Passive Investing

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)

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?

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

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

by JCORE Partners

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.

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

1^st 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)

1^st 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

by JCORE Partners

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.

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

by JCORE Partners

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.

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!)
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.
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.
Liability – With syndications, one of the greatest benefits to investing passively is that you have no liability beyond your investment.
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.
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.

by JCORE Partners

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.

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.

by JCORE Partners

Multifamily is the Best Passive Investment on the planet?

Where else can you get these benefits?

*Below-Average Risk: When the housing bubble popped in 2008, the delinquency rates on Freddie Mac single-family loans soared, hitting 4% in 2010. By contrast, delinquency on multifamily loans peaked at 0.4%. So, if you’re looking for a recession-proof way to invest your money, there is no better option than apartment building investing.

*Above Average Returns: As I describe in the Special Report, the average stock market return over the last 15 years was 7.04% but after fees, inflation, and taxes that return becomes a paltry 2.5%. On the other hand, multifamily syndications routinely return average annual returns of 10% and above. That’s compounded (i.e. without volatility) and after fees, inflation, and yes, even taxes.

*Passive Income: Unlike stocks and bonds, multifamily syndications generate cashflow for its investors from the income generated by the property.

*Extraordinary Tax Benefits: Because of the magic of “bonus depreciation”, your investment income is taxed at a much lower rate than any other investment (in fact, you may actually show a taxable loss that can be used to offset other passive income!).

*Inflation Hedge: As inflation increases, so does the value of the property – the perfect hedge against inflation.

Bottom-line investing in multifamily syndication is the BEST Passive Investments on the planet.

by JCORE Partners

Why we love Dallas

Dallas Fort-Worth is one of the most resilient MSAs in the nation with a diverse economy, affordable living, and lower costs of doing business. The region is a top choice for multifamily investors due to its rapid population and job growth, leading the nation for several consecutive years. The graph below illustrates the demand for apartments in the DFW area - it's off the charts, literally!

Similarly, job losses in the DFW market have been less than any other major metro area in the country. All 12 of the nation’s largest metro areas had year-to-date job losses. Seven metros exceeded the national average of 7% - with New York and San Francisco leading the losses at over 11% each. Phoenix and Dallas were basically tied for the least job losses at 3.5% each - that's less than one-third the job losses or those two leaders and less than half the loss of the national average! Economic resiliency is key for investing in multifamily.

DFW is a leader in transportation and logistics. Dallas leads the job growth in the US. DFW has one of the most diverse economies in the country and it actually leads the country in net migration by adding over 1 million residents since 2010! I could go on and on but you get the point. We're not seeing any discounts in the Dallas market but there's a reason - the facts just don't justify it. With rates low and opportunities still in the market, we plan to continue moving forward.

by JCORE Partners

Some Huge Personal News

If you’re reading this, I’ve been fortunate enough to connect with you over the past few years. And since we’re connected, it’s time to update you on some recent changes along with why I’m so excited about the future.

I’m beyond grateful for the support of my wife and family and the education and mentorship I’ve received from so many amazing people in my military career as well as in my Real Estate Investing ventures. This support has enabled me to achieve so many amazing milestones and set my family up for financial success for years to come.

It’s also a large part of the reason why I’ve formed a Real Estate Investing partnership with several other current and former military investors, the ‘JCORE (Joint Chiefs of Real Estate) Partners.’ We are dedicated to bringing you valuable investing education and passive investing opportunities.

As military members, we understand the demands of a busy work life, travel, family, and deployments. We acknowledge that not everyone has the time and knowledge to invest ‘hands on’ in Real Estate. Therefore, we have partnered to provide solutions through Apartment Syndications- a truly passive way to invest in Real Estate. We work to acquire, manage and operate large Apartments so that you can collect mailbox money and focus your attention on your career and family.

If you’re somebody who values your time and your financial future, then please visit our website at https://www.jcoreinvestments.com/ to access our FREE Multifamily Investing Masterclass Interviews and to schedule a call with me or one of my partners.

In spite of the challenges of 2020, we have seen tremendous success and our momentum is building! I want to thank you from the bottom of my heart for your connection, time and interest. Please don’t hesitate to reach out and let me know if there is anything I can do for you personally or professionally.

Signing Off,

Noel

by JCORE Partners

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