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.
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.
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.
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.
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.
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.
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.
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.
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?
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.
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.
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
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.
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.
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.
Summing It All Up
So there you have it. Projected returns for our middle-of-the road typical investment looks like this:
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.
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
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:
Full investment summary
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.
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.
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.
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.
Imagine with me, that your workday began with the usual routine, but halfway through your morning, you received the news you’d been laid off.
For most Americans, that means zero income starting tomorrow morning.
Now, let’s pretend that during your employment, you leveraged your money.
The rich don’t work for money. They make their money work for them. – Robert Kiyosaki
Three Types of Income
Most people’s income is active, which means it’s from a consistent paycheck. But wealthy people typically earn Residual or Passive income (or both!).
Active income is from your employer and requires activity in exchange for money. When you stop, the income stops.
Residual income means you receive money after the work is done. For example, every book an author sells provides residual income.
Passive income is earned with very little effort and continues flowing even when you aren’t working. Real estate investments are one of the most stable sources of passive income.
Remember the job loss scenario? Let’s pretend you’d built passive income, on the side, during employment.
Since being laid off, your earnings decreased by your monthly salary amount, but you still have income.
Financial freedom is achieved when your earned passive income supersedes your active income.
Investing in Stocks vs. Real Estate
Historically, the stock market returns about 8% annually, which means $100,000 would produce roughly $8,000 per year. That’s only $667 per month.
To replace an income of $3,000 per month, you’d need $36,000 per year, which would be 8% of $450,000.
However, with real estate, $100,000 could buy a $400,000 rental home. How?
The bank brings $300,000 to the table.
You put in 25%, the bank puts in 75%, and you earn 100% of the profits.
A $400,000 home renting for $3,600 with a mortgage of $2,100 would net you $1,500 per month. Theoretically, 2 investments of this size could replace a $3,000 monthly income.
The total rental income plus $25,000 in additional equity (based on 5% annual appreciation) equals $43,000, or 43% return in just one year.
But I Don’t Want to Be a Landlord
The numbers look enticing, but being a landlord does not.
This is where, instead, you join a small team to acquire real estate.
When investing $100,000 in real estate syndication, it’s feasible to earn $8,000 per year (8%), similar to the stock market.
However, the real opportunity lies in the sale of the asset. Syndications hold the property for about 5 years. During this time, building improvements are made and the land market value typically rises.
Upon the sale, you receive $160,000 ($60,000 in profit). This, plus the passive income of $8,000 per year (totaling $40,000), equals $200,000, which is a 20% average annual return.
If, while employed, you’re able to create passive income, you’ll be less stressed when facing a layoff. You may even find yourself celebrating unemployment.
If you’re like me, one of the last things you think about when investing in a new venture, is taxes. It’s way more fun to think about all the potential luxury vacations you’ll take and the new cars you’ll buy, than to think about the taxes you’ll be paying.
Well, I’m here to tell you that, when you start out investing in real estate, it’s actually okay that taxes aren’t on your mind. That’s because, unlike when you invest in stocks and mutual funds, investing in real estate tends to make your tax bill lower, not higher.
Yes, you read that right. Investing in real estate can often help lower the amount of taxes you owe, even while you’re making great returns on your investment.
But how is that possible, you ask?
There’s actually a HUGE difference between the way the IRS views stock market gains and the way they view real estate gains. And that’s exactly what we’ll discuss in this article, specifically from the standpoint of a passive investor in a real estate syndication.
But First, a Disclaimer
Just so you know, I am not a tax professional, nor will I ever seek to become one (those people have really tough jobs). As such, the insights and perspectives provided in this article come from my experience only.
You should speak with your CPA for more details, and specifics on your situation.
Okay, now that that’s out of the way, let’s dive in.
The 7 Things You Should Know about Taxes and Real Estate Investing
Okay, get ready to have your socks knocked off. As much as taxes can knock one’s socks off, anyway.
Here are seven main things I think every passive investor in a real estate syndication should know about taxes:
The tax code favors real estate investors.
As a passive investor, you get all the tax benefits an active investor gets.
Depreciation is hecka powerful.
Cost segregation is depreciation on steroids.
Capital gains and depreciation recapture are things you should plan for.
1031 exchanges are amazing.
Some people invest in real estate solely for the tax benefits.
#1 – The tax code favors real estate investors.
You may have heard that more people become millionaires through investing in real estate than through any other path. And believe it or not, the tax code plays a big role in that.
You see, the IRS recognizes how important real estate investing is, in providing quality housing for people to live in. As such, the tax code is written in such a way that it rewards real estate investors for investing in real estate, maintaining those units, and making upgrades over time (more on these benefits in a moment).
So as a real estate investor, you’re like the IRS’s teacher’s pet.
Hey, there are worse things.
#2 – As a passive investor, you get all the tax benefits an active investor gets.
This is a big deal! This means that, even though you’re not actively fixing any toilets or climbing on any roofs, you still get full tax benefits, whether you’re an active or passive investor.
This is because, as a passive investor in a real estate syndication, you invest in an entity (typically an LLC or LP) that owns the property, and that entity is disregarded in the eyes of the IRS (these entities are sometimes called “pass-through entities”).
That means that any tax benefits flow right through that entity, to you, the investors.
Note: This is different for investing in REITs. With a REIT, you are investing in a company, not directly in the underlying real estate, and hence you don’t get the same tax benefits.
Common tax benefits from investing in real estate include being able to write off expenses related to the property (including things like repairs, utilities, payroll, and interest), and being able to write off the value of the property over time (this is called depreciation).
Let’s focus in on this thing called depreciation.
#3 – Depreciation is VERY powerful.
Depreciation lets you write off the value of an asset over time. This is based on wear and tear and the useful life of an asset.
What is depreciation?
To give you a simple example, let’s say you just bought a new laptop. On day one, that laptop works great. Over time, however, the keyboard gets sticky, the processor slows down, and the battery barely lasts more than a few minutes. Eventually, the whole thing will go kaput and be worth very little, if anything. This is the essence of depreciation.
Essentially, the IRS is acknowledging that, if the property is used day in and day out, and if you do nothing to improve the property, that over time, the property will succumb to natural wear and tear, and at a certain point in the future, the property will become uninhabitable (just like when that laptop eventually dies).
As you can imagine, every asset has a different lifespan. You wouldn’t expect a laptop to last more than a few years. On the flip side, you would expect a house to still be standing several years, or even decades, later.
For residential real estate, the IRS allows you to write off the value of the property over 27.5 years.
Note: Only the property itself is eligible for depreciation benefits, not the land. The IRS is smart enough to realize that the land will still be there in 27.5 years and will still be worth the same, or more.
Here’s an example
Let’s say you purchased a property for $1,000,000. Let’s say the land is worth $175,000, and the building is worth $825,000.
With the most basic form of depreciation, known as straight-line depreciation, you can write off an equal amount of that $825,000 every year for 27.5 years. That means that, each year, you can write off $30,000 due to depreciation ($30,000 x 27.5 years = $825,000).
The reason that this is such a big deal is this. Let’s say, that first year, you make $5,000 in cash-on-cash returns (i.e., cash flow) on that property. Instead of paying taxes on that $5,000, you get to keep it, tax-deferred (i.e., without having to pay taxes on it until the property is sold).
*Disclaimer: This depends on your individual tax situation. Please consult your CPA.
That $30,000 in depreciation means that, on paper, you actually lost money, while in reality, you made $5,000.
Plus, properties acquired after September 27, 2017, are eligible for bonus depreciation, which can really amp up the tax benefits for that first year.
This is why depreciation is SO powerful.
#4 – Cost segregation is depreciation on steroids.
But wait, there’s more!
In the last example, we talked about something called straight-line depreciation, which allows you write off an equal amount of the value of the asset every year for 27.5 years.
But, for most of the real estate syndications we invest in, the hold time is around just five years. So if we were to deduct an equal amount every year for 27.5 years, we’d only get five years of those benefits. We’d be leaving the remaining 22.5 years of depreciation benefits on the table.
This is where cost segregation comes in.
Cost segregation acknowledges the fact that not every asset in the property is created equal. For example, that printer in the back office has a much shorter lifespan than the roof on top of the building.
In a cost segregation study, an engineer itemizes the individual components that make up a property, including things like outlets, wiring, windows, carpeting, and fixtures.
Certain items can be depreciated on a shorter timeline – 5, 7, or 15 years – instead of over 27.5 years. This can drastically increase the depreciation benefits in those early years.
Here’s an example
Let me give you an example. And this one is based on a true story.
A few years ago, real estate syndication group purchased an apartment building in December of that year. That means that the investors only held that asset for one month of that calendar year.
However, due largely to cost segregation, the depreciation schedule was accelerated for many items that were part of the property, including things like landscaping and carpeting.
The K-1 that was sent out to investors the following spring showed that, if you had invested $100,000 in that real estate syndication, you showed a paper loss of $50,000.
That’s 50% of the original investment.
Just for owning the property for a single month during that tax year.
And, if you qualify as a real estate professional, that paper loss can apply to the rest of your taxes, including any taxes you owe based on your salary, side hustle, or other investment gains.*
*Again, this depends on your individual situation, so please consult your CPA.
This is a game-changer, folks.
#5 – Capital gains and depreciation recapture are things you should plan for.
You didn’t think that real estate investing would be 100% tax-free, did you?
Unfortunately, the IRS likes to be included in everything.
In real estate investing, the way they get their cut is through capital gains taxes when a real estate asset is sold, and sometimes, through depreciation recapture, depending on the sale price.
In a real estate syndication that holds a property for 5 years, you wouldn’t have to worry about capital gains taxes and depreciation recapture until the asset is sold in year 5.
The specific amount of capital gains and depreciation recapture depends on the length of the hold time, as well as your individual tax bracket.
Here are the brackets and percentages based on the 2021 tax rates:
For more details and the most up-to-date laws and info, I recommend you discuss the specifics with your CPA.
#6 – 1031 exchanges are amazing.
I mentioned above that when a real estate asset is sold, capital gains taxes (and often, depreciation recapture) are owed. However, there is one way around this. And that’s through a 1031 exchange.
A 1031 exchange allows you to sell one investment property, and, within a set amount of time, swap that asset for another like-kind investment property.
Doing so means that, instead of having the profits paid out directly to you, you roll them into the next investment. As such, you don’t owe any capital gains when the first property is sold.
Only some real estate syndications offer a 1031 exchange as an option. Often, the majority of the investors in a syndication have to agree to a 1031 exchange to make it a possibility.
Unfortunately, you cannot do a 1031 exchange on just your shares in the real estate syndication.
The sponsors must decide to do a 1031 exchange on the whole shebang. It’s all or nothing.
Every sponsor is different and approaches 1031 exchanges differently. If a 1031 exchange is something you’d be interested in, be sure to ask the sponsor about it directly.
#7 – Some people invest in real estate solely for the tax benefits.
The tax benefits of investing in real estate are so powerful that some people (namely, wealthier folks) do so purely for the tax benefits. You see, by investing in real estate, they can take advantage of the significant write-offs, and then apply those to the other taxes they owe, thereby decreasing their overall tax bill.
This is how real estate tycoons can make millions of dollars but owe next to nothing in taxes.
It’s perfectly legal, and it’s a powerful wealth-building strategy. And, you don’t have to be wealthy to take advantage of the tax benefits of investing in real estate. The tax code makes the benefits of investing in real estate available to every real estate investor.
Like I mentioned when I started this article, you don’t have to worry about taxes when investing in real estate, especially as a passive investor in a real estate syndication. In most cases, you’ll be able to make money via cash-on-cash returns, yet you won’t owe taxes on those returns due to benefits like depreciation.
To recap, here are the seven things I think every real estate investor should know about taxes:
The tax code favors real estate investors.
As a passive investor, you get all the tax benefits an active investor gets.
Depreciation is hecka powerful.
Cost segregation is depreciation on steroids.
Capital gains and depreciation recapture are things you should plan for.
1031 exchanges are amazing.
Some people invest in real estate solely for the tax benefits.
As a passive investor, you don’t have to “do” anything to take advantage of the tax benefits that come with investing in real estate. That’s one of the benefits of being a passive investor. You don’t have to keep any receipts or itemize repairs. You just get that sweet K-1 every year, hand that over to your accountant, and that’s it.
Ah, investment summaries. They’re the all-in-one marketing package / business plan / underwriting explainer / photo gallery / why-you-should-invest-in-this-deal packet for every commercial real estate syndication deal that everyone loves and hates.
Often, when deal sponsors are raising money for their deals, they’ll put together investment summaries to explain to potential investors why the deal is so great, what they plan to do with it, and how much the investors stand to gain from participating in the investment.
Investment summaries are like snowflakes. No two are the same.
Some investment summaries consist of gorgeous graphics and iconography, professional photos and clear tables. Others are written like textbooks and include haphazard low resolution phone pictures someone probably threw in at the last minute. Sigh.
But here’s the thing. Regardless of what an investment summary looks like, you have to be able to swallow your initial impressions (good or bad) and look at the numbers and business plan for what they really are.
If you decide to invest because the investment summary looks pretty, you may be putting yourself at risk, if you haven’t done proper due diligence on the deal and the team.
Likewise, if you write off a deal because the investment summary looks like your Aunt Ida’s tax returns from last year and causes your eyes to glaze over, you might be missing out on a great opportunity.
So what exactly should you look for? Good question.
Let’s take a look at a sample investment summary. I’ll walk through my thought process when I first look through an investment summary, so you’ll know what to look for the next time one lands in your inbox.
Please note: For simplicity’s sake, I’m using a one-page executive summary for this example, rather than a full-blown investment summary, which could be dozens of pages long.
Investment Summary At A Glance
Even though every investment summary is different, there are some basic elements that are pretty common across all multifamily real estate syndication investment summaries:
Project name (often the name of the apartment complex)
Photos of the property and area
Overview of the submarket
Overview of the deal
Details of the business plan
Projected returns and exit strategies
Detailed numbers and analyses
In a one-page executive summary, you get bits and pieces of each of these elements, though you would need the full investment summary to get all the details.
If this executive summary landed in my inbox, here’s what I would do. I’d start by skimming through the whole thing.
In skimming this executive summary, here are the things that would jump out at me:
When an asset is acquired off-market, it means that the seller chose not to list the asset publicly. Maybe the seller didn’t want the tenants to know that the building was being sold (this is quite common). Maybe the seller needed to sell within a set timeline. Or maybe the seller already had a buyer in mind.
Regardless, off-market is almost always a good thing. This means the deal sponsor team did not have to compete with other potential buyers on price. Thus, there’s a good chance that the purchase price is low, or at least very reasonable.
A value-add investment is exactly what it sounds like – an asset that presents an opportunity to add value in some way. Maybe the rents are significantly below market rates because the previous owner hasn’t raised rents in 10 years. Maybe the kitchens are still from the ’90s and could use some updating. Maybe there’s an opportunity to add some brand new additional units.
Whatever the case may be, value-add means more control is in the hands of the deal sponsor team. Rather than relying solely on market appreciation, there are things they can do to create additional equity, even if the market stagnates.
One of the most common value-add scenarios is one in which the units need to be updated. Let’s say the apartments haven’t been updated in 10 years, and the rents are $1,000 per month. Even if the team were to stay the course, that $1,000 per unit would still be able to cover the mortgage and fetch a modest profit.
But, who gets out of bed for modest profits? Not I.
Because there’s a chance to add value and improve the living conditions, as well as the returns for the investors, this is a true value-add. The team will go in, complete the renovations, then rent out the updated units for, say, $1,200 per month.
When you add up the $200 per month increases across all 250 units, that creates a ton of additional equity in the building, not to mention a ton of value for the residents who live there. Once residents see the updated spaces, they’re often happy to pay the higher rents and start to take more pride in their community.
The next thing that catches my eye is, “Similar to Beta Apartments (acquired just last year and currently undergoing renovations)…” This tells me that this is not this team’s first time at the rodeo. They’ve done this before and are currently in the trenches with another asset nearby.
I also see, in the Investment Highlights section, that they’ve started implementing their business plan at Beta Apartments and that they’re surpassing their original projections. This tells me that their business plan is working and that they would likely be able to continue to strengthen their track record through Omega Apartments.
Further, this tells me that they’ve likely built up a strong reputation in the area, amongst brokers, property managers, and other apartment owners. Otherwise, they wouldn’t have been awarded this off-market deal.
I don’t know about you, but if I’m going to invest in an apartment building, I want it to be in a growing and developing area.
The fact that this submarket is the “#1 fastest growing” within this fictional metropolitan area tells me that things are moving and shaking here. I would likely open a new browser tab and immediately google that metro area and that particular submarket, to learn more about them.
What am I looking for? Things like proximity to major employers in the area, shopping centers, decent schools, any news about developments in the area, what it looks like on Google street view, what nearby houses are selling for, and anything else I can find.
Much of this will be in the full investment summary, but I always like to do a little research on my own as well.
Did you catch it? “Ten units have already been updated and are achieving rent premiums of $150.” Jackpot.
Why is this so important? This takes all the guesswork and assumptions out of the value-add proposal. The previous owner already created the proof of concept. They updated a set amount of units, and they were able to fetch higher rents.
This is great news. This means that all we have to do is go in and continue those renovations to achieve those same rental increases. To me, this signals much lower risk in a value-add opportunity.
There are certainly lots of numbers in any investment summary, and they can be overwhelming. Percentages, splits, projected returns…what do they all mean?
One metric I’ve come to rely on is the equity multiple. In this case, the projected equity multiple is 2.1x. This means that during the life of this project, my money will be more than doubled.
That is, if you were to invest $100,000, you would come out of this project with $210,000.
This $210,000 would include your original $100,000 investment, as well as $110,000 of profits. This $110,000 would include the quarterly cash-on-cash returns you would be getting as long as the asset is held, as well as your portion of the profits from the sale of the asset.
Typically, I look for an equity multiple around 2x, so this one passes my test.
I always like to know how many units I’m investing in. In this case, Omega Apartments consists of 250 units. This is a pretty decent size. This means that the team would be able to take advantage of economies of scale (i.e., increasing efficiencies by leveraging shared resources across the many units).
I will typically look at anything above 50 units. Ideally, to maximize economies of scale, I like to see over 100 units.
Now that I’ve taken my initial look through the executive summary, my immediate next step would be to decide whether or not to request the full investment summary.
In this case, I would go ahead and request the full investment summary, as this opportunity ticks off most, if not all, of the things I look for in a multifamily investment opportunity – strong team, strong submarket, and opportunity to add value.
In the meantime, I would do some more research on both the submarket and the deal sponsor team. I would definitely google Alpha Investments and read about the core people on their team, learn about other assets in their portfolio, and see if I can find any negative reviews or stories out there about the individuals or the team.
Once you find an investment summary that meets your investment criteria, it’s critical that you move quickly. Why? Because these opportunities fill up on a first-come, first-served basis.
Chances are, if this investment opportunity met your criteria, it likely met others’ criteria as well. Be ready to make a soft commitment to reserve your spot, then take time to review the investment summary in detail.
Pro tip: There’s no penalty for backing out of an investment down the road, so it’s to your benefit to reserve early, to ensure you get a spot in the deal. If you wait around to be 110% sure, others will have jumped in front of you in line, and you may be left on the backup list.
Request a Full Investment Summary Sample
If you’re interested in seeing a sample of a full investment summary, or to gain access to the deals in our pipeline, consider signing up for the Noblivest Investor Club.
We are here to support you in your investment journey and will never pressure you to invest. Our goal is to help you gain the knowledge you need to invest with confidence (whether in our deals or not), so that together, we can change the world, one investment at a time.