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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.

Active Versus Passive Real Estate Investing – Which One Is Right For You?

Posted on by New Level Investments

Did you know that you could invest in real estate without the headaches of tenants, toilets, and termites? It’s true – you can get all the benefits of investing in real estate, without any of the hassles of being a landlord.

In this article, you’ll see what passive real estate investing means and find out if you should be an active or passive investor.

What It Means To Be An Active Investor

When most people think of real estate investing, they think of rental property investing – buy a single-family home, find a renter, and collect monthly rental income. Sounds easy enough, but the reality can be quite different.

Even with a professional property management team on board, you as the landlord still have an active role in the investment.

The property managers may take care of the day-to-day issues, but you will still need to be involved in strategic decisions, including whether to evict tenants who aren’t paying, filing insurance claims when unexpected surprises happen, and sometimes having to put in additional funds to cover maintenance and repair costs.

What It Means To Be A Passive Investor

On the flip side, you have passive investing, which is the “set it and forget it” type of real estate investment. You invest your money, and someone else does all the heavy lifting.

The great part about passive investing is that it’s totally passive – you don’t get any calls from the property manager, you don’t have to screen any tenants, and you don’t have to file any insurance paperwork.

However, being a passive investor also means that you relinquish some of your control in the investment and trust someone else (i.e., the sponsor team) to manage the property and execute the business plan on your behalf.

Should You Be an Active or Passive Real Estate Investor?

Here are 10 factors to help you decide which path is right for you.

#1 – Tenants, Termites, and Toilets

If you’ve dreamt of becoming a landlord, having tenants, and making improvements, then consider an active investor role.

Otherwise, if the title to this bullet point makes you nauseous, you should go the passive route.

#2 – Time

Active real estate investments require more time, during the initial acquisition and throughout the project lifecycle, while passive investments only require your time upfront, during the research phase.

#3 – Involvement

How hands-on do you want to be? Do you want to manage the property yourself, field tenant requests, and schedule maintenance and repair appointments? Or do you want to sit back while someone else does all of that?

#4 – Profits

With active investing, you would likely be the only owner of the property, so you would get to keep any net profits. With passive investing, the profits are distributed among many investors.

This doesn’t necessarily mean that one type of investment will net you higher returns than the other; you’ll need to compare one deal to another.

#5 – Expenses

Active real estate investors should plan to handle insurance claims, emergencies, and repairs, which may require additional money at times, whereas passive investors only make an initial capital investment.

#6 – Risk and Liability

With active investing, if things go south, you are personally held liable, which means you may lose not just the property but also your other assets.

With passive investing, your liability is limited to the capital you invest. Typically, the asset is held in an LLC or LP. If anything goes terribly wrong, the sponsors are held liable, not the passive investors.

#7 – Paperwork

Active investments are paperwork-heavy, from the initial purchase of the property to tracking purchase and rental agreements, bookkeeping, and legal documents throughout the project.

With passive real estate investments, on the other hand, you typically sign a single PPM (private placement memorandum) to invest in the property. No need to fill out lender paperwork, file for insurance, or do any bookkeeping.

#8 – Team

As an active real estate investor, you will need to build your own team, including brokers, property managers, and contractors.

As a passive investor, you rely on the shared expertise of the existing deal sponsor team. The sponsors are experts in the market and typically already have a team set up to manage the property.

#9 – Diversification

With active investing, you yourself would need to be an expert in the market and asset class you’re investing in. If you’re investing outside your local area, you would need to research the market, find a “boots on the ground” team, and possibly visit the area.

With passive investing, it’s easy to diversify across different markets, since you don’t have to start from scratch with each market. You are investing with teams that have already taken the time to research those markets and build strong local teams.

#10 – Taxes

As an active investor, you’ll be responsible for the bookkeeping, meaning that you will need to keep track of the income and expenses. You’ll also need to work with your CPA to make sure that you are properly depreciating the value of the asset each year.

As a passive real estate investor, you don’t need to do any bookkeeping. You receive a Schedule K-1 every spring for your taxes, which shows the income and losses for that property. No need to track income and expenses throughout the year.

Conclusion

If you’re ready to roll up your sleeves and get involved in the various aspects of being a landlord, active investing just might be the perfect adventure for you.

However, if your time is limited but you have the capital to invest, you might want to consider being a passive investor.

If you’re hoping for a middle ground option, turnkey rentals and buy-and-holds may provide some control without the huge time investment.

When determining which is the right path for you, be sure to factor in your unique situation, goals, and interests.

1031 Like-Kind Exchanges in Multifamily Syndications

Posted on by New Level Investments

You just sold a real estate investment for a big gain congratulations! Now, Uncle Sam wants his share of capital gains tax.  If done correctly, rolling the sale proceeds into a multifamily syndication is a great way to mitigate or defer the tax altogether if you don’t need the cash immediately.

Most investors have heard of like-kind or “1031 exchanges” (named after the tax code section).  The idea is that the investor has not cashed out of their investment, but rather merely substituted one investment for another, such that they have not recognized capital gain for tax purposes.  Deferring the tax significantly increases your reinvestment capital.  Paying capital gains tax when you transition from one investment to another reduces your buying power, opportunities for compound growth, and reinvestment opportunities.  1031 exchanges allow you to harness your own tax dollars to grow your investment real estate portfolio.

How Does it Work?

First, there must be an exchange of a like-kind real property. This can include an exchange of undeveloped real estate for a developed rental property.  Both the relinquished (old) and replacement (new) properties must be held for use in business or investment, but cannot be inventory held for sale in the ordinary course of business.  Accordingly, property held by a developer or flipper primarily for sale does not qualify.

Next, the real property must be directly owned or co-owned as tenants-in-common (i.e., “TICs”) and not through a partnership or other business arrangement.  Property held through certain trusts may also qualify.  In practical terms, the investors must retain certain management and leasing rights over the property.  They also must share proportionately in profit, loss, and debt of the property.  Moreover, the lender will play a critical role and will have significant say in the structure.

Timing is Everything

You have 45 days from the date of closing on the old property to identify potential replacement properties.  You then have 180 days from the date of closing to close on one or more of the new properties. If a direct exchange cannot be accomplished, a qualified intermediary must hold the sale proceeds of the old property until the closing of the new property; if the investor receives the cash directly, a section 1031 exchange will not be possible. 

Traps for the Unwary

In order to fully defer tax on the exchanged property, you must reinvest all cash proceeds from the sale in the acquisition of the new property or properties.  Special consideration must be given in cases of debt cancellation involving the old property.

IRS rules limit the number of TICs to 35, but in practice, TIC groups rarely exceed 5 owners due to legal and administrative complexities.

In Summary

Multifamily syndications can be a great opportunity to utilize 1031 like-kind treatment for real estate investors.  Coordination of the timing and financing with the sponsor and lender is critical to qualify for treatment.  This is a high-level summary not intended as a substitute for individual tax or legal advice.