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

Should you pay off your mortgage?

For most, paying off your mortgage is a personal decision that factors in comfort level of how much debt you have. For me, instead of paying off my mortgages, I leverage that debt to invest in more real estate. First, let me explain leverage.

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What Is Leverage In Real Estate?

Greek philosopher Archimedes once said:  “Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.”

If you’re a home owner, then you’re well aware of what it means to use leverage in real estate. Leverage allowed you to borrow money to help finance your home in the form of a mortgage. Most millionaires and billionaires have real estate in their portfolio. Why? They know that a major advantage is something called financial leverage.

Leverage in real estate means buying property with debt instead of paying cash. This allows you to buy a much larger asset and increase the potential return on your investment than you could if you had to pay 100% of the purchase price upfront.

Now that we understand Leverage, should you pay your Mortgage off.

I say No and here’s why.  Before I knew about Real Estate, my original investment strategy was to invest in index funds as it was all I knew about saving for retirement. If I put $100,000 into an index fund, then I could only purchase that amount as a shareholder. On the other hand, I could use that same $100,000 and leverage it to buy an investment property that was a much higher valued asset.

With interest rates at historical lows, there is an opportunity to use cheap debt as leverage to increase your real estate portfolio.  If you currently have a property that has equity in it, you should consider pulling that equity out with a refinance and taking advantage of the low interest rates. Instead of paying off your mortgage you can apply that equity and take advantage of financial leverage. Just like I mentioned above that most millionaires and billionaires do.

Let’s take a look at how I recently used leverage as an active investor after taking equity from one of my SFH rental properties.  Before refinancing this property, I was making about $350 a month in cash flow but had a high interest rate with a lot of trapped equity. After the refinance, I pulled out about $100K of equity, dropped my interest rate substantially but did reduce my monthly cash flow from $350 to $275.

You might be saying well that doesn’t make sense because you reduced your cash flow by $75 a month and took on more debt since you have to finance that additional 100K pulled out. ($75* 12 months = $900 a year in reduced cash flow).  Well, let me show you how I leverage that $100K instead of paying the mortgage off of the SFH rental.

With my partners, we purchased an apartment building as a joint venture and my investment of $100K was used as a portion of the down payment to finance this asset. After all expenses and mortgage, we projected this investment will produce 13% to 15% annual (CoC) cash on cash return. To be conservative, let’s say it’s a bad year and I only make 10% return on my investment. With only 10% return that means I made $10,000 return for the year and even after considering the monthly income lost of $900 from the refinanced property, I still cleared $9100. Let’s do the math.

10,000           (CoC on $100K investment at 10% return)

-900            (reduced cash flow on refinanced SFR)

$9100 (total return after accounting for reduce cash flow from refinanced SFH rental)

This is a very simplistic way to look at this but not only did this new investment make up for the lost cash flow in the refinance, but it greatly increased my monthly returns. What else to remember is I now own 25% of a multimillion-dollar apartment building that over time will appreciate as the mortgage is also paid down by the tenants. This scenario could easily be replaced with a SFH rental investment.

And that is the magic of using leverage in real estate.

Be cautious with debt.

First off, real estate investing should be viewed NOT as a liability but as an asset that is sustainable in paying all operating cost and debt while providing cash flow. Before taking on additional debt, you need to stress test the real estate investment to understand when it goes from being an asset to a liability. For example, in this multifamily investment if it went under 60% occupied it was longer considered an asset and instead was losing money – becoming a liability. In SFH Rentals, maybe over three months vacancy is when this creates a hardship and becomes a liability. Each investment is different.

By stress testing your investment, you can better understand the right amount of debt that is manageable and what reserves are required in an underperforming rentals. Underperforming rental properties may be manageable for the near term with being over leveraged but you also need to consider a downturn in the market. You need to ask yourself what if there is a major downturn in the market and this property is making no income. Worse what if this occurs across several of your properties and you are now having to pay several large mortgages out of your own pocket.

Summary

For me, I’d rather carry debt on my real estate investing and leverage that debt to grow my portfolio. Debt is cheap right now and I highly recommend that you use the equity instead of paying off the mortgage. Just don’t get carried away in over leveraging yourself.

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


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What's better the Stock Market or Real Estate?

Foreign Service Officers are well positions for retirement with the 3-Legged Stool – “FERS + Social Security + TSP.” The question is do you want to wait till retirement to start earning passive income. There are so many options out there to invest so what’s better the Stock Market or Real Estate?

What if I told you there is a way you can take total responsibility for your financial outcomes NOW, and can keep those fees that Wall Street & the IRS would of taken year after year from stock market investing. This Blog will provide an alternative that you may have never considered that provides immediate cash flow, higher returns with less headaches. Also very easy to manage especially while serving overseas. And NO the Stock Market isn’t going to get you there.

But what about your other investments in the stock market? Are you concerned about the future of the stock market? If so, you’re not alone. How can you possible plan for your financial future with the uncertainty and volatility of the stock market. After exploring the Pros and Cons in investing in the stock market, I’ll suggest an alternative for you to consider and NO its not Single Family Homes (SFH) either.

I know many Foreign Service Officers are purchasing SFH rentals using their disposable income while stationed overseas or turning their primary house into a rental properties to earn passive income.    This is a great introduction into real estate but have you ever considered Multifamily Real Estate Investment?

Before getting in Multifamily, let’s review my I no longer invest in the Stock Market nor Single Family homes.

Stock Market returns will surprise you. The average stock market return over the last 20 years from the S&P 500 was 6.41% (from 2000 to 2020) and 9.65% over the last 30 years (from 1990 to 2020) [1] That means that if you invested $100,000 in 2000 it would be worth $346,456 in the end of 2020 – not bad right? But wait…not so fast.

Market volatility can crush your returns. What most investors don’t realize is that the same $100,000 isn’t actually worth $346,456 twenty years later – that’s because of the volatility of the stock market from year to year. In fact, that same $100,000 was actually worth $255,891 – which is only 4.81% return compounded every year. Not nearly as good but still not bad … until we realize these returns are BEFORE brokerage fees.

Fees stealing you blind?

The average expense ratio for actively managed mutual funds is between 0.5% and 1.0% and can go as high as 2.5% or even more. For passive index funds (ETFs), the typical ratio is approximately 0.2%[2]. Most investors have a blended portfolio of ETFs and mutual funds, so let’s assume the average fee is 1.0% per year.

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After taking out a 1% fee each year, instead of being worth $346,456, your $100K invested twenty years ago is now only worth $209,066 – a mere 3.77% compounded return!

What makes it even worse is you still have to pay fees even if you lost money that year.

Let’s not forget taxes!

If you’re filing jointly and making more than $77,201, your long term capital gains rate is 15%. If you sold your entire portfolio, the taxes you’d have to pay would push your average annual return from 3.77% to 3.34%.  Reducing the worth to $192,707. ($100K Initial investment + $92,707 Net Gain after 15% taxes)

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Inflation – The Silent Killer

The dollar had an average inflation rate of 1.99% per year between 2000 and today, producing a cumulative price increase of 51.12%. This means that today’s prices are 1.51 times higher than average prices since 2000, according to the Bureau of Labor Statistics consumer price index. Of course, inflation silently erodes the buying power of your portfolio. So your initial investment of $100K now only has a buying power of $67,297 in today’s dollars. Compounded over twenty years, an inflation rate of 1.6% reduces your after tax return from 3.34% to 1.62% and investment worth to $150,925. Wow!!!

What does this all mean?

This means that if you invested $100,000 in 2000, your ACTUAL return, i.e. the kind of return you can actual BUY something with in 2020 dollars AFTER you pay brokerage fees and taxes is a mere 1.62% compounded per year. More specifically, after getting your initial investment back, you have $50,925 in net gains after twenty years.

I had no idea that even when losing money in the stock market I was still on the hook to pay broker fees,  after pulling profits out (if any) I had to pay 15% capital gains tax while also losing value through inflation. I remember when I use to investment with Amerprise, I could never get a clear answer from them on what my real returns where and now understand why. They didn’t want me to know that the average person like you and I aren’t making money in the stock market. This is a big reason I no longer invest in the stock market and started to look for other ways to earn passive income.

What’s the Alternative?  – “Real Estate”

You might be saying “That’s great, I appreciate you breaking this down for me. But what else is there? I’m so glad you asked, because some Foreign Service Officer believe that Single family Homes (SFH) is your only alternative in Real Estate. Even SFH rentals have their limits too.  I’m going to show you a viable alternative to both SFH and the stock market with less risk and volatility, above average returns, lower taxes and a hedge against inflation.

Why not single family homes (SFH)?

Yes I agree there are Pros to SFH investing but it took me 15 years to realize that with my large SFH Rentals portfolio that I was limited on how big I could, that cash flow is not substantial, vacancies are costly and a hassle to manage while overseas. Ask me how I know.

SINGLE-FAMILY RENTALS

Most Foreign Service Officers, who are considering investing in real estate consider investing in single family rentals (SFH) first. What most FSO do is buy one or more SFH’s and either hire a property manager or become a landlord managing themselves. The challenge with this option is that it’s not very passive or cuts into your cash flow. Actively managing as a landlord, you’re responsible for finding the tenant, taking calls when something breaks, making repairs, dealing with bad tenants, etc. This is even more difficult while serving overseas. On the other hand, if you hire a property manager you are charged leasing fees and a monthly management fee anywhere from 8% to 10% monthly. Also, finding good property manager for single family rentals can be a challenge in itself. It is hard to get out of a contract with a bad property manager without having to pay for future earnings per the contract. That sure does eat into your cash flow and your time.

I also thought turnkey rentals would be a better option since most turnkeys are either new construction or fully remodeled properties that should have less repairs for the first few years of ownership. Also these turnkeys usually have a property manager that as already leased out the property with immediate cash flow. I think for FSO that are serving overseas, this is a good option but you are usually paying a higher price to purchase this property. Also, some of the turn keys that I’ve purchased did not provide the returns that the turnkey provided advertised.

Finally, SFH is very expensive when it goes vacancy. Not only do you lose each month’s rent payment when vacant but also there are leasing fees, utilities to pay to get a new tenant placed. This is a  real problem with SFHs that might be in area with a  market downturn. Look at what happened during the great recession of 2008: SFHs suddenly had higher vacancies as tenants fled into cheaper apartments and property values plummeted, resulting in a massive loss of capital.

The Alternative is Multifamily Investing or called Multifamily Syndication

What is a Multifamily Syndication? A 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, securing financing and managing the property; the general partners are sometimes referred to as the “sponsors” or “operators”.

The group of people who are providing the cash investment are often referred to as “passive investors” or “limited partners”. In return for their investment, the limited partners receive an equity share in the syndication along with cash flow distributions and profits.

Benefits of Multifamily Syndication

There are 5 main advantages of passively investing in multifamily syndications over any other investments:

  1. Below-Average Risk
  2. Above Average Returns
  3. Passive Income
  4. Extraordinary Tax Benefits
  5. Inflation Hedge

Below –Average Risk Perhaps the greatest advantage of investing in apartment buildings lies in its extremely low risk profile. For decades, the multifamily market has proven much less volatile than residential real estate, the stock market and cryptocurrency. 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%. The same can be said for 2020 and how multifamily has continued to be strong through the entire Pandemic. So, if you’re looking for a recession-proof way to invest your money, there is no better option than apartment building investing.

2. Above Average Returns As we’ve seen, the average stock market return over the last 20 years was 6.41% but after fees, inflation, and taxes that return becomes a paltry 1.6%. 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.

3. Passive Income Unlike stocks and bonds, multifamily syndications generate cashflow for its investors from the income generated by the property. This cashflow afforded by multifamily investing generates the kind of passive income that leads to financial freedom. (Can you say early retirement?) The brilliant part is that the multifamily asset itself is appreciating in value over time and can usually be sold for a significant profit. The combination of passive income and appreciation lends itself to the kind of generational wealth you can pass on to your children.

4. Extraordinary Tax Benefits Real estate has advantages over nearly every other investment, from stocks and bonds to business investments to precious metals. In Multifamily Syndication as a Limited Partner, you invest directly in the real estate and become a fractional owner of the property. This is important, because it positions you to take advantage of the other tax benefits of this profitable asset class. The biggest tax benefit to Multifamily investors is Cost Segregation.

What is Cost Segregation? In general, residential properties can be depreciated over a 27.5 year period based on their classification as Section 1250 property, but certain categories of assets within a building can be depreciated more quickly, over five, seven, or 15 years due to their reclassification as Section 1245 property. These include non-structural personal assets, land improvements, leasehold improvements and indirect construction costs, when applicable. Separating these faster depreciating assets into their proper categories allows for the frontloading of the appropriate tax deductions, lowering upfront payments and increasing cash flow. Which means you shouldn’t have to wait all those years to get a tax deduction for them.

The IRS allows multifamily investors to write off each year as an expense through something called “depreciation”. This is only a “phantom” expense, meaning it doesn’t actually cost you anything but it does reduce your taxable income. The reason for this is simple: the U.S. government wants people to invest in real estate; it’s actually a tax incentive, and it’s required by law. To illustrate the magic of depreciation, let’s look at this example.

The main thing to note here is that the $10,000 you put into your pocket is entirely tax free.  Instead of showing a taxable income, your tax return shows a taxable loss. Amazing, isn’t it? You can even “carry forward” your “loss” to future years or you can use it to offset gains from other passive income – further reducing (or even eliminating) taxes in the future, too.

WOW! Do your stocks do this for you?

Depreciation is a benefit of ALL real estate investments, but multifamily gives you an additional tax bonus – called “bonus depreciation”. Recently Pass into law, bonus depreciation allows us to deduct the entire value of the investment from our taxable income in the first year. This produces a GIANT tax loss that we can carry forward and apply to other passive income – reducing our even eliminating taxes paid on any gain. And if we sell for a big profit at the end, we can do something called a “1031 Exchange” that allows us to defer taxes – indefinitely. No other investment on the planet offers such incredible tax benefits.

5. Inflation Hedge Multifamily investments are a fantastic hedge against  inflation. If you recall, the Federal’s Reserve’s inflation target is 2% each year, which means everything goes up in costs, including rents. And as income goes up, so does the value of the property. I hear you saying “Yes, but no so fast. It’s true that rents are going up by 2% but so are expenses! And that  keeps the net income of the property the same and with that the value of the property, isn’t that right?” Actually no … take a look at the following table that shows both the rents and expenses going up 2% each year, look at what happens to the Net Operating Income:

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The Net Operating Income (or “NOI” for short) is going up!  And the higher the NOI, the higher the value of the property. In fact that small 2% inflation rate results in a 10% average annual return on the cash invested in a typical real estate syndication. It’s like magic: the more inflation goes up, the more the apartment building appreciates – the perfect hedge against inflation!

The best investment no matter where you are overseas – by far – is passively investing in “multifamily syndications”.

Most investors invest their hard-earned money in the stock market. It’s not their fault, really, because that’s what 99% of financial advisors advise their clients to do! But as we’ve seen, the average annual returns of the stock market (after fees, inflation and taxes) are a mere 1.62% over the last 20 years. Coupled with the uncertainty of a market crash makes this investment class questionable at best. After studying every other possible alternative, I’ve come to the definitive conclusion that investing in multifamily syndications is the best investment on the planet. No other investment performed so well in the last recession and offers above average returns (including cashflow), extraordinary (and legal) tax advantages and a built-in hedge against inflation.

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


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So what is it that the wealthy know that the rest of us don't?

So what is it that the wealthy know that the rest of us don’t?

They understand the incredible power of real estate. Real estate has the ability to generate passive income and provide a path toward building wealth. 

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#1 – Cash Flow

One of the biggest advantages real estate creates for earners is passive cash flow. Most of us go through our entire careers focusing on and growing only one stream of income, our active/earned income. Here’s a cash flow example from an active real estate investor:

If you put down $50,000 to buy a rental for $200,000, the mortgage payment would be roughly $1,000 per month. Now let’s say that you’re able to rent it out for $2,000 per month. Upon receipt of the $2,000 monthly rent payment, you pay the $1,000 mortgage, use $700 for expenses and reserves, and keep the remaining $300 as passive cash flow (i.e., money in your pocket).

This is great but what about the busy professional that wants an extra stream of cash flow WITHOUT landlord duties (myself included)?

Enter real estate syndications. These are group investments you can invest in that purchase assets such as apartment complexes. Each one of the units is creating an income stream from the current tenants. They pay rent each month, and that monthly income flows to the owner(s). In this case it’s to the limited partners such as you, me and others without having to become a landlord.

Unfortunately, too many people are only focused on saving for retirement but not cash flow now. The good news is that they’re focused on investing but the bad news is they’re trying to save up enough money so one day they can replace their current income in order to stop working. By choosing this method, they may not ever save enough money to retire and if they do, they then have to worry about running out or being too old to enjoy it. On the flip side, every time you invest in real estate (either physical property or a passive syndication), you develop an extra stream of cash flow which moves you one step closer to your goal of income replacement.

 

If you are interested in earning cash flow in our upcoming Investments, click to join JCORE Investor Club.

 

#2 – Leverage

In the example above, you hypothetically bought a $200,000 rental without paying $200,000 in cash. Instead, you put up $50,000 as a down payment, and the bank contributed the remaining $150,000. The cash flow you earned is based on the full $200,000 asset, not the $50,000 portion. Even though the bank contributed 75% of the money, all you have to do is pay the mortgage and interest, and any excess cash flow or profit is all yours.

This is the magic of leverage.

Leverage is the use of debt to increase the potential return of an investment. Most of us are familiar with debt. Take buying a car. You can use debt to purchase a vehicle without having to come up with the entire purchase price. This is NOT something I’d recommend but is done more frequently than not. Regarding real estate investing, leverage can be used by taking out a mortgage and only putting down a fraction of the total cost. Even though you only put down a small portion of the purchase price, you are still entitled to ALL of the benefits including:

 

  • the income generated
  • build up of equity
  • property’s appreciation
  • tax benefits

 

#3 –Equity

If you’re a home owner, then you’re aware that each time a mortgage payment is made, a portion of it goes toward the principal value. This is also true regarding rental property except it’s your tenant that’s paying down the mortgage. In this way, the rental property generates income to pay for itself.

At the end of the mortgage period you’ll own the entire property, and your tenants will have paid for the majority of the cost.

 

#4 – Appreciation

Real estate values tend to rise over time, which means your money can also work for you in the form of appreciation. From the 1960’s through the early 2000’s there wasn’t a single year of decline in the median home price in the U.S. Appreciation is an important variable which plays a key role in defining the profit from a property for a real estate investor.

Whenever someone is considering investing in apartment complexes, they should pay attention to what improvements are being performed in order to increase the future value. For example, consider a property purchased for $580,000. In time, the duplex appreciates to $750,000, at which point it is sold. The profit at the sale, or $170,000, will have been generated via appreciation, plus any additional equity that you had built through paying down the mortgage. That being said, while appreciation is nice, it’s not guaranteed, which is why you should always invest for cash flow first and foremost, with appreciation as the “icing on the cake“.

 

#5 – Tax Benefits

When you invest in real estate, you get the benefits of depreciation and mortgage interest deductions, as well as a whole host of write-offs for a number of other related expenses. Depreciation is an accounting method that allows you to deduct the value of an asset over it’s useful life. Investors often show losses on paper, while actually making money through cash flow. The losses play a big part in helping to offset other income, which is a major reason real estate is so lucrative.

Further, when investing in commercial real estate syndications, you have the opportunity to take advantage of cost segregation and accelerated depreciation, further increasing your tax benefits.

 

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


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A Trillion What

This has been covered a trillion times (pun intended), however I think people need to be reminded on how much of anything encompasses a trillion. Joe Biden offered up his plan for a 1.9 trillion dollar stimulus package and I am flabbergasted by the sheer number of dollars that our government is able to spout with a straight face. I am not going to dispute that people and small businesses are in great need of this help. This is not to debate of which party spends more, the only goal is to put a face to the behemoth of a 1 followed by twelve zeros.

I’ll make you the richest person in the world ( well kinda)

I am a genie and I am going to grant your wish and pay you 1 dollar every second for your entire life, from the time you are born to the time that you die. If we do some quick math, every day of your life you will make $86,400. With that figure in mind we can calculate your annual one dollar a second income to be 31.5 million dollars every single year of your life. To keep things simple you will also not have to pay taxes, because I am a genie and I can make that happen.

OK, let’s figure out how much you would make in your lifetime

On average a US male lives to be 78.5 years old, but for the sake of argument we are going to round to 80 years. So if you made $1 for every second of your life you would accumulate a grand total of $2,522,880,000. That is 2 billion, 522 million, and some gas money, to spend on whatever you want, all completely tax free. Side note: that wouldn’t even get you in the top 200 billionaires, you would still need another 5 billion just to break into the list.

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OK, so you’re not the richest, but does this have to do with a trillion?

You’re right, but I am getting to the point. Let’s say that you wanted to crush the billionaires list and be the first guy with four commas. Screw the three commas club!. At your current rate of income to reach 1 trillion dollars you would need to live for 31,709.79 years.

Wait a minute, that sounds like a really long time…

Glad you brought that up. You would have to start making one dollar a second, 86,400 dollars a day ~20,000 years BEFORE the Saber tooth tiger became extinct and ~28,000 years BEFORE Wooly Mammoth became extinct. By the way, to get to the 1.9 trillion in the aforementioned stimulus package, it would take you ~60,208 years, which would put you into the end of the middle paleolithic era. Maybe you should have wished for $100 a second?

Oh god, what about the national debt?

Why would you even ask that! The national debt is racing toward 28 trillion dollars. With that in mind, using our calculation of $1 a second, the national debt would take approximately 881,000 years to pay off the national debt. However that 881,000 years does not include interest. That would put us closer to the Big Bang.

By Chris Hinshaw