Below are some of the most Frequently Asked Questions we hear regarding private equity investing. While there are various types of investment structures, we're focused on value-add apartment syndications which is a common first investment for many investors new to real estate.
What is syndication? Syndication is the pooling of investor money where the investor is typically a limited partner and the general partner, or active partner, puts the deal together and manages the business plan to provide a return for the benefit of all investors.
What are your return projections and how are your returns calculated? In my experience, typical annual returns are in the 8-10% range and an average annual return in the 15% range. In a value-add project, a large part of the investor returns come in the year of sale. This is often modeled as year 5.
When will I get my original investment back and what is the holding period? We target a 5 year hold on our deals. This provides ample time to execute our value-add plan and then cash flow for a few years while looking for an opportunistic sale. Some investor principal could be returned as early as year 2 from a refinancing event or we may want to continue to cash flow till year 7 if the market is down in year 5.
What is the minimum investment? We generally set it at $50K and increments of $5K.
When and how will I get paid? Most syndicates do monthly or quarterly distributions.
How will you communicate with me? We’ll provide monthly or quarterly email updates on the investment’s progress including renovation status/pictures, rents we are getting, and the distribution amount for the period. You will also receive a K-1 statement from us in March of each year for your tax filing.
What are the tax impacts? Apartment syndications are very tax efficient. As a partner in our limited partnership, you will benefit from your portion of the investment’s deductions for property taxes, loan interest and depreciation. We like to use a cost segregation strategy as well to accelerate depreciation. It’s not unusual on a $100K investment to return actual cash in your pocket of $8K while experiencing a paper loss on your annual K-1. That loss can then be used to offset other income. At time of sale the partnership gains are treated as long-term capital gains.
What are the financial risks? Risks are outlined in the Private Placement Memorandum. That said, I like to provide a few data points. In 2009, at the bottom of the financial crisis, delinquency rates on single family homes was 5% vs 1% on MF apartments. Additionally, vacancies in Class C and B (older properties where value-add syndicators play) remained steady at 8%. We further mitigate risk by targeting proven assets where current owner is generating good cash flow (our due diligence includes auditing the trailing 12-month financials, bank records and tax returns). Additionally, lenders will not loan millions of dollars unless we are experienced, have a good business plan, conservative underwriting (bank’s will underwrite the deal as well), have adequate insurance, and have an inspection completed by outside experts.
Do you invest your own deals? We operate on a core value of treating investors’ money as its own and we invest right alongside our clients in every deal.
What if we have a downturn in the economy? We won’t want to sell in a down market. The goal would be to continue to cash flow and hold until the market is healthier to achieve a better price at sale. Class B/C value-add properties tend to hold up much better in downturns because folks need a place to stay and rents are more in line with the market / service economy demographic that is typically still employed in downturns versus the higher paid class A renters whose jobs are more at risk.
What is the process & timeline? We’ll let you know we have an investment available when we get a property under contract. We start the equity raise process with investors immediately and it runs concurrent to due diligence and the bank’s underwriting which takes about 5 weeks. Typically investors reserve their spot in the 1st week. In the 5th week, investors review and sign the PPM and transfer funds to the escrow account. Then we close on the property 2-3 weeks later.
Do you perform sensitivity analysis? Yes, we model different scenarios to show our breakeven point for profitability given a decline in occupancy or if rents drop below projections. Most of our scenarios allow occupancy to go drop between 75-80% to break even. Third party data shows that most of our target markets’ worst vacancy levels were around 85% during the 2009 financial crisis.
Can I invest using a retirement account (IRA or solo 401K)? Yes, you can invest in real estate with certain retirement accounts. I’m happy to discuss how I boosted my own IRA investing returns with real estate investing.
What happens if I have a hardship and want my money before the property is sold? There is nothing in our prospectus for a workout or formula for such a scenario. The investment should be considered an illiquid investment. That said, the general partner will review your situation and see if there is something that can be done to help.
What are the general partner’s fees? The returns forecasted to you are post fees. The most common fee is an acquisition fee based on purchase price and is paid closing. This covers the general partner’s costs to find the deal and get it under contract. The second most common fee is the asset management fee which is compensation for holding the property manager accountable, to ensure execution of the business plan, bookkeeping, and distribution of checks and K1s. The asset management fee is aligned with the investor’s interest as it is based on the property’s revenues. Industry averages are 1-3 % for both fees.
What is a PPM? The Private Placement Memorandum is required by the SEC and describes the offering, risks, includes the partnership agreement, investment summary and subscription agreement. It is a lengthy legal document (approx. 100 pages) prepared by a syndication attorney. The subscription agreement section includes basic information as to amounts being purchased and percent ownership. The risk section highlights just about every possible risk that could happen.
What are sophisticated and accredited investors? We currently market our investments under SEC regulation 506(b) which allows us to include investors who are either sophisticated or accredited, and with whom we have a relationship. A sophisticated investor is one who has sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment. To be accredited you must have:
Earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
Net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
Accreditation is simply determination by self-disclosure of the investor via a checkbox in the subscription agreement.
Can international investors participate? Yes. While it is more complex due to taxation, foreign exchange, and bank accounts, it is possible for a non-U.S. resident to invest in real estate syndications. We can help our international members navigate through the entire process which may include:
ITIN: Registering with the IRS as a foreign investor
Tax Preparation: Our network of accountants is experience in dealing with taxation services and advice for international investors investing in the U.S.
Transferring your money in and out of the U.S.
Limited Liability Company (LLC): An LLC is an entity that can provide legal protection and taxation benefits
No Financing: If you invest in one of our deals there is no need to obtain U.S. bank financing, as we secure the debt (our names are on the loan).