Month: December 2021

It’s important to expect the unexpected with your real estate portfolio. We can’t predict the future market, but, based on historical data, we know to expect cycles. Market corrections and recessions occur every so often, so it’s important to prepare your portfolio to withstand those fluctuations.

One of the most powerful strategies used to successfully weather economic cycles is diversification. Even within real estate, you can diversify and maximize the long-term growth of your investments. By investing in a variety of different real estate assets, you can lower the risk overall. Here are 5 ways to do this:

#1 – Asset Type

Within the real estate world, there are a variety of asset types to choose from. You can invest in retail, industrial, multifamily, office space, self-storage, and more. By varying the types of properties you invest in, you’re hedging against broader changes to the economy.

#2 – Location

At any given time, one city might be booming while a neighboring area may be experiencing a lull. Smart real estate investors desire properties in growing areas or those expecting growth.

By diversifying across multiple cities, counties, or states you can take advantage of the potential across several markets and hedge your bets against a correction in any one area.

The challenge in diversifying across geographical locations is obtaining the research, connections, and more that you’d need to feel comfortable investing in them. This is what makes passive investing so attractive – you can leverage the expertise of the sponsor team in each market.

#3 – Asset Class

Aside from asset type, there is also asset class, which is a range of moderate-to-luxury unit prices within each asset type. Take an apartment complex, for example, and consider the range between moderately priced units, nicely developed units for the upper-middle class, and finally, the ultimate luxury apartments that are available in some areas.

Certain asset classes, like the more conservatively priced units, do well during rough-patches in the economy. Luxury properties do best during the so-called booming economic years. It’s important to have both in your portfolio so that at any given point in the economic cycle, your portfolio is profitable.

#4 – Hold Length

Real estate syndication investments have an associated hold time which can range between 3 -10 years (or more). Consider varying the hold time of your investments, so you’re not entering and exiting more than one deal at a time.

#5 – Funds

One of the easiest ways to diversify quickly is to invest in a real estate syndication fund. A fund pools together investors’ money to buy a variety of assets within a specified period of time. Funds can be defined by geography, asset type, or asset class.

Conclusion

At certain points in the market cycle, it will feel as if the market will go up forever. Conversely, it may feel like the market will continue a downward spiral forever. We know that neither of these are true and that during one phase of the cycle, portfolios should be diversified in preparation for the next phase.

Keep these 5 ways to diversify in the back of your mind as you explore potential deals. Doing so will help you find various opportunities to diversify your portfolio, no matter the current market cycle.

If you’ve invested in residential real estate before, you have some important, basic lingo like rental income, mortgage interest, and amortization under your belt. When you step into the world of commercial real estate, you’ll begin to see other terms, like “cap rate”, thrown around as if everyone inherently knows what that means.

It’s okay if you don’t know what a cap rate is or what it’s used for. It can be challenging to understand and hard to calculate. As a passive investor, you won’t have to do any of the hairy work to calculate cap rates, but it’s helpful to have a very basic grasp of what they are.

Keep reading to find out what a cap rate is, how it’s calculated, what it’s used for, and what you need to know about cap rates as a passive investor in a real estate syndication.

What Are Cap Rates?

Cap rate is short for capitalization rate and is used to indicate the rate of return expected for a particular property. Investors use the cap rate to estimate their potential ROI (return on investment) for a particular asset.

When someone says a property has a cap rate of 5%, or that assets in a given area are trading around a 5-cap, they are talking about the return on that property.

How Are Cap Rates Calculated?

There are multiple ways to come up with a cap rate, so be sure to always ask how it was calculated.

Most cap rates are calculated by taking the net operating income and dividing it by the market value. Cue the example for clarity –

Cap Rate Example

Let’s talk about a property valued at $1 million. Over the past year, it’s brought in $100,000 in rental income.

After paying $50,000 in expenses, we wind up with $50,000 in Net Operating Income (NOI).

We take the NOI of $50,000 and divide that by the total value of the property.

$50,0000 / $1,000,000 = 5%

This means if we bought that property with $1 mil right now, we could expect to earn $50,000 net income over the course of one year. This, loosely, is your Return on Investment or ROI.

One way to think about it is that it would take 20 years of returns at $50,000 to recoup your $1 million initial investment.

If the property generated $150,000with the same $50,000 in expenses, the cap rate would be $100,000 divided by $1 mil, which would equal 10%. In that case, it would only take 10 years to recoup your initial investment value.

The higher the cap rate, the faster you’d earn back your investment capital, and the better the investment choice. The good news is, you don’t need to know all the specifics in order to see success as a passive investor.

How are Cap Rates Used?

Some investors rely heavily on cap rates and look for investments with cap rates of 8% or higher, for example. However, that’s just one data point (from only 1 particular year) on an asset.  Cap rates don’t take into consideration other factors like loans or the time value of money.

When comparing different properties in the same market, cap rates can be very useful.

As an example, if you’re looking at apartments that have a cap rate of 7%, in comparison to other properties that have cap rates of 6.7%, 7.2%, and 7.5%, your property’s cap rate is right in the middle and fairly comparable to the rest.

If the property had multiple points higher or lower than the others in the area, that should be a red flag.

Cap rates can also be a good general measure of the asset class and corresponding risk in general. Assets with higher cap rates tend to be in developing areas and those with lower rates may be in more established areas. As with most investments, a higher rate means higher risk as well.

What You, As A Passive Investor, Need To Know About Cap Rates?

Now that you’ve slogged through what cap rates are, how they’re calculated, and how they’re used, do you need them?

Not really.

As a passive investor, there are many data points that are far more important. The track record of the sponsorship team on a real estate syndication investment should be the top thing you look at.

Otherwise, the cap rate might carry weight in these two areas:

#1 – Is the cap rate comparable to other assets in the area?

A stong sponsor team will have already evaluated the property to ensure the cap rate is comparable to others in the area, but you could double-check that your property isn’t’ 4% while others are 7%.

#2 – What’s the reversion cap rate?

Here’s one that might throw you for a loop – Reversion Cap Rate.

Sometimes the cap rate is referred to as the exit cap rate because the reversion cap rate is a measure of the cap rate at the sale of the asset, versus the cap rate at the time you purchased the asset.

If nothing else, take this knowledge with you- When evaluating a potential real estate syndication deal, be sure the reversion cap rate is at least 0.5% HIGHER than the current cap rate.

This means that the sponsors believe the property/ market conditions will be WORSE than it is now. In other words, they assume things will be in worse condition than they are now and that the property will sell for a lower price.

If the current cap rate is 5%, then the reversion cap rate should be at least 5.5%. That will be a great indicator of conservative underwriting and that projections include the possibility of the market softening in upcoming years.

Cap Rates – All Said And Done

At the end of the day, the cap rate is a single measurement at a single point in time, based on the current performance of a given property. Cap rates don’t measure the potential of an asset or how much you’ll receive in distributions.

As a passive investor, you definitely want to know what things mean and be on the look for this terminology while choosing an investment. Beyond that, you will find that cap rates are one of the last things to be concerned about.

We’d like to invite you to remember a time when you stepped into a store, only to be instantly overcome with a wave of home-style comfort. Certain retailers take great care in creating an atmosphere and an experience for their customers unavailable elsewhere, and that will keep those customers coming back time and time again.

In many ways, this is just like what we do at New Level Investments.

We find the best real estate syndication deals on your behalf, conduct extensive vetting processes, and provide only the best opportunities available to our investors. Come behind the scenes with us today, for an exclusive look at how it all works and why you should consider working with us.

What We Do

There are three main parts to real estate syndications: sourcing deals, asset management, and capital raising. We source deals in the local Carolinas markets where we are based and have local contacts.

Additionally, we look to partner with local operators in markets outside of where we are based to bring the best opportunities to our investors. We only present deals to our investors that we actually invest in ourselves.

We help people passively invest in group real estate investments. Our capital raising business has two parts: Education and Investing

Education

The education piece of New Level Investments includes the production of articles, videos, online resources, and other offerings created to help you and your friends learn the value of real estate syndications and their benefits.

Investing

Once people are informed on how syndications work and are interested in real estate syndications becoming a part of their portfolio, we help find that perfect deal.

Every step of the way, from discovering the investment opportunity, to signing the legal documents, wring funds, and communication throughout the lifecycle of the project, New Level Investments is here for you.

We expect and are happy to answer your questions, share information with you, and become your ally throughout your syndication journey.

How It Works

So you’re probably wondering how we get paid, right? Well, we earn income based on the percentage of the profit splits allocated to the general partnership.

You see, we invest as general partners in the deals we present to our potential passive investors. Most deals result in a 70/30 split (70% to passive investors, and 30% to general partners, also called sponsors) of profit at the time the asset is sold.

For sourcing deals, obtaining financing, managing the asset, educating our investors, guiding them through the process, and managing investor relations, we share in that 30% profit split.

Investors never pay us direct fees and we never even touch your money. Once you sign the PPM (private placement memorandum), you wire funds directly to the property account. You never pay money directly to New Level Investments.

Why Work With Us

The world of real estate syndication investing has many different sponsor/operator teams, and we aren’t the most experienced or the biggest. So why would you want to do business with us?

Simple. Because we’re focused on YOU, the investor.

There are teams in place acquiring, underwriting, and managing the assets to make the property perform. Their daily grind consists of renovations to the property, coordinating with contractors, and tenant retention.

Our daily focus consists of serving YOU – ensuring that you have all the details so you can make an informed decision, so you can invest wisely, create passive income for your family, and reach your investment goals. We don’t see products, we build relationships.

We do the behind-the-scenes research, vetting, and due diligence so we don’t waste your time with risky or low-performing deals. Since our focus is on you, we can provide that full-service experience you’d dream of while continually bringing you more and better deals.

Explore Your Options

On behalf of all of us at New Level Investments, we invite you to feel your way around the syndication world. In fact, if you’re accredited, check out RealtyMogul and RealtyShares. If you’re curious about our partners, we encourage you to sign up with them and let them know we sent you!

Your projected returns are the same since we don’t add any fees on top in order for you to invest with us. So, it’s completely in your hands and based on your comfort level.

When you decide you’re ready to invest with us, sign up for the New Level Investments Club and take your portfolio to a new level!