daileycre

CRE Life Cycle

Something useful to know as an investor are the phases that a sponsor will go through to set up real estate investment.

Phase 1: Aquisition

Obviously no syndicator will get very far without finding quality assets for investors to invest capital into.

The sponsor team will typically find a market or two to zero in on.

They want to know how good the job prospects in the market are, the housing values, and crime rates of an area.

It will be important to know that there are grocery stores, decent schools, and other things residents would care about.

Many syndication sponsors will also have a certain criteria for their prospective properties.

This could include the class of the property (A,B, or C), the number of units, the ratio of studios to 1bed to 2bed units, or even a certain type of roofing.

Their criteria will vary based on how large of a capital raise they are capable of, and their overall business model.

It is a good idea to ask them to walk you through their business model, and their criteria. Transparency is an important trait for any sponsor team.

Once a property is identified, there will be due diligence done on the condition of the property. This will play a huge roll in how the capital will be leveraged on the property.

A value add will need rehab and have potential tenant turnover while the property is being stabilized.

Be very vocal about the level of risk you are comfortable with as an investor and your goals. Any sponsor worth their salt will know what deals to bring to you.

Phase 2: Value Add:

Once a property is brought under contract and the deal is closed, it is time for the sponsor team to optimize.

Even a buy and hold might benefit from some toilet upgrades or other small improvements. There is also a likelihood of raising rents.

For a heavy value add, it could take a while to really get the property up to standards with the market.

That brings us to…

Phase 3: Stabilization

A full stabilization can take as much as 3-5 years, but the returns can be significant. It’s well worth it if you have a skilled and capable team running it.

All those new upgrades, and improved living quality will often attract better tenants and majorly improve the NOI.

This is where you see the biggest appreciation. It is also where your preferred returns will be getting paid and your part of the gravy after that.

Finally:

Either your sponsor team will continue to hold the property or the will exit the deal. This can be a great pay out either way, and will ultimately allow your principle capital to be recycled into a new deal.

Sour Grapes

There is always risk in any investment vehicle. This is an important consideration to have up front. Not every grape in the bunch is sweet.

This is also good reason to do your own due diligence on your sponsor and any deal they bring your way.

By due diligence, I mean make sure to look at the business plan and check that the numbers make sense.

I have a previous post on calculating NOI. Take your total income – operating expenses.

This can be used to find the cap rate or the appropriate property value.

A lower cap rate will probably be a buy and hold with minimal value add. The market is compressed.

A high cap rate means there is a lot more room for returns. It is also more likely to be value add.

If it is a buy and hold, make sure it has a healthy NOI. If it is a value add, pay attention to your sponsor’s business plan. They need to be able to execute that plan and stabilize it in a timely manner. This may take 3 years, but can also produce massive returns.

The biggest mistakes in real estate are made due to buying poorly and being ill prepared. Be sure your sponsors have buffers for the unexpected in their underwriting.

Don’t be afraid to ask if they have business insurance. Ask them about their legal structure, so you know who they have on their team.

Also, ask about their level of experience and that of anyone they are partnering with. A seasoned team may have had their sour grapes, and will know how to navigate through them.

Finally, make sure you know what you can afford to lose. Don’t invest your money if your financial house is not in order. Investing is not a financial nightmare cure. It is a tool that is best implemented once you’re ready.

Good luck, and happy due diligence. Be sure to follow for continued learning on navigating CRE.

The Hunger for Financial Freedom

There have been multiple influences on my desire to achieve financial freedom.

I’ve been financially conscious since I was a kid.

My folks did a pretty good job giving my siblings and I a solid financial education.

It started with learning to save our pennies.

Then, we played lots of Monopoly.

Eventually, my Dad bought “Cashflow for Kids”. We spent numerous Sunday afternoons on that game as I grew up.

My Dad’s Business

Yet, the earliest spark was my Dad’s own efforts to start a business. He left his job and decided to be the pioneer that brought a company to Arizona.

He was making phone calls, and buying business cards, and letterhead. He was always at his desk, typing busily away at his laptop. He would run off to meetings and was just immersed in a way that caught my admiration.

At one point, he had a bunch of cardboard from something he had set up in the office. Being the artsy kid I was, I thought one of the cardboard inserts looked like my dad’s laptop. I drew a little screen and keys on it.

Dad helped make the other pieces into a mini cubicle. Whenever he was on the phone, I would pretend that I was typing away at the computer and working in the little office just like he did.

Maybe the business didn’t make it past 2008, but the impression it left on me will never be forgotten.

Learning to see Opportunity:

In addition to playing pretend, my siblings and I were opportunists. We would often go around the neighborhood selling treats, jewelry, and toys to our neighbors.

I knew that if I had something pretty, yummy, or somehow desirable, there was someone who would pay for it.

My personal best was during the winter time in 4th grade. My mom had started buying a bunch of the dollar tree dinner mints. I loved them, so I’d sneak a bunch to school and enjoy them throughout the day.

Every time I had mints on hand, the other kids would ask for some. So, I started sneaking mints to school everyday, and kids would trade their lunch money for them.

My parents asked where I kept getting money from. I’d bring home anywhere between a quarter and a few dollars a day.

“I found it on the ground.” I’d say with a grin. If it was an individual coin, that was usually true. However, I was actually the school mint dealer. 😎

Eventually, the candy business was adopted by other kids at school. I closed shop, and started peddling the goods other kids had brought. Nobody ever suspected a thing, and I profited well from the market I created.

^Leveling Up^

I quickly reached $20 in my piggybank, so my folks decided it was time for a real savings account.

When we got to the bank, I drilled the poor banker with questions. Where was my money going to be stored? How much interest would it earn?

I don’t think my parents knew I had learned what interest was, and the banker sure didn’t know what to do with me.

I also scoffed when I learned that my money wouldn’t even earn a whole 1% each month. This really rattled the banker, and baffled my parents. That day, I learned that the bank wasn’t going to make me wealthy.

Entrepreneurial Spirit

Since I was a young kid, business ownership is something I really wanted to do. I didn’t always know what kind of business, but it has always been on my mind.

One fateful duty day, I was standing Midwatch in the Messenger shack.

I had found a book called, “Rich Dad Poor Dad” by Robert Kiyosaki. This title wasn’t new to me, since I had played Cashflow growing up. However, that book had a captive audience. My fellow watchstanders were not that talkative, so I decided give it a read.

The fire was already lit, but that book fanned the flames. Suddenly real estate, and wealth building was all I could think about. I started reading about it, watching videos, and talking about it nonstop.

I believe in it. Real estate is one of the oldest ways to build wealth. It has made so many millionaires, and even billionaires. I want other people to catch that spark, and to help them build their wealth too.

Be sure not to miss future posts, because I will be striving to make you a more confident investor.

The Unaccredited Investor

Is 50,000 dollars a daunting amount of money for you right now? To many, this is a high bar to entry.

Well, maybe you don’t have to have a whole 50,000 dollars. There is a way to get by with 10,000 or 25,000, and still be passive.

Some sponsors will do capital raises for smaller deals.

Here’s How:

While a syndication can raise unlimited amounts from accredited investors, they can currently also raise income from up to 35 unaccredited or sophisticated investors through the 506b regulation D exemption.

Per the SEC (the Securities and Exchange Commission), here are some of the major rules:

The sponsor is required to have substantial proof of prior relation to the potential investor.
General solicitation is prohibited.
Must provide the non-accredited investors with disclosure documents, and an audit of the fund’s balance sheet.

This may make it seem difficult to get your feet in the water, but it’s really as simple as building relationships with potential sponsors.

Real estate is a relationship business for both passive investors and general partners.

In a lot of cases, there will be initial phone calls, so the sponsor can learn your goals. Then, you can choose to proceed from there.

All the while, you can sponge lots of juicy knowledge by subscribing for future posts.

The goal is to help you become a knowledgeable and prepared investor one little knowledge nugget at a time.

Why Multifamily?

Real estate is an incredibly wide spectrum. There is single family. There are mobile home parks, storage units, hotels, office spaces, and so so much more.

So, what makes multifamily so great?

In short, everyone needs somewhere to live, and multifamily has the power of scale.

Residential real estate is a powerful choice in the first place, because you are providing safe housing. It’s in high demand no matter what, because people need it. This has become even more true since the onset of Covid-19.

However, instead of getting just one door by investing in single family, it is possible to get a piece of the action in a larger deal.

50k is a very common investment amount for an accredited investor in a syndication deal. That would possibly buy 1 or maybe 2 doors for single family.

In multifamily, you will see multiple investors come together to buy multi-million dollar properties with each individual contributing that same principle 50k.

Scenario A:

Say you manage to buy 2 single family homes with a total property value of 250,000 dollars between them.

At 2% you might be collecting 5,000 a month from your two properties. They will both need property management. This will amount to about 10% of your rental income.

There will still be utilities, capex, a mortgage, taxes, insurance, and other costs to cover on your single family homes. If you earned a return of 500 dollars in cashflow each month, that would be doing incredibly well.

This is assuming you will have tenants in your two properties 100% of the time. Single family homes are either 0 or 100% occupied.

Now, another key attraction to single family real estate is often appreciation. This is true for almost any area of real estate.

Your 250,000 dollars worth of property will range on appreciation depending on the other single family homes in the area. If the market is hot, there will be high appreciation. Yet, the general average appreciation year over year has been about 4%.

Do keep in mind that your property’s value is hinged on the values of the surrounding area. This will often limit how much additional appreciation you can force with upgrades.

Scenario B:

Instead of buying single family, you decide to find a sponsor that matches your goals and values for real estate. You invest your 50k as an LP (Limited Partner). The property your sponsor is capital raising for is worth 1 million dollars for 20 doors.

Depending on how the ultimate profits are split up between the sponsor team and the passive investors (LPs), you could make anywhere between 6-10% preferred returns. It also depends on whether the deal is following a buy and hold or value add model.

In this case, let’s say we have a largely stabilized property that your sponsor intends to buy and hold for 10 years. They have promised a 6% preferred return per year. This means you and your fellow passive investors make the first 6% of cashflow or sale value of the property before your sponsors make a penny!

After that, the returns waterfall into a 70/30 split between passive investors and the sponsor team. That means if there are 12% overall cashflow, the passive investors are getting 70% of that.

Cool thing about multifamily as opposed to single family, their 3rd party management company will only take about 3-4% of the total income.

Multifamily also offers scale. The property is appreciating against 1 million dollars as opposed to 200,000.

Plus, your sponsors will likely do things to decrease the expenses of the property, and improve the units. This more directly increases the NOI, and it is not nearly as hinged on the surrounding neighborhood.

To conclude:

While single family seems like the less risky option, that is not necessarily true. Multifamily spreads your eggs into more baskets, and is much more scalable.

Additionally, multifamily is not something only the ultra wealthy do! It is reachable with some judicious capital building.

Be sure to subscribe for future posts, so we can keep learning together. 😊

Assets vs Liabilities

An important aspect of financial intelligence is learning to identify the difference between an asset and a liability.

Assets are the key 🔑 to building wealth.

Liabilities eat wealth.

Some liabilities are obvious, like loans or credit card debt. Others are not thought of as liabilities, but can eat into our pocketbooks if we aren’t wise to them.

Conventional wisdom often advocates for buying a home, and how this is an investment. It can be, but the house you live in and pay for is moreso a liability.

You don’t want to lose it, and unless you property hack, it isn’t earning you money. There may be appreciation, but you are paying the mortgage and all of the expenses.

On a numbers basis, cars are also a liability. Their value depreciates and they cost money. It is better to have a car that gets the job done and invest the rest, so your cash flow can buy something nice later.

In wealth building, it is essential to ask if whatever you are investing in has a ROI. This is also known as return on investment. It is how much cash you are earning on the principal amount you invested.

If you divide the amount you earn by the amount you invested, that will determine how strong of an asset you have.

Debt and depreciating items will have a negative ROI. Try to make sure these don’t eat your base income, otherwise your finances will become one leaky bucket!

For multifamily real estate, there is usually a certain percentage of preferred returns when investing with a syndication.

This is money passive investors get to earn before their sponsors get a dime! It is also a way to earn a very strong ROI passively.

👇My inspiration for this topic👇

If you wish to dig into the mindset of redefining assets and liabilities, I must highly recommend reading “Rich Dad Poor Dad” by Robert Kiyosaki.

He explains the fundamental mindset of wealthy folks, and it is fair to call the book foundational to any investor.

What is NOI

NOI is net operating income. It is the profit left after expenses.

It is used in valuing a property. ROI also can be for comparing income to other properties in the area.

How to find it:

Firstly, we need our total gross potential income. This is accounting for all of the units, pet fees, and parking fees.
Take your total potential income (the max you would make under 100% occupancy), and subtract vacancy and credit loss. You will now have your gross operating income.
Next, we need all of the expenses added together. For example, this can include utilities, management, legal expenses, lawn maintenance, and so on.
Finally, it’s time to take the gross operating income and subtract the operating expenses. The resulting number is your NOI.

How to use NOI to calculate property values:

Simply take your NOI and divide it by the market cap rate. The market cap is a metric a company or property is valued by.

That’s the basics of net operating income. Be sure to subscribe so you can learn some more real estate fundamentals.