“Ladies and gentlemen, buckle your seatbelts. There will be turbulence ahead.”
When I think about our current economy, I think of it like an airplane flying through a rough patch. The Fed adjusts their flight controls based on economic data similar to how a pilot adjusts their speed (size of rate hikes) and glide slope (terminal interest rate) depending on what the visual glide slope indicator shows – the lights beside the front of the runway that tell a pilot if they’re coming in too high (high inflation) or too low (overtighten and break the economy).
Over the last year, the Federal Reserve increased interest rates several times causing markets like the S&P 500 to drop about 12%, and the DOW down about 20%. These past couple weeks were a bit of a mixed bag coming off the heels of good CPI news that triggered a rally a little earlier in the month. It’s been volatile, nonetheless. We feel it in real estate too, with the cost of debt increasing substantially cutting into the net income of properties.
However, turbulence does have an end. The good news in Jerome Powell’s speech today is while there will still be rate hikes in December and early into 2023, the hikes will be smaller at around 50 basis points in December. While the future is uncertain, there is hope for a soft landing. Only time will tell.
“Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level. It is likely that restoring price stability will require holding policy at a restrictive level for some time. History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”
Jerome Powell (Nov 30, 2022)
So with this, is now still a good time to invest in real estate? Well, this certainly isn’t just a yes or no question. Here are some of our considerations:
Shift expectations – Changing expectations should be adopted across the board among sellers, buyers and investors. Deals are to be underwritten and approached differently from even just earlier this year. Many deals now are retrading with price negotiations, as sellers must change their expectations on their pricing. Double digit cash-on-cash returns are no longer realistic in today’s climate for investor returns.
Diversify and educate – Now is the time to educate ourselves on the changing tides, because the playing field is different from where we were in the past couple years. Multifamily has been tried and true, and undoubtedly stable over time; however maybe it’s time to look at other higher yield opportunities with data supporting its growth.
All eyes on debt – Debt and leverage are more important now than ever! As the interest rates are rising, this subsequently is causing the debt service to eat up cash flows which affects the debt-service-coverage-ratio (DSCR). The DSCR is what the lenders use to determine whether the asset is spinning off enough cash flow to make the monthly debt service payments. Lenders prefer a minimum of 1.25 DSCR, and when it drops below this point they lower the loan-to-value percentage (LTV%).
There are always opportunities to buy assets in any market condition. In my opinion you should always be looking to invest, as money sitting in a bank account does nothing for you except lose value due to inflationary pressures.
One of the best things you can do is find a general partnership team that has skin in the game and that is using conservative measures to find assets that meet the criteria for solid returns. Also, an operator that sets up their assets with ample operating reserves that should allow us to weather most economic storms that may be on the horizon. This mitigates the potential for capital calls in the future.
I truly believe this is a great time to invest your hard-earned money to see some great quality returns during these times. We, at Noblivest, are continuously monitoring the market conditions and tracking the data that support our investment opportunities. We are tightening our due diligence on not just our deals, but also the asset classes, market conditionals and partners & sponsors we work with.
If you still have questions, I encourage you to schedule a call with us so we can provide answers to your questions or simply talk through a situation that you may have right now.
There are many options from which to choose from investing in crypto currency to investing in gold and precious metals but most people would invest in the stock market while others would invest in real estate.
Every investment is subject to risk so let’s take a close look at investing in stocks versus real estate and the four basic risks of investing.
Risk #1 – Market Correction
Stock Market
Sudden market corrections can result in wild swing in stock prices and during a downturn, investors may exit quickly which only solidifies their losses. Others try to ride it out but a bear market during a recession can last for months, or even years.
Multifamily Real Estate Investments
Recessions can actually be good for commercial multifamily real estate investments, especially for workforce housing. During a recession, many people forego buying a home and choose to rent instead. This increases the demand for apartments, thereby decreasing the risk.
Risk #2 – Competition
Stock Market
Consumers don’t have insight into technology development or companies’ operations. At any point, a new competitor can disrupt the market with a new approach or new technology and have a significant impact on investment returns.
Multifamily Real Estate Investments
Multifamily competitors don’t just spring up out of nowhere, because space, zoning, and permits are limited. In addition, the demand for multi-family housing continues to outpace supply so apartment vacancies are at record lows.
Risk #3 – Consumer Behavior
Many stocks are consumable products that may be affected when consumers cut down on their spending. In addition, changes in technology and consumer behavior can drastic impact stock prices
Multifamily Real Estate Investments
Real estate is a basic human need that will never go away. Everyone needs a place to live and that need has only strengthened over time, especially with rising population trends.
Risk #4 – Lack of Control and Transparency
Stock Market
Investing in stocks is like buying a train ticket. There are hills and valleys but the conductor (CEO) is unreachable so you’d better buckle up and hang on!
Multifamily Real Estate Investments
In a real estate syndication, you know exactly who the deal sponsor is, and you can reach out directly to ask questions. In addition, there are multiple buffers in place to protect investor capital, such as reserves and insurance, and experienced professionals to handle the unexpected.
Conclusion
Whatever investment you choose, understand the risks going in, and just do it. Because that money you see sitting in your savings account? It’s losing value (because of inflation) with every passing second.
There’s certainly no one “right” way to invest. The key is to invest. Period.
Real estate investors, along with the rest of the world, are experiencing an inflationary environment. Even investors with a diversified portfolio are looking for more ways to create an inflation hedge.
You’re feeling this same decline in purchasing power at home as you pay more daily at the pump, face rising energy costs for the summer, and see the cost of food and clothing shoot upward for your entire family.
You want to make sure your family is well-provided for even in challenging times.
One of the best ways to hedge against inflation is real estate investing in “sticky assets.”
Let’s take a quick look at our economic environment, the definition of “sticky” real estate, and then how specific types of real estate can hedge against inflation.
Rising Consumer Price Index and Interest Rates
The combination of the Covid pandemic, the war between Russia and Ukraine, and supply chain shortages across the globe have the world reeling under rising inflation.
In response to inflation, the Federal Reserve has raised interest rates with the hope of curbing high inflation without stunting economic growth.
As consumers see their monthly payment go up in almost every area, investors are looking for an investment strategy that will work as an inflation hedge, provide real estate income, and create long-term cash flow if inflation hits even harder.
This is where the “sticky” asset classes of real estate come into play. Real estate prices continue to rise, but not all commercial real estate provides the same long-term value and rental income that you want from real estate investing.
Because you entered real estate to avoid the fluctuations of the stock market, maintain your level of purchasing power, and gain inflation protection, let’s define the term “sticky” and how such investments can work for you.
Defining “Sticky” Assets in Real Estate
“Sticky” real estate is the idea that the revenue stream of the property is consistent over the long term. Commercial real estate is valued by tenants and whether or not it is a piece of income-producing real estate.
Property values in private real estate like houses are often evaluated based on the location of the house. The improvements the neighbors do (or don’t) affect your home value too!
However, commercial properties are valued based on their revenue streams and the consistency of those revenue streams.
For example, an office space might have a 95% tenancy rate, but that rate alone doesn’t make it a sticky asset class. You also need to look at how likely the tenants are to stay in that building long-term.
Many office buildings do not fall under the umbrella of “sticky” real estate because of various factors such as remote work and ease of movement from one building to another. These office buildings find it difficult to raise rents because the demand is low. This keeps investors from having a higher rental income.
However, doctors’ offices and other medical buildings are often considered sticky because of the amount of money that goes into building the infrastructure for the building. The medical corporation, rather than the landlord, is usually investing millions in a specialized infrastructure that will keep them in the building for the long term.
These tenants will usually remain even if property prices go up because they would need even more money to invest in a new building. Such office buildings are considered “sticky.”
An investment strategy that focuses on “sticky” real estate investments has the potential to stay strong in the face of high interest rates, a steep inflation rate, and a fluctuating stock market.
So how does a real estate investment hedge against inflation?
Real estate investing in sticky asset classes can hedge against inflation and bolster your portfolio against a future that may see interest rates rise again.
Multifamily units are often in great demand during a period of high inflation and high interest rates. If families have to downsize their lifestyle as inflation rises, they often move into an apartment or condominium. This property sector often sees consistent income even during an economic downturn.
Storage units can be a good hedge against inflation. People who can’t find housing due to high demand or those who are moving into multifamily units due to housing prices often turn to storage units. They’ll put the majority of their belongings in storage while they live with the bare minimum belongings in a minimally sized apartment or with another family. These storage units often provide positive cash flow and passive income for a real estate investor.
Because real estate rental properties that fall under the “sticky” asset class are often in high demand no matter the economic situation, they are usually a strong source of passive income and a great hedge against inflation.
Real Estate Investment Trusts or Real Estate Syndications?
Real estate investment trusts work more like the stock market and may see fluctuations similar to stock prices. Real estate syndications, on the other hand, usually require more up-front investments but often provide a more stable source of passive income. Alternative investments like real estate syndications can offer you access to “sticky” assets that can hedge against inflation, even if you don’t have millions of dollars to buy commercial real estate on your own.
Face the Future with Confidence through Strong Investments
You can’t control the Federal Reserve or overall consumer prices. What you can do is pursue an investment portfolio that contains commercial property with solid infrastructure, long-term tenants, and the potential for raising rents.
Even as inflation rises, your confidence can rise too knowing you are seeking sound investment advice by understanding how “sticky” assets can help you reach your financial potential during shaky economic times.
Your peace of mind will allow you to focus on your family and not on your worries about inflation, recessions, or any number of problems on the horizon. Allow investments in “sticky” assets to provide for your family and create a sense of security in an insecure world.
Suppose you haven’t yet invested in your first real estate syndication with us. In that case, it’s likely you’re still learning the process, building your various savings accounts so that you can feel confident as an investor, or maybe you’re unclear about which type of asset would be best as your first foray into commercial real estate.
Alternatively, suppose you have invested in Multifamily. In that case, it’s likely your concerns revolve around how to build diversification into your real estate portfolio and what types of assets should be accumulated in which order.
Well, I’ve got good news!
In this article, I’ll walk you through the steps to building a diversified, complimentary commercial real estate portfolio. So, when you’re done reading this article, you’ll know exactly what to look for next, no matter where you are in your investing journey.
Our Three Favorite Asset Classes For Diversification
The key is to select uncorrelated yet complementary asset classes. We’ve found three unique asset classes that are a step above the rest based on cash flow, renters’ needs, and operator strategy.
We started by investing in multifamily and, in time, added self-storage and short-term rentals. Each diverse asset type provides a unique solution to a different demographic, varies in monthly or yearly turnover, and requires a different business plan to best serve all involved.
When you have a single asset in your investment portfolio, your risk is concentrated on that one property. However, if you spread your investing power over three or more assets, each one carries less power to make or break your investment strategy. And, to take it a step further, when you spread your risk over multiple properties in various markets across these three asset types, you’ve created a truly diversified real estate portfolio.
Multifamily Real Estate As Part Of Your Diversified Portfolio
First and foremost, multifamily real estate syndications have been our default and reliable asset class because of their unique position in the housing market – tenants find them more affordable than single-family homes. With the increased migration patterns and shortage in housing supply in the past couple years, we are still seeing very high demand for multifamily and apartments.
Multifamily investments can be found in every city, job market, style, and demographic across the US, allowing diversification within the asset class. Apartments are generally rated as an A, B, C, or D-class property and can come with all the bells and whistles of a new build or reflect years of neglect and deferred maintenance.
Multifamily real estate properties produce cash flow monthly from rent payments, and turnover is typically on an annual basis as tenant’s leases renew.
Self-Storage Property As Part Of Your Diversified Portfolio
One great addition to your real estate portfolio could be self-storage. Self-storage properties have come a long way in recent years! Of course, you’ve seen Storage Wars, right?
Nowadays, operators and owners have leveraged technology to allow guest entry, turn on and off lights, unlock and lock facility gates, allow renters to pay fees electronically, and much more. This has reduced the need for on-site staff to the point that one employee can serve hundreds of units at a time, which also drastically reduces overhead.
Storage units can turnover monthly as renters’ needs adjust, but re-leasing a unit only requires a little dusting of the cobwebs to be ready for a new renter within the same day. While per-unit rent is much lower than a multifamily unit, self-storage properties can easily pack hundreds of units onto a small piece of real estate, making storage facilities’ lot size to revenue ratio ultra-efficient.
Storage units come in various sizes, climate-controlled, non-climate-controlled, interior access, exterior access, with or without utilities, and, of course, in different metro and suburban locations, all of which provide the opportunity for diversification within the asset class.
Short-Term Rentals As Part Of Your Diversified Portfolio
We’ve all seen how popular AirBnB and VRBO have become in the last decade. Especially with the lockdowns during the pandemic and the whole remote work culture, many people especially in smaller homes and apartments sought refuge in more remote destinations and stayed in short-term rentals that provided more space and breathing room.
Within the last 5 years, we’ve seen nearly 300% growth, and it continues to grow as it competes with the hospitality and hotel industries. These shorter-stay homes and properties provide a larger, more spacious and unique experience to make traveling to various destinations more comfortable for individuals, couples, families and larger groups.
Short-term rentals tend to see higher revenue based on a per-night charge basis, yielding higher profits and margins despite potentially higher expenses and turnover costs. Due to this, STRs provide significantly more upside on cash-on-cash than traditional long-term rentals and allow for a higher resale value based on the increased revenue.
How To Build A Diverse Portfolio With Three Asset Types
With just these three asset types – multifamily, self-storage, and short-term rentals – you can immensely diversify your portfolio. In addition, by investing in multiple properties of varying class, located inside and outside of metro areas, with differing job opportunities and population diversity, you can spread your risk relatively thin across all your syndication investments.
While this isn’t likely something you can achieve tomorrow, it’s crucial to start with the end in mind. If your goal is to have 20+ syndications providing you cash flow and appreciation from nearly every state across the US, now you have a strategic way to approach that goal.
For those just getting started, we suggest getting your feet wet with a multifamily syndication first and adding on various asset types and classes as your confidence in real estate investing grows.
Private equity real estate funds are becoming more and more popular in the last few years, but they’re not exactly new. Real estate syndications have existed for decades, with some of the earliest examples dating back to 1926. Real estate funds come in two different flavors: REITs (Real Estate Investment Trust) and private investments. Private investment funds allow you to invest alongside a small group of other investors, while REITs offer publicly traded stocks that represent an ownership stake in a larger pool of properties around the world.
Commercial real estate has always been considered an “alternative investment,” but it is fast becoming more mainstream. With housing prices skyrocketing, the increasing cost of raw components and lumber, and labor shortages, the idea of owning a piece of income property is just not in the cards anymore for many individuals. So, most investors are turning toward small multifamily or other hands-off type commercial real estate properties.
Aside from buying an entire storage facility or small multifamily complex on your own, another more affordable entry point into commercial real estate can be found through real estate investment funds. These funds appeal to investors who want to own commercial property but would rather be passive in their investing approach, meaning they do not want to directly partake in property management activities.
Investors pool money to purchase assets within the fund. The fund’s sponsor then directs all of the fund’s operations, including property management. If the fund purchases and renovates or buys and holds property for an extended duration of time, the sponsor team will need to make stronger efforts in property management. Real estate funds are a fantastic strategy for individuals who want to generate passive income by investing in real estate, but don’t want to be responsible for the property.
Below, you will find everything you need to know about real estate investment funds, their benefits, the structure, profits, returns, and more!
What Is A Real Estate Fund?
Real estate funds are a mutual investment entity. Mutual investments allow investors to invest any amount of money they choose toward numerous properties at the same time, regardless of the property-to-capital ratio. This way, investors circumvent the need to have the entire capital amount that would be required to invest in whole properties as an individual. Investors can purchase a portion of several properties in the form of shares.
Real estate investment funds provide you the chance to invest in real properties with a variety of rules and regulations that are specific to each region. There are different kinds of funds, including dividend-paying real estate investment funds, which are similar to mutual funds. These funds combine money from investors and give them the opportunity to explore Investors may choose from a wide variety of funds, each with its own targets. For example, some real estate funds focus on large residential properties, while other funds might be focused on commercial properties that can be sold quickly.
Rules for each real estate fund vary. But generally, the funds offer investors the chance to invest in real estate at a lower price point, maintain liquidity since shares can be cashed out early, and, of course, the opportunity to earn passive income when rent is paid on the properties and when the value of the real estate increases.
Types of Real Estate Funds
As you look deeper into real estate funds, you will notice two main types of real estate funds. The first type is a private equity real estate fund. Private equity funds are not open to the public and have more restrictive membership criteria, such as high net worth or an institutional affiliation.
The second type is a Real Estate Investment Trust (REIT). Real estate investment trusts are publicly traded. Although there is a cost to the investor, REIT’s offer liquidity and can provide diversification within your portfolio.
Real Estate Funds vs REITs
A real estate fund is pretty much another form of a mutual fund, except it is focused on investing in the securities public real estate companies offer. These real estate mutual funds differ from real estate investment trusts or REITs. Real estate mutual funds are exempt from registration with the Securities and Exchange Commission or the SEC, and they are exempt under what is known as Regulation D, Rule 506.
REITs are corporations that invest directly in commercial real estate, and when you invest in a REIT, it is like buying stocks, where shares can be purchased and sold. REITs and other securities have to be registered with the SEC. They can seek exemption from the SEC, but this process is costly, complex, and time-consuming, therefore not typically done.
How To Invest In Private Equity Real Estate Funds
Once you connect with a firm or sponsor who is offering an investment opportunity, you have a couple of choices as to how you can invest your capital. You can either send in capital you’ve saved in a highly accessible account or you can invest using your retirement savings.
Wire Liquid Funds
If you’ve saved your investment capital in a highly-accessible, highly liquid savings or other bank account, you can simply wire the entire investment amount to the sponsor, according to the instructions provided in the investment documentation. The sponsor will then buy shares in the fund on your behalf and list them in an account that is maintained at the transfer agent.
Self-Directed IRA Funds
The self-directed IRA is one of the most popular ways to access real estate investment funds. This version of an IRA isn’t much different from a Roth IRA. Self-directed IRAs are more popular because they allow investors to invest in a wider range of assets, such as real estate investment funds.
Traditionally, brokerages do not allow investors to invest money in non-traditional investment possibilities from a Roth IRA, Traditional IRA, or 401K. As a result, investors interested in a real estate fund strategy may need to transfer funds from their existing, likely traditional brokerage account to an IRA custodian that offers self-directed investing choices.
The main benefit of investing in a real estate fund instead of buying and managing an investment property is it allows the investor to diversify their portfolio and still keep a hands-off approach. Investors should remember that self-directed IRAs are self-directed, which means it is 100% up to the individual to do their research and conduct thorough due diligence, find good sponsors, and explore potential opportunities and risks prior to investing in any fund or other alternative investment.
Who Qualifies to Invest In A Real Estate Fund?
There are a few qualifications that investors need to be aware of before they decide if this investment choice is right for them.
Investor Qualifications
Depending on the qualifications that fund management outlines, real estate funds may require that you have a net worth of at least $250,000 and that you contribute an initial minimum investment, which can range from $5,000 to hundreds of thousands of dollars, depending on the size and type of fund you’re investing in. Many real estate funds will also have a maximum investment amount, and some will be open ended.
Real estate funds typically require a minimum investment period of one year or longer, although there are also “opportunity zone” real estate funds that allow for turnover in under two years. Real estate is typically considered an illiquid investment because it takes time to sell the property and receive your capital back out of the fund so investors will need to be prepared for this type of timeline.
REITs typically have much lower minimums and will allow you to buy in with a much smaller investment. They’re more accessible, generally listed on public exchanges, and available for investment inside most standard retirement savings accounts.
Sponsor Qualifications
You gain from the fund sponsor’s qualifications, connections, and experience when you invest in real estate funds. The sponsor is often a sector expert or group with extensive expertise in managing real estate investment opportunities. They’ve already performed detailed due diligence on the properties included in the fund, the market, and analyzed the projections extensively.
Sponors will provide investors with thorough financial information to evaluate and evaluate prior to asking for financial commitment to the fund. They will also be accessible and delighted to answer any questions about the fund’s strategy or how it will be a success for investors. Keep your eyes and ears open for any calls, webinars, or presentations in regard to the fund, as this is an excellent opportunity to get to know the team and the strategy on a deeper level.
The fund manager is in charge of all aspects of the fund’s day-to-day operations, allowing investors to invest without being concerned with each transaction made through the fund.
Benefits of Investing in Real Estate Funds
Real estate funds often provide higher than average, consistent returns, that are independent from the stock market’s fluctuations, further proving that investing in real estate is a dependable way to generate revenue and profits over time. Real estate investing allows you to diversify your portfolio instead of having all of your eggs in one basket like with buying an investment property or stock market investments alone.
Investing in real estate funds also gives you access to the real estate market without the hassle of being a property owner or manager. You can pick and choose from different types of real estate investments without having to do all the research yourself – the fund’s sponsor will have already done that for you.
Diversification
You combine your money with other investors’ to buy a set of similarly rated assets in different locations using real estate funds. You may also diversify your holdings by purchasing shares in multiple funds. You can even diversify across asset types, markets, and appreciation profiles by buying shares in different funds. Diversification lowers risk while increasing the potential for greater returns for investors.
Profitability
Most real estate investment funds are designed to pay investors back before the fund’s sponsor makes any money. As a result, the sponsor is under great pressure to ensure that the transaction meets its intended profit goal. The structure of investments is designed to maintain the interests of the sponsor and their investors in alignment.
Tax Efficiency
Most funds are structured to last longer than one year, meaning they will be taxed as long-term capital gains instead of short-term. Real estate funds also allow you to invest in real estate without worrying about depreciation.
Investors may benefit from pass-through depreciation, and the tax benefits will rest on the investor’s shoulders and be driven by their circumstances. Real estate funds offer investors a way to defer taxes on their share of income and capital gains until they actually sell their shares in the fund.
Preferred Returns
When it comes to preferred return, the investor is paid first. If it’s a cash flow fund, investors will receive their distributions throughout the life of the investment. This sort of return is necessary because you’ll be paid before the professional manager, which is crucial when dealing with higher-risk assets.
Will Your Next Real Estate Investment Be In A Fund?
There are many reasons people decide to invest in real estate and an additional list of reasons they might decide to invest in a real estate fund. Real estate investment funds are a great way to diversify your portfolio without having to take on all the hassles of owning property directly.
Not all funds are created equal, and you always want to do your research and due diligence before investing in a particular real estate fund. Be sure to vet the fund’s sponsor, management team, and explore the fund’s track record. Evaluate the fund’s targeted returns, then determine if you believe in or agree with their strategy and how long it will take to hit their target metrics.
As with any investment, research the opportunity thoroughly. No investment comes without risk, and no investment is foolproof. But the more you know about how the fund is structured, the team running it, and the assets that are inside the fund, the more likely you are to invest your hard-earned money in a profit-making machine!
Margaret spent 20 years working her way up the corporate ladder as an executive for media and market research firms before escaping the grind for real estate. She realized over time that she was ready to give up the long hours and time away from her family working and traveling for another company. She jumped into real estate and obtained a residential real estate license with Keller Williams, which allowed her to control her time while working towards her passion. She has helped countless people and families purchase and sell their homes across CT and NY. She started her real estate investing career in multifamily, and founded MGH Investments in 2016 and has invested in properties in TX, NC, SC and IN.
Christine knew fairly early on that corporate life wasn’t the best fit for her. After the first honeymoon year in any new job she had, the excitement quickly wore off with the long hours, highly competitive environment and unwelcome attitude towards thinking outside of the box. It wasn’t until 11 years and 2 children later in her career, did she finally take action to find another path. In late 2019, she started learning as much as she could about real estate. She purchased numerous books and listened to endless BiggerPockets podcasts to speed up the learning curve. By 2020, she was committed to jumping into this business. By that summer, she and her husband sold their primary home in NJ and purchased a duplex in NY to househack. This helped save on housing and living expenses, thus making leaving her job and pursuing real estate investing a slightly less risky endeavor. Along with that transition, she also purchased 4 rental properties in Philadelphia and invested in multifamily and mobile home park syndications across NC, SC, GA, FL and TX.
How did Margaret and Christine meet?
It all started with LinkedIn. Christine didn’t know who to talk to or ask about investing in Real Estate when she first started, so she did a quick search in the search bar on LinkedIn– “Real Estate Investor”. Margaret was one of the first names that came up due to mutual connections and similar career backgrounds. Margaret very graciously responded and hopped on a call with Christine. After a couple calls, they decided to meet in early 2020 over coffee and chat about all things real estate. Margaret told Christine about the amazing things that come with Multifamily investing, and even brought her into her first deal as an LP. The friendship grew organically there, even keeping in touch during the pandemic and starting a 30-day meditation challenge together in a small group on text with Deepak Chopra. Even though they were both in different stages of life, there were still so many similarities not just in career transitions, but also in faith, values and family circumstances. Some time had passed as the pandemic led people to stay home and social distance. The hot real estate market in CT and NY kept Margaret busy, and acquiring and managing rental properties took much of Christine’s time. By early summer 2021, as everything started opening up more they reconnected over a delicious lunch and caught up on life, kids and real estate. It was then they discovered their long term goals were still focused very much on multifamily. Margaret was doing very well as a real estate agent, but it wasn’t the long term plan. She hoped to scale back and retire early with multifamily syndications. Christine was ready to move on from the rentals business and scale with multifamily properties. They decided, why not partner?!
After many months of planning and brainstorming, Noblivest was born. We wanted our company to stand for what we felt was most important to us, faith, family and integrity. While real estate is a common vehicle to wealth, we didn’t just want to build a nest egg for our own families, we wanted to bring impact to those around us too. We wanted to help open doors to our investors and their families to another stream of passive income and an investment strategy that outperforms what banks and traditional brokerages offer. We wanted to improve and create communities with apartments and homes that are clean, safe and comfortable to the families we cater to. We hope to use our profits to support families and women of children with disabilities and special needs, helping them navigate the complex world involved with that as it is a cause very close to us and our families. We would like to champion other women like ourselves to financial literacy, especially concepts that are not commonly taught in schools or spoken about.
We have personally seen the benefits of investing in real estate syndications. It is our goal to discover the opportunities for us to invest alongside with you, while creating a platform to inform and educate on the concepts around real estate and syndications.
We look forward to partnering with you on this exciting journey as the Noblivest tribe! We are always here to support you, so please don’t hesitate to book time with us for a chat. We would love to hear about your investing goals and whether this amazing strategy fits into your long term goals!
The problem with investing is, it’s really easy to look back in time and see the best path, but it’s not so easy looking forward in time. Being able to assess your current financial situation, reflect on your investing goals, and commit to a plan of action are all easier said than done.
I can’t pretend that I have a crystal ball for you to show you the future and what’s best for you to invest in at the moment. But, what I can do, is show you the past performance of three multifamily real estate syndications (group investments) that we and our investors have invested in, how much they’ve returned to investors, and the impact that they’ve had on their respective communities.
Let’s take a look at three multifamily real estate syndication projects, all based on actual projects in our portfolio, and how their performance to date. Please note that all data and identifying information below is based on actual projects but has been changed to protect the privacy of the deals, our partners, and our investors.
Case Study #1 – 320-Unit Apartment Community
Here we are looking at a 320-unit apartment community acquired in May 2016 for $26.6 million. This class B apartment community was built in 1983 and is in a rapidly growing submarket of Dallas-Fort Worth. The previous owner had inherited the property from their father, no longer wanted to manage it, and was looking to cash out.
The business plan for this real estate syndication was to improve on-site operations by bringing in professional property management and to renovate each unit to the standard of other apartments in the surrounding area.
Upon acquisition, the team immediately put into place a professional property management team, which was able to maximize operational efficiencies and oversee and execute on all phases of the value-add business plan.
The renovations were completed within 18 months. The market was quite favorable at the time, so the team decided to sell the property. After just 22 months, they were able to sell the property for $35.2 million and exit the real estate syndication with a profit of $8.6 million in less than 2 years.
What did this look like for investors? Let’s take a look.
If you had invested $100,000 in this real estate syndication, you would have ended up with $170,000 in 22 months. That means you would have made a profit of $70,000 in less than 2 years, while having to do zero work.
Case Study #2 – 216-Unit Apartment Community
In October of 2016, our partners acquired another apartment community in the Dallas-Fort Worth area. This complex was a bit smaller, at 216 units, and was built around the same time, in 1981. Similar to the last example, this apartment community was a class B asset in a growing submarket.
One key difference, however, was that this property was acquired off-market (i.e., it wasn’t publicly listed). Because of the relationship our partners had established with the broker based on their previous transactions and track record, they were able to acquire this property without having to compete with other potential buyers, meaning that they were able to get it at an excellent price.
This property was purchased for $12.2 million. The team worked hard to rebrand and reposition this property, investing several thousand dollars per unit to renovate the property.
Their hard work paid off.
In just 18 months, they were able to sell the property for $18.25 million and exit the real estate syndication with a profit of over $6 million in just a year and a half.
If you had invested $100,000 in this syndication, you would have ended up with $200,000 just 18 months later. > <blockquote
In other words, you would have doubled your money in a year and a half.
A Behind-the-Scenes Look At 3 Multifamily Real Estate SyndicationsA Behind-the-Scenes Look At 3 Multifamily Real Estate Syndications
Case Study #3 – 200-Unit Apartment Community
Let’s take a look at one more example. This one is a current project. It was acquired in December of 2016. Similar to our other examples, this 200-unit apartment community is a class B asset in a growing submarket of the Dallas-Fort Worth area. The property was originally built in 1981 and was purchased for $16 million through an off-market deal.
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May 2017 (6 months after purchase)
In the six months since acquisition, 38 units have already been renovated, and new rent premiums are $20 above what was originally projected. This means that the property is already doing better than expected, just six months in.
Sidebar: Okay, I know that $20 above original projections doesn’t sound super exciting, but you have to think about the scale of this thing. $20 across the 38 renovated units means an additional income of $760 per month, or $9,120 per year. At a conservative cap rate of 10%, this adds an additional $91,200 of equity to the overall value of the property. All from a measly twenty bucks.
Other projects that have been completed within the first six months include the installation of an outdoor kitchen, the addition of a new dog park, rebranding with new signage, and the construction of over forty carports.
Phew! That’s quite a bit of work in just six months.
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December 2017
Renovations have continued to go well during the second half of the year, and the new units continue to achieve rental premiums above the original projections. Because of this, investors in this real estate syndication will receive an additional 2% in returns this month.
Sidebar: The normal distribution to date has been 0.67% per month. In other words, for an investment of $100,000, you would have been getting $667 per month. With the extra 2%, your payout for December 2017 will be $2,667.
Always nice to get a little extra bonus to cover all that holiday shopping, don’t you think?
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February 2018
We are consistently and significantly outperforming our projections. In fact, within the first year, we’ve created a 26.4% surplus. Thus, we will be refinancing at the end of the month and will be returning 40% of investor capital while still projecting the same cash-on-cash returns based on the original equity invested.
Sidebar: Okay, let’s dissect that golden nugget right there. What that update is saying is that the property is performing so well that the team has decided to seek a refinance to pull out some of the original money invested in the project.
This means that, if you had originally put in $100,000, you would be receiving a check for $40,000, returning a portion of your original investment.
However, you will continue receiving monthly cash flow distributions as if the entire $100,000 were still invested.
Let me repeat that. You get $40,000 of your original money back, free and clear. But you’re still getting cash flow as if all $100,000 were still invested in the project.
This is HUGE. This means you can then take that $40,000 and invest it elsewhere, essentially “double dipping” your money.
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August 2018
A total of 135 of the 200 units have been renovated thus far. Renovated units are renting for $80 above original projections. (Quick math: Each unit renting for $80 per month above projections adds an additional $9,600 per month to the overall value of the property. Woot woot!)
In addition, we have installed eco-friendly toilets and shower heads in over two-thirds of the property. Each additional unit that gets eco-friendly fixtures helps bring down our overall utility costs.
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Future
The value-add progress continues on this property, and we aim to complete all the renovations within the coming months. At that point, depending on the state of the market, we may sell the property, or we may hold onto it until market conditions are most favorable.
Either way, this real estate syndication project has been a huge success thus far. Both investors and residents are very happy with all the progress made to date.
A Behind-the-Scenes Look At 3 Multifamily Real Estate SyndicationsA Behind-the-Scenes Look At 3 Multifamily Real Estate Syndications
Conclusion
In our experience, the number one thing that holds our potential investors back is lack of education. These real estate syndications sound great in theory, and you see people around you making great returns, but investing your own $50,000? Eek!
That can be a huge step, and it often requires a lot of time and energy up front to really learn what real estate syndications are all about, how they work, and what to expect throughout the process so that you can invest your hard-earned money confidently.
The case studies in this post are all real projects that we or our partners have been a part of. None of the returns or the performance of the projects have been fabricated. Everything is 100% real and true.
These real estate syndications originated in 2016, just two years ago. Think about yourself two years from now.
What can you do today to set Future You up for success?
Investing time in your education is one of the best ways to jump start the process, so you can ensure that two, five, ten years from now, you will be quite satisfied with all the chances you took, the returns you’ll have made, and the impact your investments will have had on the world.
As you probably know, no two real estate investments are exactly the same. There are a million ways to structure a real estate deal, and just as many potential outcomes.
Some deals offer a huge potential upside, but also come with huge risks. Others offer steady cash flow, but without the potential for appreciation.
At Noblivest, we’re investors first.
We look for deals that we would invest in ourselves, do our due diligence to ensure we feel comfortable investing our own money in the deal, and only then do we offer those opportunities to our investors.
We look at a lot of deals. And just like snowflakes, no two are the same. But we’ve established some criteria that we look for when evaluating deals, and these are the benchmarks we typically aim for in the investment opportunities we offer.
In this post, we’ll look at some of the typical returns we aim to offer investors.
Big Fat Disclaimer
You probably saw this coming from a mile away, but I gotta do it anyway. Before we get into the numbers, I have to insert a big fat disclaimer here, for the one percent of you who will, at some point, get all up in arms because we didn’t deliver these exact returns. Yes, I see you, don’t be trying to hide.
As the title of this post suggests, these are only PROJECTED returns. As with any investment, we cannot guarantee any returns, and there’s risk associated with any investment. This is only meant to give you a rough ballpark of the kinds of returns we’re typically considering.
With that, let’s get to it.
Three Main Criteria
If you’ve ever seen an investment summary for a real estate syndication, you know that there are a TON of facts and figures in there. #chartloversunite
Each metric has its merits and tells you a certain something about the asset and the deal at hand. When doing our quick synopsis of a deal, we look at three main criteria:
Projected hold time
Projected cash-on-cash returns
Projected profits at the sale of the asset
Projected Hold Time: ~5 Years
This is perhaps the easiest of the three criteria to understand. As the name would suggest, projected hold time is the amount of time we plan to hold the asset before selling it. Typically, we look at projects that have a hold time of around five years.
Why five years? Well, a few reasons.
First, five years is a relatively long time, if you think about it. Technically, you could have six children during that time (yes, I did the math). You could start and complete a college degree. You could binge-watch five seasons of your favorite Netflix show. You get the point. Five years is a decent chunk of time.
There are certainly some investors who are at a point in their lives where they want to invest for a longer period of time. However, we find that five years is a good length of time for most investors. Long enough to see some healthy returns, but not too long that you feel like your kids will have graduated from high school before you get access to that money again.
In addition, given real estate market cycles, five years is a modest timeline for us to get in, update the property, give the asset and market a little time to appreciate, and get out before lingering for too long (when it’ll be time to update those units all over again).
Plus, commercial real estate loans are often on a seven- or ten-year fixed term, so with a five-year projected hold time, that gives us a bit of buffer to hold the asset a little longer if needed, in case the market is soft at the time we’d originally projected a sale.
Projected Cash-on-Cash Returns: 8-10% Per Year
The next core metric we look at are the cash-on-cash returns, also known as the cash flow, which makes up the passive income you get during the course of the investment.
Cash-on-cash returns are what’s left after you factor in vacancy costs, mortgage, and expenses, and it’s the pot of money that gets distributed to investors, usually on a monthly or quarterly basis.
For the projects we’re looking at, we like to see cash-on-cash returns of about eight to ten percent per year.
That is, if you were to invest $100,000, the projected cash-on-cash returns for each of the five years would be about $8,000, roughly $2,000 per quarter or $666.67 per month.
This comes out to roughly $40,000 over the course of a five-year hold.
Just for kicks, let’s compare that to what you would get from a savings account during that same amount of time. Average interest rates on savings accounts sit south of one percent, but let’s just stick with one percent for simplicity’s sake.
If you were to put $100,000 into a savings account over five years, you would make about $5,000 in interest over the course of five years ($1,000 per year for 5 years).
That means that, at the end of 5 years, you’d have a grand total of $105,000. When you compare that to the $140,000 with the real estate syndication, it’s a total no-brainer.
Projected Profit Upon Sale: 40-60%
But of course, that’s not all. Perhaps the biggest piece of the puzzle is the projected profit upon sale of the asset in year five.
At this point, the units have been updated, the tenant base is strong, and rents are at market rates. Each of these improvements contributes to the overall revenue that the asset is able to generate, thereby increasing the property value. (Remember that commercial properties are valued based on the amount of income the asset generates rather than comparables, so these improvements typically add significant value to the property by the time of the sale.)
For the projects we’re looking at, the projected profit at sale is around forty to sixty percent.
Sticking with the previous example, if you were to invest $100,000, you would receive $40-60,000 in profits upon the sale of the asset in year five.
This is on top of the cash-on-cash returns you’re receiving throughout the hold time.
I should also point out that the projected profit on sale takes into account the improvements and efficiencies the sponsor team plans to implement, but it does NOT factor in appreciation of that particular market.
This is a really important distinction.
When we choose markets to invest in, we’re always looking for areas where job growth is strong, and as a by-product of that, population is increasing as well. This leads to increased demand for housing, which, in turn, leads to increased rents.
However, when putting together these projected returns, we always underwrite conservatively, and we never count on that market appreciation.
We factor in baseline inflation, but anything on top of that is a bonus. This is so that, even if the market tanks during the course of the hold, we can make sure that the investment can still stay afloat, and that investor capital is protected.
Preserving investor capital is ALWAYS our number one priority, above and beyond any shiny projected returns.
Summing It All Up
So there you have it. Projected returns for our middle-of-the road typical investment looks like this:
5-year hold
8-10% annual cash-on-cash returns
40-60% profits upon sale of the asset in year five
If you were to invest $100,000 in a real estate syndication deal with these projected returns, you would end up with roughly $200,000 at the end of five years.
$100,000 of your original principal + $40,000 in cash-on-cash returns + $60,000 in profits upon sale = $200,000 at the end of five years
Double your money in five years? Try asking for that from a savings account, and let us know how that goes.
For most people, the process of buying a house is fairly familiar.
You decide you want to buy a house, think about the neighborhoods and features in your must-have versus nice-to-have columns, talk with a lender to see how big a loan they’re willing to give you, consequently move some things from your must-have to your nice-to-have column after you get your lender’s pre-approval letter, then get together with a broker to tour properties until you find the home of your dreams and put in that offer package that the seller would be crazy to turn down. [Insert your own variations and horror stories here.]
By extension, the traditional types of real estate investing that involve buying a house and making some sort of profit on it, are also fairly easy to grasp. Fix-and-flip: buy a house, renovate it, sell it for a profit. Buy and hold: buy a house, rent it out, get monthly rent checks.
Beyond that, the edges can get a little fuzzy, especially when you start talking about things like group investments (aka, syndications), in which you invest passively alongside several, sometimes hundreds of, other investors to purchase a large asset, like an apartment building.
In this post, I’d like to take you through that process from start to finish, so you have a clear understanding of all the steps involved in investing passively in your first real estate syndication.
While the timeline can vary with different deals, the overall steps of investing in a real estate syndication are largely the same:
1. Decide whether to invest in real estate, period
2. Determine your investing goals
3. Find an investment opportunity that fits
4. Reserve your spot in the deal
5. Review the PPM (private placement memorandum)
6. Send in your funds
7. Celebrate
I tend to think of this process as a funnel, each step of which helps you gain a little more clarity on what you want and helps you get a little closer to your goals of finding and investing in a specific deal.
Step #1 – Decide Whether to Invest in Real Estate, Period
This is perhaps the most important step of all, the decision of whether you want to invest in real estate, period. After all, there are many other things you could invest in, from gold to coffee plantations to stocks and bonds.
This is a decision that I won’t be able to make for you. You’ll have to look at your overall portfolio, reflect on your goals, and decide whether investing in real estate can help you reach those goals.
What I can tell you, is a bit about how I got into real estate investing.
For me, I more or less fell into real estate investing. The first house my husband and I bought was a duplex, so right out of college, we became landlords. We quickly glommed onto this idea of passive rental income, and we had fun doing the renovations ourselves and finding tenants (some of whom are still good friends to this day).
Over the years, as we acquired more rental properties, we really started to grasp the power of passive income. Today, we have a number of rental properties in a number of different markets. Some we purchased ourselves, and others we invested in through group syndications.
Has every investment been a homerun? Absolutely not. But am I glad we made each and every investment that we did? Yes. 100% yes. Real estate has taught us about people and relationships, leverage, tax benefits, passive income, and the power of community. For us, real estate is a critical part of our personal portfolio and of our long-term strategy of building wealth for our family.
Once you decide that you want to invest in real estate, think about what you’re hoping to get out of it. Are you looking for a long-term or short-term investment? Are you hoping for a lump sum fairly quickly, or a steady stream of passive income over time? How much do you have to invest, both in terms of money and in terms of time?
If you’re not afraid to roll up your sleeves and put in some sweat equity, or you want to choose your own tenants or cabinets or flooring, you might consider trying a fix-and-flip, or buying and holding a small rental property.
If, on the other hand, you want more of a set-it-and-forget-it type of investment, a real estate syndication might be a better fit. You can invest your money alongside other investors, then have an asset manager take the helm, manage the asset, and carry out the business plan to update the units and maximize impact and returns.
Step #3 – Find an Investment Opportunity That Fits
If, at this point, you’ve decided that a real estate syndication is the best fit for you, the next step is to find a syndication opportunity that works for you. Just as there are a variety of different real estate assets you can invest in personally, there are a variety of real estate syndication projects available as well, from ground-up construction to value-add assets, and even turnkey syndications.
To help investors learn about investment opportunities, deal sponsors typically provide some variation on the following materials:
Executive summary
Full investment summary
Investor webinar
These are the core materials that will give you a full 360-degree view of the asset, market, deal sponsor team, business plan, and the projected financials.
Personally, when I review these materials, I’m looking first and foremost at the team who’s running the project. I want to make sure they have a solid track record and that they’re good people. As you know, you can give a great project to a terrible team, and they’ll drive it into the ground. On the flip side, you can give a struggling project into a terrific team, and they’ll turn the whole thing around.
Beyond the team, I look to see if the business plan makes sense, given the asset class, submarket, and where we are in the economic cycle. I do my own research on the market, looking at job growth, population growth, and other trends. I look at the minimum investment amount, projected hold time, and projected returns. I look to make sure that the team has multiple exit strategies in place, in case their Plan A doesn’t pan out. I look for conservative underwriting. I attend or review the investor webinar and ask tough questions.
I essentially look for any reason NOT to invest in the deal.
If, after all my research and analysis pans out, I consider investing in the deal.
But again, this is my personal philosophy and methodology. As you review different investment summaries, you’ll come up with your own criteria of what you’re looking for. The more you review, the better you’ll know exactly what you’re looking for.
Step #4 – Reserve Your Spot in the Deal
One thing to note about real estate syndications is that the opportunity to invest in the deal is on a first-come, first-served basis.
This can be especially important for deals in hot markets with strong deal sponsors.
I’ve seen multi-million-dollar investment opportunities fill up in a matter of hours.
That’s why it’s important to do your research ahead of time, to know how much money you want to invest, and what you’re looking for in an investment opportunity.
That way, when the opportunity opens up, you can jump on it.
Often, there will be an opportunity to put in a soft reserve amount. This is to hold a spot for you in the deal while you take some time to review the investment materials. If you decide to back out or reduce your investment amount later, you can do so with no penalty.
The flip side is, if you don’t hold a place, but then later decide you want to invest, there may no longer be room for you in the deal, and you’ll have to join the backup list.
Not every deal offers a soft reserve, but when there is one, and I think I might be interested, I always put in a soft reserve to buy myself some more time to think about the deal, review the materials, and do my own research.
For deals with a soft reserve, this step and the previous step #3 might be flipped or more fluid, so I tend to review the executive summary, reserve my spot in the deal, then review the rest of the materials.
Step #5 – Review the PPM
Once you’ve decided to invest in a deal, the first “official” (aka, legal) step is the signing of the PPM (private placement memorandum).
This is a legal document, often quite lengthy, that goes into detail about the investment opportunity, the risks involved, and your role as an investor in the project.
The PPM is certainly not the most fun document to review, but it’s very important that you read through it, so you fully understand all aspects of the investment opportunity, including the risks, subscription agreement, and operating agreement.
As part of signing the PPM, you’ll also need to decide how you want to hold your shares of the entity that’s holding the asset. Often, you can also specify whether you want your cashflow distributions sent via check or direct deposit.
Step #6 – Send in Your Funds
Once you’ve completed the PPM, the next step will be to send in your funds (aka, the amount you’re investing into the deal).
Typically, you will have the option to either wire in your funds or to send in a check. I’ve used both methods before and have had no issues with either method.
Pro tip: Before wiring in your funds, be sure to double check the wiring information, and let the deal sponsor know to expect your funds so they can be on the lookout.
Step #7 – Celebrate
You did it! By this point in the process, you’ve done your due diligence on the investment, reserved your spot in the deal, reviewed all the legal documents, and sent in your funds.
That means you’re done with all the active parts of your role as an investor. If we’re using the syndication-as-an-airplane-ride analogy, that means you’ve picked your destination, bought your ticket, checked your bags, reviewed the safety information, buckled your seat belt, and now you’re ready for a cocktail and a movie.
The next piece of communication you’ll likely receive is a note once the property has closed. Deal sponsors typically like to put lots of smiley emojis and exclamation points in these emails.
After that, expect monthly updates on the project, more detailed quarterly reports on the financials, quarterly cashflow distributions, and an annual K-1 for your tax returns.
Conclusion
So, there you have it. Hopefully, the process of investing in a real estate syndication is a bit clearer now, and perhaps, a little less intimidating.
Real estate syndications are more of a set-it-and-forget-it type of investment, so most of your active participation is up front. After you decide to invest in a syndication, you review the investor materials (executive summary, full investment summary, and investor webinar), reserve your spot in the deal, review and sign the PPM, and send in your funds.
The first time you do it, it might seem a bit confusing as to what to expect and what questions to ask. However, as you review and invest in more deals, the process will become second-nature.
Let me ask you a question. How did you find the home you’re currently living in?
I’m guessing that you didn’t just close your eyes and blindly point to a spot on the map. You probably had a specific area in mind, probably something fairly close to school or work, near some shopping or amenities you like, and with a specific number of bedrooms, bathrooms and price range in mind.
Let’s say you were looking for a three-bedroom home in the middle of the city, near public transit. Knowing your criteria, you likely would have turned down a one-bedroom condo in the suburbs, even if it had a beautiful view and a rooftop patio. You could picture beautiful summer evenings on that rooftop patio, but you could also picture your kids crammed into that one bedroom with you, so no. Cross that one off the list.
The same thing goes for investing in real estate. Before you do so, you have to know what you’re looking for, so that you’re anchored by the must-haves and not distracted by the nice-to-haves.
Without clear goals, you’re more likely to get swayed by any ol’ investment opportunity that comes along, because, hey, the numbers seem like they work, and the property photos look nice. Or, on the flip side, you might be paralyzed with fear because you’re not sure which opportunity is best for you, since they all look decent.
Once you have your investing goals in mind, you’ll have a clear idea of what you’re looking for from an investment, so when that next opportunity comes along, you can easily determine whether it’s a good fit for you.
Let’s take a closer look at a few examples, so you can try them on for size and see if any of these investing goals resonate with you and your life.
Investing Goal Example #1: Investing for Cash Flow
Meet Janet. She’s a working mom who’s been in the corporate world longer than she cares to admit. Her job pays well, but she doesn’t love it, especially because it comes with long hours and lots of meetings. Meetings upon meetings.
Janet’s investing goal is to create passive income streams that will cover her family’s living expenses, so she can eventually quit her job.
In other words, Janet is investing for cash flow. She’s interested in investments that will provide a steady and ongoing return for her family now, rather than years in the future. She’s looking for an investment whose returns will help offset her income, so that she can eventually quit her job.
Janet’s goal is to generate $2,000 per month in cash flow. If she’s able to do that through passive income, she’ll switch from a full-time to a part-time role, giving her more time to spend with her family.
When reviewing passive investing opportunities, she sees that she can make about eight to ten percent in cash flow per year from many of the multifamily real estate syndications she’s looking at.
As such, in order to get $2,000 per month, or $24,000 per year, in cash flow, Janet would need to invest roughly $300,000.
$300,000 x 8% = $24,000
With that benchmark in mind, Janet can easily turn down any investment opportunities with projected cash flow returns lower than eight percent. If she sees any opportunities with cash flow higher than ten percent, she knows she would be highly interested.
Investing Goal Example #2: Investing for Appreciation
Meet Ricardo. Unlike Janet, Ricardo isn’t interested in cash flow. He has plenty of good, steady income coming in every month, both from active and passive sources.
Ricardo doesn’t mind some cash flow, but that’s not why he’s investing. Ricardo is investing for potential appreciation. He’s seen how coastal cities like New York and San Francisco have had huge upswings in real estate values, and he wants a piece of that. He knows that these kinds of investments come with higher risk, but he’s okay with that.
Ricardo is also okay waiting a bit longer for a potentially bigger payout, rather than getting returns immediately. Because he has multiple streams of passive income and has a fair amount of assets, he’s okay with taking a bit more risk. If the appreciation doesn’t play out as predicted, and he doesn’t get as high a return as expected, he’s fine with that. He just wants to invest for the chance of appreciation.
Many investors will tell you that it’s way riskier to invest for appreciation, and that you should always invest for cash flow first and foremost. While this is true for many investors, there are some investors with a higher risk tolerance who want to gamble on that appreciation, for the possibility of a higher payout. There are definitely people who have made some great money through appreciation. But there are also many who have lost money investing for appreciation.
Ricardo knows his risks, though. So he looks for investments in appreciating markets, as well as value-add deals, so he can maximize his chances for appreciation.
The Hybrid: Investing for Cash Flow AND Appreciation
Most investors are not strictly like Janet nor strictly like Ricardo. Rather, most investors are looking for a combination of cash flow and appreciation.
You get some cash flow throughout the lifecycle of the project, but you also add value and invest in an appreciating market, to maximize the potential for appreciation.
Hybrid investments like this give you the best of both worlds. Hybrid investments are our sweet spot, mainly because it’s what we like to invest in ourselves. We get ongoing cash flow to help with our current living expenses, as well as the potential for appreciation later on in the project.
Know Your Goals
I’ve been in the field of graphic design for several years now, and I’ll tell you, when you see one of the investment summaries for a real estate syndication investment opportunity, you’re going to get distracted by the pretty colors and beautiful photos. I certainly did.
That’s why it’s so important to know what you’re investing for, so you can set the photos aside and really scrutinize the core of the investment opportunity, and determine whether it fits with your investing goals.
That way, when a deal comes along that fits your criteria, you can pounce on it with full confidence that it’s the right thing to do for you and your family.
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