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Month: September 2021

5 Reasons You Should Invest Outside Your Local Market

Posted on by New Level Investments

Investing in real estate outside your local market, in an area you may never visit, and where you have no trustworthy friends on whom to call can seem absolutely terrifying, especially for new investors.

However, this leap into seemingly scary territory may be the key to real estate investing success.

Most real estate investors begin with local deals, and while some get lucky, others do not. The truth remains: There are more opportunities “out there” than you could ever imagine, and you’ll never see or know about them without the courage and wisdom to explore outside your local market.

Investing Out of State, and Why Everyone Should Do It

Investing across state lines allows you to align your real estate portfolio to your long term investing goals through:

  • Removing Emotion
  • Increasing Flexibility
  • Building Your Team
  • Diversifying Your Portfolio
  • Focusing Your Intentions

#1 – Take the Emotion Out

Personal biases, convenience, and emotions are highly likely to cloud your vision when in search of a local investment opportunity. For example, you’re more likely to give an investment a chance (even though the numbers are low and it needs a ton of work) because it’s in between your home and your favorite coffee shop.

Investing elsewhere forces you to rely on the property-specific data and removes the emotional component from the process, resulting in a higher likelihood that you’ll invest based on preset criteria and goals.

#2 – Increase Your Flexibility

It’s highly likely that your local real estate market can provide only a narrow slice of the attributes you’d need for your overall investment portfolio.

By constraining yourself to invest locally, you’re barred from options in other markets representing the ideal mix of investing criteria – population and job growth trends, geography, real estate prices, and government and state laws – that would help you, personally, to meet your investing goals.

Further, because real estate is hyperlocal, investing in a variety of different markets allows you to adapt your investing strategy to where you are in the market cycle.

Simply being open to the possibility of investing in real estate outside your local market expands your options and removes potential limitations.

#3 – Learn to Build a Great Team

Investing outside of your local market FORCES you to rely on others. There’s just no way you can do everything from thousands of miles away, no matter how diligent and capable you think you are.

Building a great team is a skill. So is learning to leverage and rely on that team.

Once you properly execute this in one market, you can replicate that anywhere, ever-furthering your reach and the investment opportunities available to you.

#4 – Diversify Your Portfolio

Similar to the way your local market has limited attributes (population/job growth, demographics, geography, etc.) when compared across the states, by only investing locally, all of your proverbial real estate eggs are in a single basket.

A local-only strategy leaves room for little-to-no diversification and could be devastating to your real estate investments if any type of natural disaster, local economic/government issue, or market recession were to occur.

By investing in multiple markets, both locally and out of state, you’re actually creating diversification within your real estate portfolio and protecting yourself from the ever-changing market cycles.

#5 – Focus Your Intentions

When you invest outside of your local area, you’re automatically protected from “stumbling upon” an investment. You can’t get a “great feeling” during a tour or buy into some real estate out of convenience.

Since you’d be throwing money in “sight unseen,” investing across state lines requires a process, intentional communication, and, possibly, more research and analysis on the property to ensure its qualities align with your investment goals.

To Wrap It All Up Nicely

Every real estate investor should explore options outside their local area, either exclusively, or in addition to local real estate deals.

Investing money is already an emotional endeavor, but by investing out of state, you can be more deliberate and intentional about meeting your personal finance goals.

The opportunity to cherry-pick the markets with the highest job and population growth and to build a strong team sounds exciting and challenging all at once… and completely worth it.

Bonus Tip: Investing Passively in Real Estate Syndications

One of the best ways to invest quickly and easily out of state, and not have to worry as much about the team-building part, is to invest passively in real estate syndications.

The sponsor team leads the project and allows the investors to enjoy passive income and diversification of multiple markets and asset classes.

If you’re interested in learning more about becoming a passive real estate investor, consider joining the New Level Investor Club.

Where Does Cash Flow In A Real Estate Syndication Actually Come From?

Posted on by New Level Investments

Are you considering investing in a real estate syndication but are leery that it sounds a little too good to be true? You’re not alone.

Many investors are shocked when they first learn about the potential cash flow returns they could receive through investing passively in real estate syndications.

The key, though, to put your doubts and skepticism to rest is to understand where that cash flow comes from and how it makes its way from the asset itself to your pocket, and that’s exactly what we’ll cover in this article.

Cash Flow Distributions

Typically, within the first few months after closing, you can expect to start seeing monthly cash flow distributions – your new stream of a passive income!

But how is it that these investments are so lucrative? Where does the money really come from?

Where Cash Flow Comes From

Every investment property, no matter the size or number of tenants, is an asset that generates income and expenses. Let’s talk about how apartment complexes generate income, the expenses they typically incur, and how cash flow is calculated.

Gross Potential Income

In an apartment building, the main source of income is the tenants’ rent that’s due each month.

As an example, let’s say the average rent in a 100-unit building is $800. That means the gross potential income is $80,000 per month, which comes to $960,000 per year.

Monthly Gross Potential Income

100 units x $800 each = $80,000 per month

Annual Gross Potential Income

$80,000 per month x 12 months = $960,000 per year

Now, don’t get too excited. I hate to break it to you, but that $960,000 is the gross POTENTIAL income for the whole complex assuming 0% vacancy and full rent payments with no expenses, deals, or discounts (e.g., “first month’s rent free!”).

Net Rental Income

Vacancy costs, loss to lease, and concessions decrease the potential income, and once they are removed, you’re left with something called net rental income.

Assuming only 10% of the units are vacant (i.e., in a 100 apartment complex, only 10 are empty), at $800 a month, the monthly vacancy cost would be $8,000.

Vacancy Cost

10 units vacant x $800 in lost rent per unit = $8,000 vacancy cost per month

If the vacancy rate remains constant throughout the year, the annual vacancy cost would be $96,000.

$8,000 per month x 12 months = $96,000 per year

Net Rental Income

Keep in mind, to get the net rental income, we must take the gross potential income (the total income if all units were filled) and subtract out the vacancy cost.

$960,000 annual gross potential income – $96,000 annual vacancy cost = $864,000 annual net rental income

Operating Expenses

Don’t forget. There are business expenses too.

Operating expenses like maintenance, repairs, property management, cleaning, landscaping, utilities, legal and bank fees, pest control, etc., have to be paid. No two apartment buildings have the same needs or the same expense structure.

Let’s presume that total projected monthly operating expenses equal $38,000, which works out to $456,000 per year. The sponsor team would work toward reducing these expenses over time, but we’ll use this figure as a starting point.

Annual Operating Expenses

$38,000 monthly operating expenses x 12 months = $456,000 annual operating expenses

Net Operating Income (NOI)

NOI or Net Operating Income is left from the net rental income after operating expenses are removed.

$864,000 net rental income – $456,000 operating expenses = $408,000 NOI

If you’re a little confused at this point, it’s okay! There are a lot of numbers here. The important thing to remember is that you want the NOI to be a positive number and as high as possible, meaning that the asset has the potential to generate a profit and thus create those cash flow distributions that got you into this in the first place.

Mortgage

Next, let’s talk about the mortgage. As with any property purchase, you’ve got to pay the lender back. Much like in a single-family home purchase, a loan on a commercial property consists of a down payment and a loan amount – usually, around 25% down and 75% leveraged – and the loan would need to be paid back through monthly principal and interest payments.

In this case, let’s say the group owes $20,000 each month (which is $240,000 per year) in mortgage payments.

Annual Mortgage Payments

$20,000 monthly mortgage x 12 months = $240,000 annual mortgage payments

Cash Flow / Cash on Cash Returns

Now that we’ve subtracted the expenses from the income, we arrive at our cash flow for the first year.

Keep in mind that several factors can change in subsequent years as the sponsor team optimizes the property and its expenses, so the cash flow figures tend to increase over time, though this is not guaranteed.

First-Year Total Cash Flow

$408,000 NOI – $240,000 mortgage = $168,000 first-year total cash flow

This amount is then split up according to the agreed-upon structure for the deal. Assuming this deal uses an 80/20 deal structure, 80% of the profits go to the investors (i.e., the limited partners), and 20% goes to the sponsor team (i.e., the general partners).

First Year Cash Flow to Investors

$168,000 first-year cash flow x 80% = $134,400 first-year cash flow to investors

Depending on your level of investment, you would get a share of that cash flow each month in the form of a distribution check or direct deposit.

Your Monthly Cash Flow Distribution Checks

If you’d invested $100,000 into this deal, you might expect a $667 check each month, which works out to $8,628 for the year.

Recap

So there you have it. The cash flow that arrives in your bank account each month originates from the tenants’ rent. Then, we deduct the expenses, pay the mortgage, taxes, and insurance, and what’s leftover is then divided and shared with investors.

Is this passive income guaranteed? Absolutely not.

Considering all the variables – location, team members, tenants, economy, and MUCH more – it’s important to remember that although useful numbers estimate. Projections are fun to track but should never be taken as absolute truth.

However, now that you have a better understanding of where the cash flow in a real estate syndication comes from, you should be able to more thoroughly understand and vet the figures you see in the pro forma and investment summary, which will lead you to make wiser investing decisions.

Know Your Goals Before Investing In Real Estate Syndications

Posted on by New Level Investments

Take a moment to think about the process that you used to find the home you’re currently living in.

You likely had a checklist that included a specific area, school district, commute, and the number of bedrooms you were looking for. If you were looking for a three-bedroom with plenty of green space in mind for your growing family, it’s very unlikely you would have settled for a one-bedroom high-rise condo, even with a great view.

Well, it’s the same type of situation when you’re investing in real estate. Before you even begin to consider potential investment opportunities, it’s imperative you know WHY you’re investing and WHAT you’re looking to get out of it.

Without clear goals, you’ll easily be swayed (or paralyzed) by beautiful photos and well-marketed opportunities that don’t actually align with your investing goals.

As we walk through these examples, see if one resonates with you. With clear goals in mind, you’ll know just what to do when the right investment opportunity comes along.

Investing Goal Example #1: Investing for Cash Flow

Katie is a mom who works a corporate job full-time. While the income is great, the meetings, commute, and other daily hassles aren’t worth her time away from the kids.

So, she’d like to create a passive income of about $2,000 per month that will fully cover her family’s current living expenses, which would give her the freedom to quit her job. Finding investments that will provide steady cash flow now would replace her income and allow her to be fully present with her children.

If Katie requires $24,000 per year ($2,000 per month), she would need to invest roughly $300,000 if expected returns are in the 8% range.

$300,000 invested x 8% cash flow returns = $24,000 in passive income per year

With this knowledge and these numbers in mind, Katie should focus on cash flow first and foremost. That means that any investments with lower projected cash flow returns should automatically be discarded, and any opportunities reflecting 8% or higher should really get her attention.

Investing Goal Example #2: Investing for Appreciation

Jesse, meanwhile, is single with no children, has excellent cash flow, isn’t necessarily interested in quitting his full-time job, and is more interested in potential appreciation.

He’s seen how property values have experienced huge upswings, and he loves the idea of investing in large coastal cities like New York and San Francisco. He’s aware of the higher risk and the longer amount of time he’ll have to wait until payout, but he’s okay with that since his current cash flow situation is strong.

Even if his investment doesn’t appreciate as much as expected, that’s alright with him. He’s more interested in the “chance” that it might.

Common investment advice is that these types of investments are riskier and that you should always invest for cash flow. However, there are investors with a higher risk tolerance who will voluntarily take on the risk for the possibility of appreciation.

In this case, Jesse is aware of the pros and cons, knows that there are winners and losers in this game, and looks for value-add deals in appreciating markets to increase his chance for high returns.

The Hybrid: Investing for Cash Flow AND Appreciation

If you didn’t really feel comfortable in either Katie’s or Jesse’s shoes, that’s okay! That just means you’re among the majority and that you’d like a mix of cash flow AND appreciation.

Hybrid investments that provide some cash flow throughout the project in addition to the potential for appreciation do exist! Don’t be afraid to seek that sweet spot – where you get ongoing cash flow to cover living expenses, plus the potential for appreciation later on in the project.

Know Your Goals

The investment summaries for real estate syndication opportunities are purposely made to attract your attention with pretty colors and beautiful photos, which is exactly why it’s important to know your purpose for investing in the first place.

When a deal does come along that aligns with your goals, you’ll be able to confidently flip past the gorgeous pictures, focus on the numbers, and pounce quickly, without second-guessing yourself.

7 Biggest Differences Between REITs And Real Estate Syndications

Posted on by New Level Investments

If real estate investing seems interesting to you, but you’d rather avoid becoming a landlord, you’re not alone. Fixing toilet emergencies at 3 am isn’t appealing to most people. Shocker.

The next logical step that many investors take is toward a real estate investment trust (REIT), which is easy to access, just like stocks.

What is a REIT, anyway?

When investing in a REIT, you’re buying stock in a company that invests in commercial real estate. So, if you invest in an apartment REIT, it’s like you’re investing directly in an apartment building, right?

Not really.

Let’s explore the 7 Biggest Differences Between REITs and Real Estate Syndications:

Difference #1: Number of Assets

A REIT is a company that holds a portfolio of properties across multiple markets in an asset class, which could mean great diversification for investors. Separate REITs are available for apartment buildings, shopping malls, office buildings, elderly care, etc.

On the flip side, with real estate syndications, you invest in a single property in a single market. You know the exact location, the number of units, the financials specific to that property, and the business plan for your investment.

Difference #2: Ownership

When investing in a REIT, you purchase shares in the company that owns the real estate assets.

When you invest in a real estate syndication, you and others contribute directly to the purchase of a specific property through the entity (usually an LLC) that holds the asset.

Difference #3: Access to Invest

Most REITs are listed on major stock exchanges, and you may invest in them directly, through mutual funds, or via exchange-traded funds, quickly and easily online.

Real estate syndications, on the other hand, are often under an SEC regulation that disallows public advertising, which makes them difficult to find without knowing the sponsor or other passive investors. An additional existing hurdle is that many syndications are only open to accredited investors.

Even once you have obtained a connection, become accredited, and found a deal, you should allow several weeks to review the investment opportunity, sign the legal documents, and send in your funds.

Difference #4: Investment Minimums

When you invest in a REIT, you are purchasing shares on the public exchange, some of which can be just a few bucks. Thus, the monetary barrier to entry is low.

Alternatively, syndications have higher minimum investments, often $50,000 or more. Though they can range from $10,000 up to $100,000 or more, real estate syndication investments require significantly higher capital than REITs.

Difference #5: Liquidity

At any time, you can buy or sell shares of your REIT and your money is liquid.

Real estate syndications, however, are accompanied by a business plan that often defines holding the asset for a certain amount of time (often 5 years or more), during which your money is locked in.

Difference #6: Tax Benefits

One of the biggest benefits of investing in REITs versus real estate syndications is tax savings. When you invest directly in a property (real estate syndications included), you receive a variety of tax deductions, the main benefit being depreciation (i.e., writing off the value of an asset over time).

Oftentimes, the depreciation benefits surpass the cash flow. So, you may show a loss on paper but have positive cash flow. Those paper losses can offset your other income, like that from an employer.

When you invest in a REIT, because you’re investing in the company and not directly in the real estate, you do get depreciation benefits, but those are factored in prior to dividend payouts. There are no tax breaks on top of that, and you can’t use that depreciation to offset any of your other income.

Unfortunately, dividends are taxed as ordinary income, which can contribute to a bigger, rather than smaller, tax bill.

Difference #7: Returns

While returns for any real estate investment can vary wildly, the historical data over the last forty years reflects an average of 12.87 percent per year total returns for exchange-traded U.S. equity REITs. By comparison, stocks averaged 11.64 percent per year over that same period.

This means, on average, if you invested $100,000 in a REIT, you could expect somewhere around $12,870 per year in dividends, which is great ROI.

Real estate syndications, however, between cash flow and profits from the sale of the asset, can offer around 20 percent average annual returns.

As an example, a $100,000 syndication deal with a 5-year hold period and a 20 percent average annual return may make $20,000 per year for 5 years, or $100,000 (this takes into account both cash flow and profits from the sale), which means your money doubles over the course of those five years.

Conclusion

So, which one should you invest in?

All in all, there’s no one best investment for everyone (but you knew that, right?).

If you have $1,000 to invest and want to access that money freely, you may look into REITs. If you have a bit more available and want direct ownership and more tax benefits, a real estate syndication may be a better fit.

And remember, it doesn’t have to be one or the other. You might begin with REITs and then migrate toward real estate syndications later. Or you might dabble in both to diversify. Either way, investing in real estate, whether directly or indirectly, is forward progress.