its also the most widely over-used buzz words in real estate investing. So what does it really mean anyway?
Simply put, a “value-add property” has opportunities to force appreciation. How is that done? Well, commercial real estate is priced off of the Net Operating Income (NOI) so if you can increase the NOI you have also increased the overall value of the asset. OK, but how? NOI is the property’s revenue less its expenses, so drive up revenues and drive down expenses. BUT HOW!? Ah, therein lies the art and the science of value-add strategies.
There are a few tried-and-true methods, the low-hanging fruit, such as bringing rents up to market levels if they’ve been mismanaged or completing selective renovations to command rent premiums over market averages, but these represent the tip of the iceberg to creative value-add investors. The more creative the investor, the more value that can be created. Below are just a few of our favorite strategies:
- Implementing Ratio Utility Billing Systems (RUBS)
- Securing lucrative laundry contracts with 3rd party operators
- Renting washers/dryers if units have hookups
- Creating and charging for reserved parking
- Charging non-refundable pet fees and pet rent (not a deposit)
- Signing exclusive marketing agreements with local companies
- Securing vending agreements
- Making common spaces available to rent for events
- Re-bidding out all property contracts to drive down costs
- Installing efficient water and electric fixtures
As you can see, there are a whole assortment of ways to “add value” to a property – and this list is by no means exhaustive. It is for this reason that we’re drawn to value-add opportunities as a way to generate superior risk adjusted returns (in a tax efficient way, but we’ll go more into that next month!).
What to look for in a proforma
November 2018
In this month’s Always Learning we’ll discuss What to Look for in a Proforma that you receive from a deal sponsor. While the proforma is one of the main documents an investor will use in determining whether to invest in a deal, it is ultimately just “numbers on a page” so savvy investors take care to understand the underlying assumptions upon which the proforma is built. Do the numbers reflect the reality of the asset and the market? Are the assumptions realistic? We’ll help you make those decisions yourself to make sure you’re never taken for a ride by a rosy proforma. Here are some things to look for:
—-Reference the Table—->
Ultimately your goal is to assess whether or not the proforma provided by the deal sponsor reflects a realistic projection of how the asset can and will perform. Always make sure the underlying assumptions are realistic and conservative, and not the “best case scenario”. Ask as many questions as you need to – any sponsor worth working with will be fully transparent with you!
THE KEY METRICS OF REAL ESTATE investing
September 2018
In this month’s ‘Always Learning, we’ll review the Key Metrics of Real Estate Investing. As with any investment there are several important measures to consider when evaluating whether or not to invest in a real estate asset, and we’ll detail them here for those of who you are new to commercial real estate investing.
<——Reference the Table———
Once you have a concrete understanding of these metrics you’ll be able to make more informed decisions regarding commercial real estate investments. If you want any more detail on these metrics, such as their formulas or typical ranges to look for, a quick Google search should return all you need. Every one of these measures figure very prominent in commercial real estate investments.
comparing syndications vs. reits
August 2018
Last month we walked through some of the risks of multifamily investing, and this month we’ll discuss the differences and pros/cons of investing in apartment syndications vs. REITs. Both are valid strategies
regularly used by investors to generate passive income from real estate but there are distinct differences between the two. Check out the breakdown to the right:
—-Reference the Table—->
Both investment vehicles have their advantages, as you can see, but in our book the score is 5-3 in favor of apartment syndications. As long as your financial situation is stable enough to commit your invested capital for a period of five years or longer then we firmly believe that apartment syndications are a superior strategy
primary risks of multifamily investing
July 2018
Having reviewed the tax advantages of multifamily real estate last month, we’d like to cover the primary risks this month. No investment is without risk and while we believe that multifamily offers superior risk-adjusted returns, we also want to help our investors be smart about understanding those inherent risks. We’ve detailed a few of the most salient ones below:
General Market Risk
Like virtually all investments, multifamily is subject to the fluctuations in the market (though substantially less-so than other asset classes). Economic downturns can impair the ability to increase or maintain rent levels, lead to higher vacancy, and inhibit the ability to sell the asset at a premium if desired. This market risk also has a geographic element as the economy in the property’s submarket may underperform the national economy.
Use of Leverage
Real estate investments use debt (aka leverage) and as such there are minimum net income levels needed to make debt service payments. If a property is over-leveraged, experiences a substantial drop in net income, or has a debt maturity at a time when the capital markets are seized up (i.e. 2009) there is a risk of losing the property to foreclosure.
Liquidity Risk
Unlike stocks or bonds, commercial real estate investments are not readily traded on an exchange and as such often require hold periods of multiple years. It is possible that an investor may want to withdraw his/her invested capital at a point in time but be unable to until the managing partners decide to sell that asset. Dependence on Key Individuals – The performance of the asset depends on the actions of a relatively small group of people including the general partners and property management team. If this team is under-performing it can materially affect the performance of the asset for all invested parties.
Our primary objective is the mitigation of these risks, which can be done in very deliberate and proven ways, and the pursuit of strong returns will always come second to the preservation of your capital.
The Tax advantages of multifamily
real estate
June 2018
We make it a point to include some educational content every month and this month we’d like to touch on the tax advantages of multifamily real estate. You may have heard that multifamily investments are highly tax-efficient, but what does that really mean? There are a few different ways multifamily investors realize tax benefits and we’ll detail them below.
Depreciation
This is the big one. The value of the physical property can be written off over a period of years and this ‘loss on paper’ is used to offset real gains in the eyes of the IRS. Also, depreciation can be accelerated completely legally through a cost segregation study. Without getting into the weeds, this has the fantastic effect of letting investors realize more of the depreciation benefits more quickly and often pay little or no taxes on income from their investment for the first several years.
Passive Income Treatment
As long as you aren’t a real estate professional, your income from multifamily investments will be taxed as the passive income rates which are lower than current income tax rates.
Pass-Through Deductions
The new tax law allows for a 20% deduction on income from pass-through entities – such as those used in multifamily syndication – and just like depreciation this benefit is passed along to investors. Your ability to take this benefit may depend on your personal financial situation but for many it has the effect of making the first 20% of your income from the investment tax-free.
I am not a CPA and nothing above is intended as tax advice, so please consult your own tax professional, but as you can see there are more than a few reasons that many investors flock to real estate investments for their tax advantages!
Stay tuned for next month’s article about the principal risks associated with multifamily investing.