www.jcoreinvestments.com

What is a Real Estate Syndication

What is a Real Estate Syndication?

The concept of a real estate syndication is not difficult to grasp especially if you’ve ever played poker.

In a syndication, you’re throwing money into a “pot” with others with the difference being in poker, you’re trying to win the entire pot.

In a syndication, you’re able to split the pot with the other players (investors) in a deal including the dealer (syndicator).

This “pot” of money is used to purchase property (apartment buildings, hotels, self-storage facilities, etc.) and hold for an extended period of time.

By “joining forces” with other investors, this type of investing becomes a team sport where everyone wins.

Basics of Real Estate Syndication

So when I get the question, “James, how does a real estate syndication work?”, I typically will compare it to traveling on an airplane.

There are several groups of people involved such as:

  • pilots
  • passengers
  • flight attendants
  • mechanics
  • luggage and ground crew

Using this analogy, the deal sponsor of a syndication are the pilots and you and I (passive investors) represent the passengers.

Even though both groups are traveling to the same destination, each have considerably different roles during the process.

If surprises occur such as unexpected weather conditions or engine problems, it’s the pilots who are responsible for the flight.

They’re the ones who will monitor and update the passengers during the flight:

(“Good afternoon, this is your captain speaking. We’ve hit an area of turbulence but should be through it shortly….”).

And it’s the passengers job to sit back and allow the pilots to make the decisions on what’s best to flying the plane.

Make Sense? 

“90% of millionaires become so through owning real estate.” – Andrew Carnegie

Hopefully you now get a gist of what’s involved during this process as real estate syndication deals works much the same way.

There’s several groups of people that all share a vision and want to improve a particular asset such as:

  • Sponsor (general partner)
  • Passive investors (limited partners)
  • Brokers
  • Property management

However, each person’s role within the project is different.

Let’s take a look at the two main groups involved:

#1 General Partner (GPs)

They’re also known as the sponsor group and typically:

  • find the deal(s)
  • get it under contract
  • arrange inspections
  • evaluate the numbers
  • obtain financing
  • keep it leased
  • manage the property

#2 Limited Partner (LPs)

This group is made up of those that choose to invest passively with limited risk.

Remember, they have no active responsibilities in managing the asset.

How can you profit from a Real Estate Syndication?

Now that you understand the basic operation of how a syndication works, let’s discuss how you can profit from investing in this type of deal.

Profit in any type of real estate opportunities, regardless of a syndication or not, comes from:

  • rental income
  • appreciation

Profit is generated when the operating costs of the property are LESS than the rents collected.

This is known as the NOI or net operating income which represents the cash flow distributed to the limited partners via distributions (monthly or quarterly).

Investors will receive an additional benefit as typically a property’s value usually appreciates over time. Because of this, the investors can net higher rents and earn larger profits when the property is sold.

Syndication example

In order to drive this concept home, let’s use an example.

Let’s say that you’ve been researching about the syndication process via blogs and other forums and decide to jump in and invest.

A group buys a 350-unit apartment complex in Charlotte, NC for the purchase price of $50 million.

Everything you need to know is outlined in the Private Placement Memorandum (PPM) which you read BEFORE investing.

You learn that the bank financing the deal requires a 30% down payment ($15M). Of this amount, the sponsors cover $1.5M and then they raise money from limited partners (LPs) for the remaining $13.5 million of the required equity.

A syndication is now formed (Limited Liability Company or LLC) between the general partners and limited partners and the apartment complex is purchased.

The projected hold time for this project was initially set forth at 5 years. During this time period, the business plan including “forced appreciation” as it was a value-add deal.

Improvements to the property were made such as:

  • upgraded fixtures
  • new flooring
  • granite countertops
  • stainless steel appliances
  • new cabinets
  • new signage
  • update fitness center
  • rehab existing pool
  • parking lot upgrades
  • painting (interior and exterior)
  • new landscaping
  • internet and wifi update

During this time period improvements were being made, the rents were gradually raised to the same amounts being charged by other local apartments with the same amenities.

Due to the increased rental income, the syndication sends the passive investors a share of the profits from the rental properties every quarter. (Profit #1 rental income)

After five years, a buyer is found and the complex is sold for $15 million ($65M) over the original sales price.

At this time, the limited partners get back their initial investment plus a share of the $15 million profit from the sale. (Profit #2 appreciation)

Remember, during this five year hold period, all of the passive investors received distributions on a quarterly basis from the profit made with the rental income.

What’s the Investing Process?

The next logical question you’re probably asking yourself is, “How do I invest?”

Here are the steps for getting into the syndication game.

  1. The sponsor sends out a “deal offering” email that an investment is open.
  2. Review the offering memorandum (property description) and make an investment decision.
  3. Submit the amount you want to invest to the sponsor.
  4. The sponsor holds an investor webinar, where you can get more information and ask questions.
  5. The sponsor confirms your spot in the limited partnership and sends you the PPM (private Placement memorandum)
  6. Fund the deal via wire or check.
  7. The sponsor confirms that your funds have been received.
  8. You’ll receive a notification once the deal closes and what to expect next.


www.jcoreinvestments.com

Multi-family prices will not come down significantly.

Multi-family prices will not come down significantly

We know that Commercial Real Estate Investments have some of the best advantages for returns when compared with Residential Real Estate. In this new post-COVID higher interest rate market, our strategies for buying apartments is changing. Here is what we see, and what we are doing.

If you think we are on the precipice of another 2008, you are smoking crack. Keep waiting, I’ll keep buying. It makes for good rhetoric, but this is not going to happen.

Here is why;

  1. More demand than supply, this is still increasing in the areas we buy in.
  2. Rents are still going up-they will not fall. Look at the historical MF Rent charts for the last 50 years. Rents don’t do down. Ever.
  3. Increase in rents continue to drive NOI and values.
  4. Sellers have been “price anchored” by 2021. They think their properties are worth a lot, and they won’t take significantly less.
  5. Single Family housing is more expensive now. Rates are making housing MORE unaffordable. We are seeing, and will continue to see, a shift in the total economy. The American dream is dying. The house and white picket fence? Not anymore. Now its the 2 bedroom with a community pool in a pet-friendly complex.

Multifamily prices have come down a bit, this is true, but are a far cry from the bloodbath of 2008.

Our Strategy – Focus on debt, not the purchase price.

This is how you are going to get ahead in this cycle and be looking smart in the next 5-10 years.

Here are the tactics;

1) Lots of great debt was placed over the last 3 years. Take advantage of it. Assumption loans used to be the red-headed stepchild, now they are the prom queen. If you have to pay more to assume a loan of 3.63% with a 7-10 year fixed term, pay it. Run your underwriting taking into account your new debt will now be 5.5%-6.5%, and over 8% for bridge!

2) Get the seller involved. Sellers want a high price, so get them on the equity side of your deal. Offer them a piece of the new deal, or maybe a promissory note, or pref equity. Every dollar they finance to you is a dollar you don’t have to raise, a % of equity not given away, and bump in IRR for your investors.

3) Shy away from the heavy lifts. Cash is king, and they need lots of it. Big remodels don’t work with assumptions typically. Grab the operational play, bump those rents, pay down the loan, and ride the inflation wave.

4) Inflation is your friend, not the enemy. For every dollar your rent rises, your long term fixed debt becomes easier to pay off. In fact, the “powers that be” know this, and because inflation benefits the wealthy land and business owners, it will always just be a political talking point. Remember-they will never stop inflation. Grab as much good debt as you safely can, and manage your costs.

What This Means For You

We have created a system for you to invest directly into cash-flowing, hard assets that don’t require you to manage tenants or deal with any of the headaches that come from owning Single Family Homes. This gives you the freedom to use your time as you wish while we grow your wealth through these amazing assets! 

If you are looking to secure your financial future, we would love to connect with you and explore partnership opportunities! 

To Learn More about the many benefits of investing in Multifamily Apartments, Download our Free Passive Investor Guide today!

You can set up a complimentary discovery call to join our investor network with one of our team members here!


www.jcoreinvestments.com

What is Value Add Real Estate Investing and How You Can Make It Work For You

We know that Commercial Real Estate Investments have some of the best advantages for returns when compared with Residential Real Estate. What strategies allow us to achieve great returns for our investors? 

When it comes to Commercial Multifamily real estate investing, there are three main strategies:

#1 – Core Investments

The Core Strategy is for those looking for a conservative return with minimal risk. Regarding multifamily properties, a core real estate example would be Class A properties. These are newer properties in upscale neighborhoods with high quality luxury amenities. Typically, core properties have higher rents with a lower vacancy rate. 

This in turn helps to mitigate risk generating a lower cap rate in exchange for the decreased amount of problems with the property.

#2 – Opportunistic

Unlike the core real estate strategy, using opportunistic strategies are the riskiest of all. These investors are looking for the potential highest returns in “opportunity” which is usually property that is bought low with the hopes of selling high for a quick profit. 

These projects often initially have minimal to no cash flow with a larger potential later once the property has been rehabbed. 

An example of this type of investment in the multifamily space would be new construction of an apartment building. Usually large amounts of capital are needed due to high construction costs which in turn will hopefully attract tenants that can pay an above average rent. 

The key to success in this area is using a highly successful team with experience in:

  • land development
  • repositioning buildings from one use to another
  • ground up developments

#3 – Value-Add Real Estate

Most of the syndication deals we’re invested in reside in the value add class which consist of Class B and Class C property.

Most are familiar with fix and flips as this would be a type of value add in the single-family home space. This is where someone finds and purchases a home that needs some TLC, rehabs it then sells to a new owner for a profit.

So this person is rewarded for taking on a high risk hoping to improve a home to the point where it’s sold to someone at a cost that will at least cover the home’s price and rehab cost.

The value-add component is similar to the fix and flip model when it comes to the multifamily space except on a much larger scale. 

Instead of renovating one unit, we’re talking about multiple units depending on how large the apartment complex is. 

What Are the Risks In Value Add?

As you can imagine, when purchasing a property that needs improving, its condition could be lacking in several areas. 

Depending on how run-down the property is, the amount of construction could be quite high which would significantly add to the risk of the project. Usually the more involved renovations (major overhauls) needed, the higher the risk

Other risks can involve the tenants.

Typically rents can be increased after the rehab has been completed. Occasionally this can cause some to move out and also make it difficult acquiring new tenants which contributes to the overall risk of the project.

Value-Add Examples – Physical Improvements

Value-add real estate is typically a B or C class property that has outdated appliances, peeling paint, distressed landscaping and more. Many times updates need to be made to both the exterior and interior of the buildings.

Here’s a few capital improvements that can be performed.

Interior updates

Common value add interior updates include:

  • upgraded fixtures
  • new flooring/carpet
  • granite countertops
  • stainless steel appliances
  • new cabinets
  • painting units
  • new lighting

Exterior updates

Adding value to the exterior of the buildings along with some of the shared spaces include:

  • new signage
  • update fitness center
  • new pool or rehab existing one
  • parking lot
  • painting 
  • update clubhouse
  • new landscaping
  • covered parking
  • playground update
  • shared spaces (BBQ pit, picnic area, etc.)

3 Reasons Value-Add Investing Can Work For You

#1 Rent bumps

One of the major reasons why a value add play can work has to do with increasing rents.

Many times the property has below average rents which sets it up nicely for the sponsors to justify the increase.  Once they make interior and exterior improvements, the net operating income (NOI) will increase which can greatly increase the building’s value (an example of this is below).

#2 Additional income streams

We all love extra conveniences, right? Your tenants will too when it comes to making their lives easier. And they’ll also be willing to pay more for these such as:

  • covered parking
  • high-speed internet
  • cable/satellite
  • Amazon package lock boxes
  • washer/dryer

#3 Analysis of existing operations

On occasion, the property’s different revenue streams and expenses can be placed in incorrect categories on the profit and loss statement making it tough to find opportunities for value add (poor management).

A good sponsor team will be able to find creative ways to create extra income if some of the expenses found can be passed along to tenants.

Also, the Net Operating Income (NOI) can be increased if some of these expenses can be somehow reduced.

Conclusion

The bottom line is that every commercial real estate strategy has both risks and benefits. Higher risks have the potential to produce higher than average returns, but when making the decision to invest passively, be sure you know the team’s track record and experience with that specific strategy.

What This Means For You

We have created a system for you to invest directly into cash-flowing, hard assets that don’t require you to manage tenants or deal with any of the headaches that come from owning Single Family Homes. This gives you the freedom to use your time as you wish while we grow your wealth through these amazing assets! 

If you are looking to secure your financial future, we would love to connect with you and explore partnership opportunities! 

To Learn More about the many benefits of investing in Multifamily Apartments, Download our Free Passive Investor Guide today!

You can set up a complimentary discovery call to join our investor network with one of our team members here!


www.jcoreinvestments.com

What is the Capital Stack?

A Commercial Real Estate Investment’s ‘Capital Stack’ is arguably one of the most important concepts an investor needs to analyze the equity, debt, and risk return profile of a project. Ultimately, as with any investment, commercial real estate comes with some downside risk. Investors who understand the Capital Stack can assess risk and repayment, where they fall in the pecking order of cash flow, and whether or not that investment is worth the assumed risk.

Let’s Dive In!

The Capital Stack is the structure of all capital that is invested into a company. At a high level, this means that the capital stack includes both equity and debt invested. More specifically, though, this means all types of both equity and debt.

  • Tiers of financing sources – such as equity and debt
  • Order in which investors are paid back through income and profit distributions over the entire holding period.
  • Repayment rights in the event of a default

Layers of the Capital Stack

  • Capital Stacks prioritize different capital types by seniority, with the least senior on the top and the most senior on the bottom. Equity positions are registered first, with debt positions below.
  • When it comes to properties that are unable to generate enough cash to pay all investors or lenders, capital listed on the bottom of the stack will be paid first and any leftover cash then flows to the capital that holds the next lowest position.
  • Should issues arise and the property goes into default, claims to assets are processed in order of seniority in the capital stack with the lower placed capital retaining foreclosure rights superior to those higher up in the stack.
  • In most cases, higher risk capital sits at the top of the stack, while lower-risk sit below, and the lowest at the bottom. In a similar vein, higher return potential typically sits at the top of the capital stack, with expected returns that decrease as you go down the stack.

Here is a run-down of primary sources of Capital most commonly seen in the ‘Capital Stack’:

Common Equity

Common equity sits on top of the capital stack and offers the highest potential reward in exchange for the highest level of risk. People who invest in the common equity of a project own a piece of the property and receive a share of the recurring cash flow and percentage of profits when the property is sold. However, funds are distributed to common equity investors only after the debt has been serviced and the investors at the lower levels of the capital stack have been paid.

Preferred Equity

Similar to the way that a first position mortgage has priority over a second position mortgage, preferred equity holders have priority over holders of common equity. Investors with preferred equity have the first right to receive a pro rata share of the monthly cash flow, along with a percentage of the profits when the property is sold, before the common equity holders are paid. Although preferred equity has priority to common equity, the rights of a preferred equity investor are lower than those of the debt holders.

Mezzanine Debt

Mezzanine debt is similar to a second position lender, and is usually unsecured by the real property. The rights of mezzanine debt holders are subordinate to senior debt holders, but hold priority over preferred equity and common equity investors. Because holders of mezzanine debt are not paid until payment has been made to senior debt holders, the interest rate paid to mezzanine debt holders is usually higher than senior debt. Sometimes mezzanine debt holders will also receive a small percentage of the profits when the property is sold, or an interest rate ‘kicker’ if the project performs better than expected.

Senior Debt

Senior debt sits at the bottom of the capital stack and serves as the foundation for financing a real estate investment. Because the real property typically serves as collateral for senior debt holders, investing in senior debt comes with the lowest level of risk. Holders of senior debt receive periodic interest payments before all other investors higher up in the capital stack are paid, and are first in line to have any outstanding debt repaid when the property is sold. Interest rates paid on senior debt are usually lower than rates paid on mezzanine debt, and may be viewed as having bond-like characteristics for investors seeking a truly passive income stream.


We at The Joint Chiefs of Real Estate have created a system for you to invest directly into cash-flowing, hard assets that don’t require you to manage tenants or deal with any of the headaches that come from owning Single Family Homes. This gives you the freedom to use your time as you wish while we grow your wealth through these amazing assets! 

If you are looking to secure your financial future, we would love to connect with you and explore partnership opportunities! 

To Learn More about the many benefits of investing in Multifamily Apartments, Download our Free Passive Investor Guide today!

You can set up a complimentary discovery call with one of our team members here!


www.jcoreinvestments.com

Build a Multifamily Real Estate Investment company during a Pandemic!

All of our lives have been forever changed since the COVID-19 Pandemic hit the U.S. in 2020. The economy experienced major shifts that made everyone uncertain about the future that still affect us today. 

Although fear gripped the world, The Joint Chiefs of Real Estate (JCORE Partners) a multifamily real estate investment company, was formed in the midst of this uncertainty. Our goal is to provide opportunities for investors looking to reach a state of financial peace through any economic event while working to make a difference in the lives of military veterans struggling with homelessness and PTSD. 

In this post, I’ll explain more about why these causes are so important and why investing alongside us can not only set a successful course for your financial future, but make a difference in saving the lives of our U.S. Military Veterans!

Our Story of Military Investing

After my wife and I spent several years investing in Single-Family Homes while I was on Active Duty in the Army, we realized that we were limited in Residential Real Estate investing. In 2019, we learned more about the scalability of Commercial Real Estate, specifically Multifamily Apartment Buildings and made the decision to pivot into that industry.

After spending the time, money and energy to receive the right education and mentorship to dive into the industry, I met Myles Spetsios, an Air Force Captain in early 2020. After a meeting over coffee, we discovered we shared the same goals and vision and we each possessed skills that were varied, but complementary. This began the journey to the formation of JCORE, which was completed with the addition of James May, a Marine Corps Veteran and Foreign Service Officer and Tom Groves, a 26-year Navy Veteran.

We faced many challenges during this time, as there was so much uncertainty in the Real Estate Industry due to the pandemic. We were all working remotely from various locations in the country but we molded as a team, sharing a common vision to acquire Apartment Complexes with the partnership of Passive Investors, providing them high yield returns through these tax-advantaged assets. Additionally, we set goals to give back from our own proceeds toward causes directly serving homeless Veterans and those struggling with the effects of Post Traumatic Stress Disorder.

Despite the challenges, we learned many great lessons on how to start a real estate syndication company and we closed on three acquisitions from 2020- 2021 – totaling 250 units! We are working tirelessly to become one of the top real estate syndication companies in the industry, creating wealth for Investors like you.

What This Means For You

We have created a system for you to invest directly into cash-flowing, hard assets that don’t require you to manage tenants or deal with any of the headaches that come from owning Single Family Homes. This gives you the freedom to use your time as you wish while we grow your wealth through these amazing assets! 

If you are looking to secure your financial future, we would love to connect with you and explore partnership opportunities! 

To Learn More about the many benefits of investing in Multifamily Apartments, Download our Free Passive Investor Guide today!

You can set up a complimentary discovery call with one of our team members here!


www.jcoreinvestments.com

Active Income vs Passive Income

Why keep working hard, paying the highest amount of taxes possible when you can work smarter?

The goal is to get your passive income to match, at some point in your career, your active income and that’s what we’re going to be talking about today….exactly how to do it.

3 Types of Income

Let’s discuss the basics when it comes to earning money.

There are only three types of income

  1. active (earned) income
  2. passive income
  3. portfolio income

1. Active income

Active or “earned” income is the most familiar to us as it’s what we make while we work at our jobs. It is also the highest taxed of the three income types. Unfortunately, we focus all of our efforts on earning this type of income which causes us to pay the highest amount of tax.

If you earn active income ONLY, you’re trading your time for money.

2. Passive Income

Passive income is income derived from a rental property, limited partnership or other enterprise in which he or she is not actively involved.

Passive income from real estate is not subject to high effective tax rates. Why? It’s typically sheltered by depreciation which results in a lower effective tax rate compared to earned income.

3. Portfolio income

Portfolio income is generated from dividends, interest, and capital gains from selling stocks.

Education Doesn’t Prepare Us

Unfortunately our education system doesn’t prepare us financially. It ONLY focuses on earning active income.

This includes

  • Work
  • Labor
  • Time

They teach us how to work and trade our time for money. Again, this type of income is the MOST highly taxed.

For Example, the Mr Smith gradates with a Bachelor’s Degree and is making $100,000 in their office job.  He’s so excited and tells his friends that he’s making $8333 a month and doesn’t have to live off Ramen noodles anymore.

Little does he know that he’s getting ready to only focus on work that trades his time for money. If they give him $8333 a month, then the government is going to take 24% of that money. Uncle Sam is going to get his share no matter what.

In Mr. Smith’s case, $2000 comes off his $8333 a month leaving him with $6333 a month. Unfortunately, most people don’t even know what their taxes are.

If he was earning $8333 a month in all passive income, only $1250 would be taxed so he’d end up with $7083. Which would you rather have?

Most people have never been taught about active income and taxes. I know I wasn’t

You Still Need Active Income

Now, you can’t just go out and make passive income today. You need the active income first. Also we need workers. People need to work as it gives them a purpose. Even if I had more money than I knew what to do with, you’d still see me working (only difference is work that I’m passionate about not about how much I’m making).

Financial Freedom

I thought the way to get there was hiring a financial advisor but after awhile I learned they were pitching their products and services for their commissions. They did do a good job though of laying out investing advice with regards to retirement plans. Only thing was the financial advisor focused on active income only and gave different scenarios of how compound interest would cause my money to grow after I worked for 30-40 years.

For most of us, this is the only financial advice we know about…work our entire live, invest our money, hopefully have enough saved to retire and never run out.

My financial planner nor anyone else ever mentioned passive income, specifically real estate passive income. If you want to someday experience financial freedom, then you must have passive income coming in.

We call Real Estate Syndication investing mailbox money and a great form of passive income.

I know some of you think the stock market is the way to earn passive income but compared to Real Estate you would be surprised. Read my blog on What’s better the Stock Market or Real Estate? 

Real Estate Investing For Passive Income

Whether you realize it or not, everybody is an investor. People are constantly investing their time and energy and exchanging it for money.

What you have to learn is how to invest your money so that it continues making money so that you don’t have to invest your time for it to grow.

Also there are many friends of mine that I talk to that have cash that they’re sitting on. When I ask them about that, they tell me that it’s for a “rainy day.”

Cash money is going down in value. If you think saving it will get you somewhere, it won’t. Unless you enjoy your money not growing.

Get rid of the money and buy hard assets.

Summary

If you want to stop trading your time for money then you’ve got to get out of playing the active game. The active income game that is. I want you to go all in playing the passive game.

Invest in yourself, focus on growing your active income and begin putting money on the side. Once it grows then buy assets that are going to go up in value and start paying you passive money on a routine basis.

Do you know what holds most people back from doing this? FEAR. That’s right, fear. Any book on being successful or any person that’s made it will tell you the same thing.

It starts with a mindset shift. It takes courage to deplete your cash reserves and put it in something such as real estate.

It’s up to you. You’ve got to make a choice.

Do you continue to let your money sit in a bank and die or not?

If you are ready to begin replacing your active income with passive then join JCORE Investor Club.

It’s Free!!!


www.jcoreinvestments.com

Proposal in U.S. House of Representatives bill prevents use of IRA funds for real estate deals

The current bill that is being proposed by the House Ways and Means Committee has a proposal that limits how investors can invest their retirement savings. Investors will no longer be able to invest retirement funds in real estate deals and must remove existing capital from these deals.

www.jcoreinvestments.com

 

Section 138312 of the current bill states the following:

  • Prohibits an IRA from holding any security if that security requires the IRA owner to have a certain minimum level of assets or income (any deal or fund that requires investor accreditation).
  • If an IRA has invested in such securities, that IRA will be disqualified and the investor must pay taxes on that account.
  • The effective date is December 31, 2021 with a 2 year transition period for IRAs already holding such investments to dispose of the asset.

The impact of this bill is significant to our industry and our investors. Real estate sponsors will no longer be able to take IRA money from investors for real estate syndication deals or any type of debt securities.

Even more concerning, any IRA money that is currently held in these types of investments will need to be removed by the investor by December 31, 2023 to avoid their retirement accounts from becoming taxable. So if an investor has invested a portion of their IRA funds in our deal, those funds will need to be exited from the deal to avoid their complete IRA account from becoming taxable

In the last few years, investor desire to diversify their holdings beyond the stock market & into real estate has exploded. This has not gone unnoticed by the companies that make revenue with a constant flow of IRA funds directly to the stock market. Clearly, there are forces working behind the scenes to reverse this trend and Section 138312 is an example of this.

What can you do:

  • Reach out to your elected officials in the US House of Representatives and the US Senate and tell them that you oppose Section 138312 and that it impacts your investments.
  • Send an email about this proposed legislation to your other investors and educate them about this change and request they email their elected officials to oppose this legislation because it limits investor choice and diversification.
  • Let your friends and family know about this so they can also oppose this proposal.

Below is additional information on the proposed bill:

Summary of each section of the House proposal:

https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SubtitleISxS.pdf

Section 138312 of the House bill can be found on the bottom on page 689:

https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/NEAL_032_xml.pdf

Forbes article:

https://www.forbes.com/sites/jamiehopkins/2021/09/15/7-ways-the-new-tax-bill-could-impact-retirement-planning/?sh=7d80ae705423

Links for investors to search for their elected officials:

https://www.house.gov/representatives/find-your-representative

https://www.senate.gov/senators/senators-contact.htm

Sample text that you can provide your investors to write to their elected officials:

Dear {insert name of official},

As an investor, I am writing to you about my opposition to Section 138312 of the US House bill. This proposal has a direct impact on investor choice and limits my ability to diversify my retirement savings. By not allowing me to invest my retirement savings in private investments, you are requiring me to keep all of my IRA money in the public markets.

Additionally, by forcing me remove this capital from existing deals or lose my tax-free status, you will have a significant impact on my retirement savings. I ask that you oppose this proposal.

Thank you.

{investor name}


We must come together, act with urgency and push back on legislation that clearly is not in the best interest of our industry and our investors. We ask that you join us and get the word out to your professional network and your investors on this proposal and make our voices heard to our elected officials.

If you would like to learn more about Multifamily Real Estate and how to invest, please email me directly at James@jcoreinvestments.com


www.jcoreinvestments.com

The Importance of Time Value of Money

You’ve probably heard about the importance of time value of money.

But do you know what it really means?

What Is The Time Value of Money?

The time value of money (TVM) is a useful concept that enables you to understand what money is worth in terms of, you guessed it, time. This is expressed in a formula which basically states that money is worth more NOW than it will be in the future. This is mainly due to inflation which increases prices over time and decreases your dollar’s spending power. Many of the financial decisions we make now and in the future involve the importance of time value of money.

Examples include:

  • taking out a 15 vs 30 year mortgage
  • buying a car on credit (no thanks)
  • investing in stocks, mutual funds or bonds

Inflation Examples

Here’s a handful of examples of how inflation increase the price on everyday items.

First Class Stamp – Back in the mid-80’s, you could mail a letter for 22 cents. That same letter today will cost you 55 cents to mail thanks to inflation.

Ticket to a movie – If you wanted to go see a movie back in 1985 such as Back To The Future or Rambo: First Blood Part 2, you’d have to shell out $3.55 per ticket. That same ticket today is right around $13.00. If you throw in popcorn and coke then you may have to borrow money from your kids!

Honda Accord – One of the most popular cars in the ’80s was the Honda Accord. Back then the base price was $8,845. Today one can be yours for $24,770.

Human Nature

It seems like kids grasp the concept of the time value of money better than adults. Don’t believe me? Try asking one if they’d rather have $100 now or pay them 10% interest and give them $110 a year later. How many would wait? I’d guess close to zero. Heck, most adults wouldn’t either!

I think that many savvy investors are starting to grasp this concept and changing the way they invest. Instead of socking away money that will be locked up in a 401K for 30+ years, they are investing for cash flow that can replace their expenses now (accumulation model vs cash flow model).

Why?

Because they want options NOW and know that buying stuff is only going to become MORE expensive each year. They’d rather have that money now rather than later.

Why Is the Time Value of Money Important?

Remember that Inflation increases prices over time so every dollar in your pocket today will buy MORE in the present than it will in the future. This makes investing even more important than most realize.

The TVM helps in that it allows you to make the best decision about how to handle your money based on:

  • inflation – Inflation causes the cost of goods and services to continue to rise. You can buy more with $100 now than in twenty years. Money you have today has a higher purchasing power.
  • risk – You understand that a lot can happen in the future. Due to unforeseen circumstances, you may not get all of your money, or any at all. But you can lower your risk to zero if you’re paid today.
  • investment opportunity – There are a lot of ways you can make your money grow today (real estate investing). But if you wait ten years to receive your money, you’re losing the opportunity to invest.

The Importance of Time Value of Money in Real Estate Investing

You didn’t think a real estate investing blog would leave out how the TVM could help them too now did you? Real estate investors can use this concept to help determine what future cash flow from a real estate investment would be worth in today’s dollars. It can also help to determine whether you’re better off using your cash now for something such as a rehab, or borrowing money and conserving cash for another purpose.

The Importance of Compounding Interest

Even though we now know that the TVM teaches us that money is worth MORE today than in the future so we should spend it now versus save it for later; we also know that sometimes that isn’t the case. While inflation works against you, eating away at the value of your money, compound interest works for you to raise the value of your present dollar tomorrow.

What Is Compound Interest?

Compound Interest is simply earning interest on interest. 

In other words, it works by calculating the interest on your entire account balance which also includes the interest that’s been accrued. Here’s a compound interest formula:

For example, if you have $1,000 and it earns 10% each year for five years,  in the first year you’ve earned $100 in interest (10% of $1,000).

In year #2, things start to pick up as you’re actually earning interest on the total amount from the previous compounding period, which would be $1,100 (the original $1,000 plus the $110 in interest earned in year one).

By the end of year two, you’d have earned $1,210 ($1,100 plus $110 in interest). If you keep going until the end of year five, the original $1,000 turns into $1,610.

The Time Value of Money Formula

Now that we’ve learned what the importance of the time value of money is, how then do we go about measuring it?

We do so by using a specific formula which takes the present value, multiplies it by compound interest for each payment period and factors in the time period when the payments are made.

Formula: PV = FV / (1+I)^N

  • PV: present value
  • FV: future value
  • R: rate of growth or interest rate
  • N: number of periods (typically measured in years or months)

Using the Time Value of Money Formula

I get it. Who wants to use a complex formula? It’s essential  if you want to answer questions such as:

How much would I need to save beginning today if I want to become a millionaire in 20 years, assuming a 7% growth after inflation?

You could also use this formula to calculate anticipated future costs like college, purchase of a home, weddings, etc.

If I start with with an account balance of zero today and put away $500 a month, what will I have in 10 years if I get a 6% growth after inflation?

This is a great way to see the direction you’re headed in.

Using this calculation with kids is a GREAT way to motivate them to focus on saving money at an early age.

Here’s an online calculator that you can use to speed up calculations.

Conclusion

Now you’ve come to realize the importance of the time value of money and that it tells us that money we have now doesn’t have the same value in the future. By knowing this, we’re able to make we’re able to set goals and make choices that affect our financial life.

 

If you would like to learn more about Multifamily Real Estate and how to invest, please email me directly at James@jcoreinvestments.com


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Multifamily Market is on fire!!!

We were outbid again on a phenomenal asset in the Dallas Fort Worth (DFW) Area. It fits perfectly into our wheelhouse on every angle so we were prepared to push hard to get it.

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Our initial underwriting put us at $12MM – in line with the guidance we were receiving.  After some further research, we felt comfortable pushing to $12.2MM, maybe even $12.3MM if we had to.  Not bad to have a few $100K to play with if need be.  Our lender even mentioned we could still get 70% LTV at $12.5MM.  While our returns began to take a hit at that point, it settled out in the 8% COC and 13% IRR.  While that may seem a little low, you have to remember that we’re talking a home run asset in a home run market so you’re going to have to give a little with the expectation that the team and the market will allow you to outperform in the long run.  Long story short the word on the street says this deal went north of $15MM before the dust settled.  WOW!

With yet another crazy price in the books, we went to go back to double check our data.  Are we being too conservative, are we missing opportunities with too much of a rearview mirror?  We don’t think so.  We think our pricing was spot on and takes into account the upside in the market.  On the flip side, I also don’t think that 4-5% returns are market either (which is what the deal would have penciled at $15MM).

We’ve been tracking the market pretty closely the past few months given all the money that’s flooded into our space and have made a couple interesting observations.

First, beginning in March of this year, rental rates literally took off on a tear.  We’ve been seeing healthy rental rate increases across the board for the past decade, but something happened in March to really amp that trajectory significantly.  Traditionally leasing season gets underway in a serious manner around that time for southern states, but usually doesn’t get it’s stride until May or June up north.  However, this trajectory was pretty consistent across all of our markets regardless of geographic location – and it’s not a small deviation, it’s massive!

Second, the spreads and rates for debt have gone to yet another record low level.  Bridge debt, the more risky debt for value-add deals, which even a month ago was 4.5%, is now in the low 3% range.  Lenders are practically climbing over themselves to sign up multifamily debt.  While occupancy, rental rates, and collections continue to make new highs as the economy improves, we suppose it’s not too hard to understand some of the enthusiasm.  This is interesting, though, considering we’re about to, hopefully, see an expiration to the eviction moratorium and potentially millions of evictions from people who have chosen not to pay rent for the past months (or year).  Maybe the market has already priced in this potential downside?

In the DFW market, the average effective rent growth was 1.9% for the quarter.  Yes, that’s the quarter, not the year.  While Class A and B took the lions share of that rent growth, that’s still an amazing statistic.  Lease concessions drove much of that increase as properties phased out previous leasing concessions that were no longer needed as demand came roaring back.  We’ve seen the same in our properties as rental rates and collections reach all time highs.  With new construction moderated by the inflationary situation for raw materials, this continues to bode well for stabilized assets.

All this to say, it is somewhat understandable why some buyers are throwing caution to the wind just to get their hands on a deal – especially in Dallas.  And while it can be frustrating and the old FOMO (fear of missing out) can set in, we have to remind ourselves that this is a long game and these are times when it’s easy to make mistakes.  We’ll continue to push forward and do the best we can to adjust our expectations (within reason) to the current market conditions, but don’t expect us to throw caution to the wind just to put another notch on the deal belt!

If you would like to learn more about Multifamily Real Estate and how to invest, please email me directly at James@jcoreinvestments.com


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Why we like the Texas market

With COVID-19 cases continuing to fall and vaccination rates rising, things are beginning to feel a bit more normal. The economy is growing, and the outlook remains positive as the health crisis abates. Here’s a quick look at current conditions and our latest projections for business activity in Texas.

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Texas has recovered more than one million of the nearly 1.5 million jobs lost in March and April of last year due to the pandemic. The state added 13,000 jobs in April (on a seasonally-adjusted basis) as strong gains in a few industry groups, such as leisure and hospitality and professional and business services, were partly offset by losses in construction, manufacturing, mining and logging—which in Texas is essentially oil and gas activity—and several others. The state’s unemployment rate has improved significantly, but is still above the national level. The bottom line is that while we’re moving in the right direction overall, there are still a few bumps in the road.

One issue is worker shortages, which were already a significant problem before the pandemic. Competition for knowledge workers and other skilled occupations is intense, industries such as restaurants and hospitality are having difficulty coaxing employees back, and school and childcare challenges restrain the entry of many (particularly females). Supply chain challenges also remain. The pandemic disrupted the entire global manufacturing and distribution complex, and it is quite a process to restore the relatively smooth functioning that typically supports production processes. This situation results in both cost escalation and bottlenecks that inhibit or even interrupt activity.

Our most recent forecast indicates an estimated 1.6 million net new jobs are projected to be added to the Texas economy by 2025, representing a 2.39% annual rate of growth over the period. This expansion is somewhat front loaded, as the state continues to regain the activity lost during the downturn and returns to long-term patterns. Services industries will drive job gains, with wholesale and retail trade businesses also forecast to see notable hiring. Real gross project is projected to gain $424.4 billion over the next five years, and output in all major industry groups is forecast to expand, with the mining and services segments leading the way. In particular, the energy sector is expected to continue its strong comeback.

I expect Texas to reach pre-pandemic employment levels in the next year or two. The state’s combination of natural resources, a large and growing population, and expansion in emerging industries position it well for expansion. While there are challenges ahead, such as providing the requisite education and training for future jobs and assuring the provision of essential infrastructure, Texas has the potential to remain a growth leader for the foreseeable future. Stay safe.

If you would like to learn more about Multifamily Real Estate and how to invest, please email me directly at James@jcoreinvestments.com


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Return on Investments - Multifamily

In the world of real-estate syndicating, there are multiple metrics tossed around to help determine the return on potential investments.  The ones I want to focus on today are the ones we use:

  • Average Cash-on-Cash (CoC) Return
  • Total Return on Investment
  • Average Internal Rate of Return (IRR)

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I will briefly mention why we use them, the pros and cons, and what to watch out for.

We will start off with the Average Cash-on-Cash return. 

This is calculated by taking the cash distribution divided by the cash in the deal and averaging that out over each year of the deal.

Example:  You invest $100K, receive an $8K distribution year 1, $9K year 2, and $10K year 3.  Your returns over the years would be 8%, 9%, and 10% respectively and the average Cash on Cash comes in at 9%.  Pretty straightforward especially for deals that do not have any refinance or return of capital events.  Now, if a deal does have a return of capital events then this can get a bit tricky and a bit mis-leading.

Example:  Same scenario as before except at the end of year 3, beginning of year 4 there was a refinance event that returned 75% of your capital back to you.  The return for year 4 was $6K and for year 5 was $8K.  Because of the refinance event, you only have $25K left in the deal yielding a cash-on-cash return of 24% year 4 and 32% year 5, creating an overall average cash-on-cash return of 16.6%.  That’s a pretty great return but it definitely feels skewed a bit.  Any error in the projections (good or bad) could drastically increase or decrease the CoC return after the refinance which doesn’t make this the best metric to use necessarily all the time (i.e. a $2K miss is only a 2% cash-on-cash decrease before the refinance but an 8% decrease after).

So what is ideal and what do you want to see? 

Ideally you want to see a fairly strong cash-on-cash early in the deal as this lowers the overall risk of the investment because unless projections are way off, that cash-on-cash should be more stable.  Note:  A low average cash-on-cash return with a high total return on investment and internal rate of return generally means most of the returns will come from the exit of the investment.  That means there is more risk in the investment as who knows what is going to happen between now and five, seven, even ten years down the road.  A good rule of thumb is you want a good amount of the total return to be from cash on cash as that means the investment has lower overall risk.

The next metric to discuss is the Total Return on Investment. 

This metric is simply telling you how much money you receive back during the life of the investment.  I.e. if you invested $50K and received $100K back your total return on investment would be 100%.  By itself, this metric isn’t very useful as it doesn’t give good insight on the risk of the investment nor what strategy is being used.  Combined with the IRR and CoC it allows you to determine if either of those are misleadingly due to a high return of capital event.  In a “straight” deal with no refinance event this will tell you the total return to expect after the set hold time but it does not account for time in the deal.  In other words, this metric may tell you your money will double but at a glance it won’t tell you if that will happen in 3 years or 10 years.

So what is ideal and what do you want to see? 

Ideally you want to see a fairly strong cash-on-cash early in the deal as this lowers the overall risk of the investment because unless projections are way off, that cash-on-cash should be more stable.  Note:  A low average cash-on-cash return with a high total return on investment and internal rate of return generally means most of the returns will come from the exit of the investment.  That means there is more risk in the investment as who knows what is going to happen between now and five, seven, even ten years down the road.  A good rule of thumb is you want a good amount of the total return to be from cash on cash as that means the investment has lower overall risk.

The next metric to discuss is the Total Return on Investment. 

This metric is simply telling you how much money you receive back during the life of the investment.  I.e. if you invested $50K and received $100K back your total return on investment would be 100%.  By itself, this metric isn’t very useful as it doesn’t give good insight on the risk of the investment nor what strategy is being used.  Combined with the IRR and CoC it allows you to determine if either of those are misleadingly due to a high return of capital event.  In a “straight” deal with no refinance event this will tell you the total return to expect after the set hold time but it does not account for time in the deal.  In other words, this metric may tell you your money will double but at a glance it won’t tell you if that will happen in 3 years or 10 years.

The final metric to discuss and is my personal favorite, the Average Internal Rate of Return. 

The average internal rate of return is shown as the interest yield as a percentage expected from an investment and helps us capture distributions throughout the years as well as the time value of money.  This is good because a distribution in year 1 is worth more than a distribution in year 5 of the same amount (due to the time value of money).  If we factor that into the equation it helps us make good comparisons for various opportunities.  See the examples below:

In these examples you can see that all investments have the same Total Return on Investment as well as Average Cash on Cash Return, however, they each have a different Average IRR.  You can clearly see the benefit to IRR from receiving cash earlier on in a deal vs later.  The sooner you get the money back the sooner you can put it back to work for you.

If you would like to learn more about Multifamily Real Estate and how to invest, please email me directly at James@jcoreinvestments.com


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Purchasing my first Single Family Home while serving overseas.

Step 1 – Take action and buy your first property.

This article will review my first SFH purchase whiling serving overseas. Even though I made a ton of mistakes on this purchase, taking the first step allowed me to grow a large SFH and Multifamily portfolio. Take Massive Action!!!

How it all Began

I joined the Foreign Service back in July 2002 which now seems like a lifetime ago. Prior to that, I severed in the USMC and never really had a lot of disposable income. In 2004, I remember while being assigned to U.S. Embassy Tel Aviv as a young single Foreign Service Officer (FSO), I mentioned to my mother that I enjoyed having so much disposable income. Wow, I thought as a FS-5, I was raking in the money.

My mom mentioned that a townhome community was being developed near where she lived and individual lots were being sold in advance of being built (my mom lives in Plano, Texas). Yes, my mother is the one who introduced me to real estate not knowing the impact that would make on my future. At the time, I seriously knew nothing about real estate, how to evaluate a deal, what cash flow is, interest rates, being a landlord, etc. I just knew I was going to buy a townhouse and call myself a real estate investor. Why not!!!

What did I actually buy?

Early 2005, I put a $10,000 deposit on a preconstruction 1850 square foot 3-bedroom 2-bathroom townhome for a purchase price of $148,914.00. (wow, where can you find that price in North Dallas, today). This was with Legacy Homes and over the next few months they sent me photos as the townhome was being built.

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Closing was Nov 2005 and was through Country Wide Mortgage which used creative financing to fund my loan. Can you believe these interest rates!!! Funny story – I remember when I went to the Embassy to get my closing documents notarized, I thought that the ACS officer would explain the documents to me. She first looked at me strange for a moment before saying, “we only verify your signature and it’s your responsibility to review the documents you are signing.” Looking back, I can see how naïve I was on loan rates, terms and the closing process.

  • Purchase price:                 $148,914
  • Closing Cost:                      $6444
  • Total Cost:                           $155,338
  • 1st Mortgage:                     $119,100             6.125% at 30 years
  • Subordinate loan:            $22,300                8.125%  at 15 years
  • Cash at closing:                 $13,952                 (minus the 10,000 escrow as deposit)
  • 1st Mortgage Monthly Payments:              $1126    (escrow included)
  • Subordinate Payments:                                 $214
  • Total Payments:                                               $1340

My total monthly payment was $1340.  Also, at the time I wasn’t even aware of Home Owners Associations (HOA) fee, more on that later.

One thing I did right

I interviewed several property managers and asked the tough questions on how they would manage my property. After a lengthy process, I signed with Remarkable Property Manager. Looking back, I’ve worked with a ton of different property managers over the years and by far Remarkable Property Managers in Dallas are they best. To this day, they are still managing this property plus 2 others I own in the DFW Area.

Cash Flow – or actually NO Cash Flow

At the time, I thought just owning a SFH was good enough even though I was still having to pay a few hundred dollars each month to cover all expenses. This property was renting at the time for $1100.00 a month.

  • Total Monthly Mortgage:              $1340
  • Property Manager Fee 10%:        $110
  • Total operating cost:       $1450.00
  • Monthly Rental income: $1100
  • Total Cash Flow:               -$350.00 

 

Yes, you are reading that right, I had a negative cash flow on my first property. Remember my comment about HOA, previously? To make things worse, I had no idea about HOA and that there were HOA dues to be paid every quarter. About a year after purchasing this property the HOA tried to foreclose on my property since I had never made a HOA Payment. To reconcile my HOA back payments and avoid foreclosure, I had to pay $4500.00 to the HOA. So not only was I having to pay $350 a month out of pocket, I was hit with another $4500.00 a year into this deal.

Summary

I still own this property and it now makes over $350.00 in cash flow a month. I’ve also leveraged the equity several times through cash out refinancing to purchase more properties.  Yes, that first deal almost ended my real estate investing career but I learned so much to be better prepared for my next investment. Even my second purchase a few years later wasn’t without mistakes but until you take the first step you will never begin your real estate investing journey.

We all say “I wish I knew then what I know now.” Well – you kind of can. Back in 2004 the online real estate community was in its infancy but now there are so many online resources and real estate communities with valuable resources. I recommend that you educate yourself and network with others in real estate to learn from their experience. I’ve found the real estate community is very helpful in providing advice and as a community wants others to succeed. If only I had that back in 2005, I wonder how different my first investment would have been.

If you have any additional questions, please email me directly at James@jcoreinvestments.com


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Have you ever heard of a Self-Directed IRA (SDIRA)?

Did you know you can invest in real estate with you IRA?

Over the years, I’ve experienced that real estate is a better investing strategy for my family compared to the stock market.  Even though I personally don’t like investing in the stock market, I continued to invest in an IRA for tax deferred reason.   What I didn’t know is there is a thing called “Self-Directed IRA” that gives you control over where and what you can invest your IRA in.

These investments grow tax-deferred; so, earnings can compound faster than they could outside of the account. The IRS allows a wide variety of investments choices for these accounts and the one that attracted me the most is real estate.

Here are a few examples:.

  • Real estate.
  • Undeveloped or raw land.
  • Promissory notes.
  • Tax lien certificates.
  • Gold, silver and other precious metals.
  • Cryptocurrency.
  • Water rights.
  • Mineral rights, oil and gas.
  • LLC membership interest.
  • Livestock

The catch is you must move your IRA from your current account to a specialized firm that offer SDIRA custody services. Most of the traditional IRA account holders do not do provide SDIRA accounts and will try to talk you out of transferring your account. The reason is they are losing the fees that they are currently charging you. There are many SDIRA custodians to choose from and they also have fees so it’s important to shop around.  You also need to be aware that SDIRA custodians can’t give financial or investment advice, so the burden of research, due diligence, and management of assets rests solely with you as the account holder. They are only there to ensure that when you are investing that you are following the IRS rules to keeping this a tax deferred investment.

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Lastly, the most important thing to be aware of when investing in Real Estate with your SDIRA is you still could be taxed because of what is called an Unrelated Business Income Tax (UBIT). This tax comes from any of the funds that you leverage to purchase the property.

If your IRA took out a loan to purchase property, any earnings yielded from the leveraged portion of the asset (referred to as Unrelated Debt-Financed Income or UDFI) may incur UBIT. For example

  • Your IRA holds a rental property. It paid cash for half and financed the other half (50%).
  • The rental property earns $10,000 in a given year. Since the debt percentage is 50%, half of those earnings ($5,000) will be taxed at the current UBIT rate.

The debt percentages from each of the previous 12 months will be averaged to represent the single debt percentage for that year. Profits garnered from the sale of a debt-leveraged property will also be subject to UBIT, but not at the current Trust Rate. Such profits would be taxed as capital gains.

If you have any additional questions, please email me directly at James@jcoreinvestments.com


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6 Amazing Reasons You’ll Love Passively Investing in Multifamily

Over the years, I have learned that investing in single-family homes (SFH) would not get me to the financial freedom I was seeking, especially while serving overseas. For example, trying to research new markets, find that next investment property, complete the due diligence, and form the team to fix and manage my rental property took up a lot of my time and effort.  These are just a few of the challenges that investing in single family rentals presented.

While serving overseas, I became even more frustrated as my SFH investing plateaued but luckily I was introduced to Multifamily real estate. In just one year, I was passively invested in over 4 different apartment complexes (over 1000 doors total) and learned quickly that multifamily allowed me to 10X my rate of investment.

When I speak about investing in multifamily real estate, many people do not even know that there are options available in these investment vehicles. For the longest time, I never even considered the idea of large apartments deals since I didn’t have the capital or experience to purchase a multifamily complex. I was very stubborn to look at anything other than SFH, until a mentor introduced me to the idea of Multifamily Syndication.

My mentor opened my eyes to that fact that there are opportunities to passively invest in multifamily real estate while still enjoying all the benefits of real estate investment.  I remember him saying “every time you drive by an apartment complex just think that someone owns that property, why can’t it be you?”

To get in on Multifamily investing, I invested Passively in a Multifamily Syndication as a Limited Partner. Passive investing is an approach for investors who are looking to establish long-term financial returns while minimizing their time investing.  By investing in multifamily syndication, you can enjoy the six benefits listed below, and more, of this investment class.

 

  1. Time – Let’s face it, your time is one of your most valuable resources, and you should spend it on doing things you love. By investing passively, sponsors like JCORE Partners are spending the time to find the right property and execute a sound business plan so that you focus on doing other things.  (we like to call this making money in your sleep, a.k.a. mailbox money!)
  2. Tax Benefits – Like any investment, you should anticipate some sort of return, but along with the opportunity to earn income, investing in multifamily properties offer several tax benefits to investors. Taking advantage of these tax benefits allows you to increase cash flow in the short term while maximizing tax savings.
  3. Diversification – The most commonly cited reason for investing in multifamily real estate is portfolio diversification. Meaning you are looking to add real estate to your investment portfolio. You can also diversify your real estate investments across several properties in different areas with different property types and other sponsors.  Doing so keeps you from over-allocating assets to any one group and will help you learn what you do and do not like from a multifamily sponsor.
  4. Liability – With syndications, one of the greatest benefits to investing passively is that you have no liability beyond your investment.
  5. Philanthropy – With most investments, only you or your family are receiving the benefits of the investment. However, when you invest in a multifamily syndication, you have the opportunity to not only receive monetary returns but positively impact the lives of many families.  Each multifamily syndication we execute aims to create a clean, safe, and pleasant place for people to live.  Doing so also has a positive influence on the community and environment.  This is a benefit you typically do not see from investing in stocks or bonds.
  6. Leverage – When you invest in multifamily syndications, it all comes down to leverage. In this instance, we define leverage as using something to its maximum advantage.  Leverage allows you to use various instruments of the sponsor to increase the potential return of your investment.  Passive investing enables you to leverage things like experience, knowledge, research, time, network, teams, and ability to syndicate with other like-minded investors to take down large multifamily deals.

Passively investing in multifamily real estate is a great way to diversify your portfolio and mitigate risk. It allows you to use your most finite resource, time, on the things you love instead of doing so much effort to find that next SFH investment. Also, you aren’t involved at all with fixing toilets, screening tenants, or handling the day-to-day operations of your SFH property. You benefit from several tax advantages, have minimal liability, and positively impact many families and communities. That said, we hope that this article helps you build a stronger foundation in making an informed investment decision.


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What are a few Key Terms to know when evaluating a Multifamily Syndication Investment?

There are so many factors to consider when evaluating a potential investment and at times it can be overwhelming, especially for those who may be investing in their first real estate opportunity. Investing in real estate is not rocket science and sometimes it’s just about gaining a little clarity on what you are looking for. Here are a few Key Terms you should be taking into consideration when breaking down a multifamily investment.

First off, what is a Multifamily Syndication?

Multifamily Syndication is where a group of people pool their resources to purchase an apartment building which would otherwise be difficult or impossible to achieve on
their own. This typically involves the “General Partners” who organize the syndication, including finding the property; the general partners are sometimes referred to as the “sponsors”. The group of people who are providing the cash investment are often referred to as “passive investors” or “limited partners”. In return for their investments, the limited partners receive an equity share in the syndication along with cash flow distributions and profits.

KEY TERMS

Preferred Return (My Favorite)

A Preferred Return is a set return percentage to be paid to investors each year based on how much money they have invested. This is the minimum average annual return the investor can expect to receive. If the investment does not generate enough Net Profit to pay this Preferred Return in any given year, the amount of unpaid Preferred Return is rolled forward to the next year. Until all Preferred Returns are paid to investors, the GP team cannot take any Equity Distributions (meaning they don’t make any profit until the investors do).

Example: A 8% Preferred Return on a $100k investment equals a payment of $8,000 per year. If the investment can only pay that investor $4k in the first year due to renovation expenses, for example, the unpaid $4k is rolled forward and the GP owes the investor $12k the following year ($8k for the Year 2 Return + the unpaid $4k from Year 1).

Cash on Cash Return COC

A measurement of profitability often used in real estate transactions to assess short-term profitability, usually for a one-year period. The calculation determines the rate of investment income relative to the amount of money invested.

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CoC Return can be increased either by increasing income received during the year or by reducing the number of dollars invested. A strong CoC comes from getting solid income from a small investment.

Net Operating Income

Net operating income in real estate is the money a property generates minus operating expenses. It is used to evaluate how much cash flow an investor can expect to earn from an investment property after operating expenses and vacancy losses.

There are certain costs that qualify as operating expenses and others that don’t. Operating expenses that should be deducted might include property tax, insurance, repairs and maintenance.

NOI doesn’t include depreciation, capital expenses, loan interest and loan payments, depreciation and amortization.

Internal Rate of Return (IRR)

The Internal Rate of Return (IRR) is a profitability metric used to asses the anticipated annualized return generated by an investment over time. IRR is a complex calculation that takes into account the amount invested, annual return distributions, and anticipated profit from the sale of the property in the future.

Importantly, IRR also incorporates the ‘time value of money’, meaning that it takes into account the increased
potential earning power investors enjoy due to 1) the early return of investment capital through refinancing and 2) earning annual income distributions rather than one lump sum payment at the end of the investment term. Receiving income or returned capital sooner means the investor has more time to use that money for other investments, which we call Opportunity Return.

Because IRR takes into account so many factors, it’s an easy way for investors to compare different kinds of investments at a glance. The higher the IRR, the better.