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Author: New Level Investments

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.

 

The Process of Investing in Your First Real Estate Syndication

Posted on by New Level Investments

When it comes to investing in real estate, most people are fairly familiar with the process of buying a single-family home or rental property. You choose the market and neighborhoods, determine how many bedrooms and bathrooms you’re looking for, get together with a lender and a broker, tour potential properties, and then make an offer.

However, when it comes to investing in a real estate syndication (group investment), the process can be entirely foreign, especially if you’ve never invested in syndications before.

For this reason, let’s explore the syndication process together, from start to finish, so you can invest confidently in your first real estate syndication.

Here are the basic steps of investing in a real estate syndication:

  • Determine your investing goals
  • Find an investment opportunity that fits
  • Reserve your spot in the deal
  • Review the PPM (private placement memorandum)
  • Send in your funds

Step #1 – Determine Your Investing Goals

Once you decide you want to invest in a real estate syndication, consider both your short-term and long-term investing goals so you can be sure to find investment opportunities that best fit your personal goals.

Think about the amount of capital you have to invest, the length of time you want that capital invested, tax advantages you’re looking for, and whether you are investing primarily for ongoing cash flow to help offset your income, long-term appreciation, or a hybrid of both.

Step #2 – Find a Fitting Investment Opportunity

Once you’ve determined your investing goals, aim to find a deal in alignment with your goals. There are real estate syndication projects available ranging from ground-up construction to value-add assets, and even turnkey syndications.

Deal sponsors typically provide an executive summary, full investment summary, and an investor webinar for investors, which provides a full 360-degree view of the asset, market, deal sponsor team, business plan, and the projected financials.

Take time to properly vet the sponsor team, ask them your questions, and read between the lines of any investment materials they provide. Take a look at things like whether the business plan has multiple exit strategies, whether there are signs of conservative underwriting, and double-check whether the proposed business plan makes sense given the asset class, submarket, and current economic cycle.

Research market trends in job and population growth. Review minimum investment requirements projected hold time and projected returns. Finally, attend the investor webinar and ask tough questions.

Basically, at this stage, look for any reason NOT to invest in the deal.

Step #3 – Reserve Your Spot in the Deal

Once you’ve found a team and an opportunity you want to invest in, it’s time to reserve your spot in the deal. Usually, deals are filled on a first-come, first-served basis, so you’ll want to take the time to ask questions and do your research BEFORE a live deal opens up.

Often, investment opportunities can fill up within mere hours, which is why it’s important to have completed research, solidified your investment value, and have clear goals. That way, when the opportunity opens up, you can jump on it.

The option for a soft reserve may be available, which holds your spot while you take time to review the investment materials. So, you might combine Steps #2 and #3 by reviewing the executive summary, reserving your spot in the deal, then reviewing the rest of the materials. This allows you the opportunity to back out or reduce your investment penalty-free.

If you are late in putting in your soft reserve, the deal may be full by the time you decide you want in, at which point your only option is to join the backup list or wait for the next deal.

Step #4 – Review the PPM

Once you’ve decided to invest in a deal, the first official step is to review and sign the PPM (private placement memorandum).

This legal document provides in-depth details about the investment opportunity, the risks involved, and your role as an investor. Although reading legal jargon may be no fun, it’s very important you gain a full understanding of the risks, subscription agreement, and operating agreement pertaining to the investment.

As part of signing the PPM, you’ll also decide how you’ll hold your shares of the entity holding the asset and whether you want your distributions sent via check or direct deposit.

Step #5 – Send in Your Funds

Once you’ve completed the PPM, the final step is to send in your funds. Typically, you’ll find wiring instructions in the PPM document.

Pro tip: Before wiring your funds, double-check the wiring information, and let the deal sponsor know to expect it so they can be on the lookout.

Conclusion

By now, the process of investing in a real estate syndication should be more clear, and perhaps, a little less intimidating.

Real estate syndications are more of a set-it-and-forget-it type of investment, so your active participation is upfront, during the time you’re choosing a deal, reviewing the investor materials, reserving your spot, reading, and signing the PPM, and wiring in your funds.

Don’t worry though, if this process still seems a bit daunting. That’s what we’re here for, and we’ll be with you every step of the way as you invest in your first real estate syndication. As you review and invest in more deals, the process will become second nature.

Introducing the Key Roles In A Real Estate Syndication

Posted on by New Level Investments

One of the best analogies for a real estate syndication is to think of it as an airplane ride. There are pilots, passengers, flight attendants, mechanics, and more, who all work together to get the plane safely to its destination.

In this analogy, the pilots are the sponsors of the syndication, and the passengers are the passive investors. They’re all going to the same place, but they have very different roles in the process.

If unexpected weather patterns emerge, if an engine has issues or any other number of surprises, the pilots are the ones who are responsible for the flight.

The pilots will likely update the passengers (“Just to let you know, folks, we’re experiencing some turbulence at the moment…”), but the passengers don’t have any active responsibilities in making the decisions or flying the plane.

A real estate syndication is much like this. The passive investors, sponsors, brokers, property managers, and more, all share a vision to invest in and improve a particular asset. However, each person’s role in the project is different.

In this article, we’ll talk about exactly who those players are, as well as their respective roles in a given real estate syndication.

People in a Real Estate Syndication

Here are the key roles that come together to make a real estate syndication happen:

  • Real estate broker
  • Lender
  • General partners
  • Key principals
  • Passive investors
  • Property manager
  • New Level Investments

Real Estate Broker

The real estate broker is the person or team who surfaces the property for sale, either as a listing or as an off-market opportunity (i.e., not publicly listed).

Having a strong real estate broker is crucial, as they are the main liaison between the buyer and the seller throughout the acquisition process.

Lender

The lender is the biggest money partner in a real estate syndication because they provide the loan for the property. The lender performs their own due diligence, underwriting, and separate appraisal to make sure the property is worth the value of the loan requested.

In the airplane analogy, neither the real estate broker nor the lender is aboard the plane. They have important roles in bringing the project to fruition, but they are not part of the purchasing entity, nor do they share in any of the returns.

General Partners

The general partners synchronize with the real estate broker and lender to secure the loan and acquire the property in addition to managing the asset throughout the life of the project, which is why they are often also called the lead syndicators.

The general partnership team includes both the sponsors and the operators (sometimes these are the same people).

The sponsors are the ones signing on the dotted line for the loan and are often involved in the acquisition and underwriting processes.

The operators are generally responsible for managing the acquisition and for executing the business plan by overseeing the day-to-day operations. Operators guide the property manager and ensure that renovations are on schedule and within budget.

Key Principals

For a commercial loan, the sponsor is required to show a certain amount of personal liquidity. This reassures the lender that the sponsor can contribute additional personal capital to keep the property afloat if things were to ever go wrong.

One or more key principals may be brought into the deal to help guarantee the loan if the sponsor’s personal balance sheet is insufficient.

Passive Investors

A real estate syndication’s passive investors have no active role in the project. They simply invest their money in exchange for a share of the returns. Like the passengers on an airplane, they get to put their money in, sit back, and enjoy the ride.

What a great position!

Property Manager

Once the property has been acquired, the property manager becomes arguably the most important partner in the project because they are the “boots on the ground” who execute renovation projects according to the business plan.

The property manager works closely with the operator (i.e. the asset manager) to ensure the business plan is being followed and that any unexpected surprises are addressed properly.

New Level Investments

In a real estate syndication, New Level Investments is part of the general partnership. Our main role is to lead investor relations and help raise the equity needed.

We serve as an advocate for investors by ensuring that the sponsors’ projections are conservative, deals are structured favorably toward investors, that multiple exit strategies exist, and that capital will be preserved and grow.

After the property is acquired, we act as the liaison between the sponsor/operator team and the investors by providing updates, financial reports, and other important information between parties.

Essentially, we are like the flight attendants, who prep the passengers for the journey and help ensure they are well-informed and comfortable throughout the flight.

Conclusion

A real estate syndication, by definition, is a group investment. And it’s only through pooling resources and coordinating that the syndication can be successful.

In addition to the key roles discussed here, there are inspectors, appraisers, cost segregation specialists, CPA, legal team, insurance agents, and more, who work in the background to make sure that the syndication gets off the ground.

While all their respective roles are different, they are all needed to ensure the success of the syndication.

 

The Benefits of Investing in Real Estate

Posted on by New Level Investments

If you’ve ever experienced owning single-family or multifamily homes, you know that these investments require time and energy. 

Investing in residential real estate can be challenging because, typically, you as the investor wear many hats throughout the seemingly never-ending process. Responsibilities include finding the property, negotiating and funding the deal, renovating the property, interviewing tenants, and even performing maintenance.

The trouble is, it doesn’t stop there. You have to repeat most of the process over again when your tenant’s lease is up.

Why Investing in Multifamily Rentals Can Be a Lot of Work

Small multifamily rentals have some advantages over single-family homes. For example, if one tenant moves out, the tenants in the other units are still there to help cover the mortgage. Plus, it’s much easier to manage one property with multiple tenants than to manage multiple properties with one tenant each. 

But, even with a property manager on board to help with your rentals, bookkeeping, strategic decisions, and maintenance/repair costs are still your responsibility. You’re basically running a small business, which can be challenging if you’re working a full-time job.

The Case for Passive Real Estate Investments

On the flip side, there are fully passive investments in commercial real estate. These are professionally managed and operated investments so you don’t have to deal with any of the three T’s  – Tenants, Toilets, and Termites.

Once investors begin to understand passive commercial real estate investments, it’s common for them to move toward syndications. Here’s why:

1. Minimal Time Required

Have you heard the phrase “set it and forget it”? In a syndication deal, you put money in, collect cash flow during the hold period, and receive profits upon the sale of the property.

You won’t be fixing toilets, screening tenants, or handling maintenance. The sponsor team and the property management team expertly attend to those things so you can sit back, enjoy the returns, and focus on living life.

2. Opportunity for Diversification

It would be unreasonable for anyone to attempt to become an expert in every phase of the property investment process, and even more so when it comes to different markets. 

By investing with experienced deal sponsors, you can easily diversify into various markets and asset classes while resting assured that the professionals are taking care of business. This allows you to quickly and easily scale your portfolio while also mitigating risk.

3. Did You Say Tax Benefits?

Similar to personally owned rentals, you get pass-through tax benefits when investing in real estate syndications. You’ll be able to write off most of the quarterly payouts, which means you basically get tax-free passive income throughout the holding period.

You will, however, likely owe taxes on the appreciation income you earn upon the sale of the property.  Always check with your own CPA on your personal situation.

4. Limited Liability

When you invest passively through real estate syndications, your liability is limited to the amount of your investment. If you were to invest $50,000, your biggest risk would be losing that $50,000. You wouldn’t be on the hook for the entire value of the property, or the loan to buy the property, and none of your other assets would be at risk.

5. Positive Impact

With personal investments, you make a difference in two to four families’ lives. But with real estate syndications, you have the chance to change the lives of hundreds of families and whole communities with just one deal.

Each syndication creates a cleaner, safer, and nicer place for people to live and impacts the community and the environment positively. And that’s something you won’t get from stocks and mutual funds.

Conclusion

If you’re on the fence between active and passive real estate investments, the experience you gain from owning small rentals is irreplaceable. However, personally owning rental properties is not a prerequisite to commercial real estate syndications.

Either way, investing in real estate is a great way to diversify your portfolio and mitigate risk. It gives you an opportunity to have a positive impact on the families who will live in your units, as well as a positive impact on the environment and community.

The 5 Basic Phases of Value-Add Multifamily Real Estate Syndications

Posted on by New Level Investments

Do you remember the 5 paragraph essay structure from elementary school? Having guidelines to introduce a central idea, provide 3 supportive paragraphs, and close with a strong conclusion provides freedom and structure all at once.

The Five Phases of a Value-Add Multifamily Syndication

Similarly, each real estate syndication goes through a progression of stages with a clear beginning, middle, and end, which ensures individual investors operate as one, according to a clear business plan.

Phase #1 – Acquire

The first stage begins with sponsors getting a property under contract. Not only can finding a great property be difficult, but this phase also requires impeccable underwriting skills and solid projection calculations.

Once under contract, sponsors work diligently to discover the property’s needs, record estimated expenses, and update the business plan accordingly. After we and the sponsors are confident with the research, the deal, and the projections, we share the deal with investors like you, to gauge interest. Once all investors send in their funds, we then close on the property.

Phase #2 – Add Value

The term “value-add” means exactly what it sounds like; we’re adding value to the property, which is why renovations typically kick off upon closing.

All in accordance with the business plan, transitions begin with the property management team and renovations on any vacant units. This phase can last 12 to 18 months or longer, depending on the time it takes for all tenants’ leases to expire and for all old units to be renovated.

Exterior and common area renovations may also be made, such as updating or adding light fixtures, a dog park, covered parking, or landscaping.

Phase #3 – Refinance

Since commercial properties are valued according to the income they generate, the whole point of the renovation phase is to fetch rent premiums to increase revenue.

Most tenants will happily pay an additional $100 per month for the opportunity to move into an updated unit, and if the apartment complex has 100 units, that’s an additional $120,000 per year in rental income, which, at a conservative 10% cap rate, equates to $1,200,000 in additional equity.

With that additional equity, a sponsor may attempt to refinance or, if the market is right, sell the property early. Although thrilling, neither of these is guaranteed. Through a refinance or supplemental loan, you would receive a portion of your initial investment back, while still cash flowing as if the entire amount were still invested.

Let’s pretend you invested $100,000 into a value-add multifamily syndication, and after 18 months, the sponsors refinanced the property and returned 40 percent of your original capital. Here’s where you celebrate, because, this means you got back $40,000, plus continuous cash flow distributions of 8-10% off your full $100,000 original investment.

Phase #4 – Hold

The next phase constitutes holding the asset while collecting cash-on-cash returns (aka, cash flow). Since the value-add phases are complete and the riskiest phases have passed, the focus shifts toward attracting great tenants and generating strong revenue.

Throughout the hold period, rent increases at a nominally low percentage each year, thus increasing revenue and contributing toward a steady appreciation of the property. The length of this phase, preferably 5 years or less, is based on the individual property, sponsor, and business plan.

Phase #5 – Sell

At this point, the property exhibits completed updates, increased revenues, and appreciation. So, the best use of investor capital is to sell the property so that they can seek their next investment project. During the disposition phase, sponsors prepare the asset for sale.

Sometimes the asset can be sold off-market, creating minimal disruption for tenants. Otherwise, sponsors muster through the whole listing and sale process. Occasionally, if investors agree, a 1031 exchange may be initiated. This allows investors to roll their capital and proceeds into another deal with the same sponsor.

Either way, once the sale is complete, you get your original capital back, plus a percentage of the profits. Time to pop those corks!

There you have it!

Just like a five-paragraph essay, you have structure, the exchange of information, and focus within each step. Remember, every deal is different and not all syndications go through all five phases.

As a passive investor, you get to avoid the legwork, but you still want to thoroughly understand the typical phases of the value-add multifamily syndication process so you’re informed every step of the way.

Exploring Projected Returns In A Real Estate Syndication

Posted on by New Level Investments

One of the most common questions that we get asked is, “If I were to invest $50,000 with you today, what kinds of returns should I expect?”

We get it. You want to know how hard real estate syndications can make your money work for you, and how passive real estate investing stacks up to the returns you’re getting through other types of investment vehicles.

In order to help answer that question, you should first know that we will be talking about projected returns. That is, these returns are projections, based on our analyses and best guesses, but they aren’t guaranteed, and there’s always risk associated with any investment. The examples herein are only meant to provide some ballpark ideas to get you started.

In this article, we’ll explore the 3 main criteria you should look into when evaluating projected returns on a potential real estate syndication deal.

Three Main Criteria

Each real estate syndication investment summary contains a barrage of useful data. Focus on these core concepts:

  1. Projected hold time
  2. Projected cash-on-cash returns
  3. Projected profits at the sale

 

Projected Hold Time: ~5 Years

Projected hold time, perhaps the easiest concept, is the number of years we would hold the asset before selling it. What this means for you is that this is the amount of time that your capital would be invested in the deal.

A hold time of around five years is beneficial for a few reasons:

  1. Plenty can change in just five years. You could start and complete a college degree, move, get married, or …you get the point. You need enough time to earn healthy returns, but not so much that your kids graduate before the sale.
  • Considering market cycles, five years is a modest stint in which to invest, make improvements, allow appreciation, and exit before it’s time to remodel again.
  • A five-year projected hold provides a buffer between the estimated sale and the typical seven- to ten-year commercial loan term. If the market softens at the 5-year mark, we can opt to hold the asset for a longer period of time, allowing the market to rebound.

Projected Cash-on-Cash Returns: 8% Per Year

Next, consider cash-on-cash returns, otherwise known as cash flow or passive income. Cash-on-cash returns are what remain after vacancy costs, mortgage, and expenses. It’s the pot of money that gets distributed to investors.

If you invested $100,000, and earned eight percent per year, the projected cash flow would be about $8,000 per year or about $667 per month. That’s $40,000 over the five-year hold.

Just for kicks, notice the same value invested in a “high” interest savings account (earning 1%) over five years would earn a measly $5,000.

That’s a difference of $35,000 over the span of 5 years!

Projected Profit Upon Sale: ~60%

Perhaps the largest puzzle piece is the projected profit upon sale. Typically, we aim for about 60% in profit at the sale in year 5.

In five years’ time, the units have been updated, tenants are strong, and rent accurately reflects market rates. Since commercial property values are based on the amount of income generated, these improvements, along with market appreciation, typically lead to a substantial increase in the overall value of the asset, thus leading to sizeable profits upon the sale.

Summing It All Up

Simple enough, right? Typically, in the deals we do, we are looking for the following:

  • 5-year hold
  • 8% annual cash-on-cash returns
  • 60% profits upon sale

Sticking with the previous example, you’d invest $100,000, hold for 5 years, collect $8,000 per year in cash flow distributions paid out monthly (a total of $40,000 over 5 years), and earn $60,000 in profit at the sale.

This results in $200,000 at the end of 5 years – $100,000 of your initial investment, and $100,000 in total returns.

Double your money in just 5 years? I bet you can’t find a savings account like that!

5 Reasons Real Estate Is The Most Effective And Lucrative Investment

Posted on by New Level Investments

The vast majority of people spend their lives working full-time jobs to earn a “steady” paycheck. Meanwhile, the wealthy have somehow unlocked the secret to working less while making their money work for them.

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

One of the biggest secrets that the wealthy tap into is the incredible power of real estate. Real estate has the ability to generate passive income and provide a path toward building wealth. Every dollar invested in real estate works for you in these five ways:

  • Cash flow
  • Leverage
  • Equity
  • Appreciation
  • Tax benefits

#1 – Cash Flow

The greatest benefit of investing in real estate is passive cash flow. When an asset is purchased and rent is collected from tenants, the remaining value after property expenses are paid is your cash flow.

If you put down $50,000 to buy a rental for $200,000, your mortgage payment would be about $1,000 per month. Now let’s say that you’re able to rent the unit out for $2,000 per month.

Upon receipt of the $2,000 rent payment each month, you pay the $1,000 mortgage, use $700 for expenses and reserves, and keep the remaining $300 as passive cash flow (i.e., money in your pocket).

#2 – Leverage

In the example we just discussed, you hypothetically bought a $200,000 rental without paying $200,000 in cash. Instead, you put in $50,000 as a down payment, and the bank contributed the remaining $150,000.

The cash flow you earn is based on the full $200,000 asset, not the $50,000 portion. This is the magic of leverage.

Even though the bank contributed 75% of the money, all you have to do is pay the mortgage and interest, and any excess cash flow or profit is all yours. No need to share it with the bank.

#3 – Equity

As you receive monthly rental checks and use them to pay the mortgage, your equity in the property increases. In this way, the rental property generates income to pay for itself.

Imagine buying a laptop that generated money to pay for its own wifi!

Once your rental builds significant equity, you may have the opportunity to use a home equity line of credit (HELOC), which allows you to borrow against your existing asset. HELOC funds can be invested into another asset, which allows you to make your money work even harder for you.

#4 – Appreciation

Real estate values tend to rise over time, which means your money can also work for you in the form of appreciation.

For example, consider a property purchased for $580,000. In time, the duplex appreciates to $750,000, at which point it is sold. The profit at the sale, or $170,000, will have been generated via appreciation, plus any additional equity that you had built through paying down the mortgage.

That being said, while appreciation is nice, it’s not guaranteed, which is why you should always invest for cash flow first and foremost, with appreciation as the icing on the cake.

#5 – Tax Benefits

When you invest in real estate, you get the benefits of depreciation and mortgage interest deductions, as well as a whole host of write-offs for a number of other related expenses.

Investors often show losses on paper, while actually making money through cash flow. The losses play a big part in helping to offset other income, which is a major reason real estate is so lucrative.

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

Advantages of Investing in Real Estate

With each dollar invested in real estate, you have the opportunity to take advantage of cash flow, leverage, equity, appreciation, and tax benefits. This is true regardless of whether you invest in single-family rentals, large syndications, or anything in between.