If you are looking for a get rich quick recipe. You work hard to earn money and you spend wisely to build up your savings.
What is the best investment option for you?
Whether you are looking to supplement your income, preparing your retirement or building a family financial legacy, many investment opportunities available:
- savings account, say 5 years CD
- treasuries
- stock market
- commodities like precious metal, say gold
- real estate indirect ownership via REIT
- real estate direct ownership (buy and hold or via syndication)
With your investor hat: you look for high returns and low risk taking into account the inflation.
Here is a chart showing the Risk and Reward of these investments corrected for inflation (2.16% average):
High Reward brings focus to the upper half of the chart and Low Risk brings focus to the left side of the chart.
We can observe:
- Investments in Savings are in a no-man's land with negative returns as they do not keep up with inflation.
- Buy and hold Real Estate have very similar performance to US Treasuries, typically very conservative investment strategies.
- Commercial Real Estate is head and shoulders above any other investment type with high returns and risks in the same category than buy and hold real estate and US treasuries.
Another approach is to ask yourself questions about you investment goals:
Do inconsistent returns on your investments in the stock market make you anxious?
Do you want to improve the low returns of savings accounts?
Do you want to diversify your investment portfolio?
Real Estate - Top 5 Benefits
Income
The income of a property is mostly made of the rents paid by the tenants, expenses are made of the cost of operating the property, including debt. A stabilized asset will generate a positive cash flow (income minus expenses) that will be distributed to the investor.
Depreciation
An investment property is an asset that can be depreciated over 27.5 years resulting in tax savings for the investor.
Equity
Through the ownership of a property, the rental income from the property pays the debt (loan): interests and principal. Upon sale of the property, the principal debt reductions will be returned to the investor.
Appreciation
Single family homes (technically up to 4 units) have their value based on property comps (comparable properties) in the same vicinity. The value of a single family home can be increased through renovations, or additions (new rooms, new floor). A multifamily property is a business that is valued by its Net Operating Income (NOI) and Cap Rate (Capitalization Rate) of the market. Through physical and operational improvements, you can increase the value of the property by increasing NOI.
Leverage
Banks offer investors loans on the acquisition of an asset with 20%-30% down payment allowing to control an asset with a value 3 to 5 times larger than the money invested. Returns are increased thanks to this leverage.
Do you have retirement money tied up in an IRA or an 401(k)?
Following the appropriate rules, regulations and guidelines, retirement money can be invested in Real Estate when transferred in Self Directed IRA or Self Directed 401(k). If your retirement money is in a 401(k) with your current employer, you can borrow money from the 401(k). With all these options, you can invest your retirement money in real estate.
Should you invest in Single Family Rentals?
Are you worn out from managing your rental houses?
You can consider Multifamily Real Estate:
Multifamily Real Estate - Top 5 Benefits
Economy of Scale
Single family properties or small multifamily properties do not have sufficient revenue to hire full time staff. The owners either handle all day to day operations of the property or they pay for professional property management 8-10% of the income. The economy of scale in multifamily allows for a lower cost of property management (3-5%), repair materials and service contracts.
Risk Reduction
Thanks to the multiple units in a multifamily property, laws of average for vacancy and maintenance costs apply. An Investor in single family homes will need many units to apply laws of average on his portfolio: a bad tenant can result in burning up all profits made in a year.
Tax benefit
In contrast to a single family rental property depreciation over 27.5 years, the depreciation on a multifamily asset can be accelerated thanks to a cost segregation analysis.
Appreciation
The value of a multifamily asset is based on the Net Operating Income (income minus expenses) and the Capitalization Rate of the market. There are three ways to force appreciation by increasing the NOI: increase income, decrease expenses, or a combination of both.
Workload
Finding the deal, underwriting, negotiating, closing and managing. Those are the tasks that must be repeated for each acquisition of a real estate asset. While less complex, single family properties must have these tasks repeated for each door. A single multifamily acquisition allows one to run a more intense process once to acquire 5, 10, 100... 1000 doors!
Do you have limited time to dedicate to investing?
Are you unsure of how to do this alone?
You can consider Passive Multifamily Real Estate Investments:
Passive Multifamily Investment - Top 5 Benefits
Passive
Possibly the most beneficial reason to consider investing in real estate syndications is that you have the ability to be a passive investor. The sponsor will find the deal, negotiate, underwrite (create a business plan), find financing, close the transaction. Then the investor is letting the sponsor manage the asset and take care of the operational perspective of the investment.
Experience
A syndication allows you to take advantage of the experience and financial strength of the sponsor. The sponsor brings a track record and a network of 3rd parties to inspect, finance, provide legal support and manage properties.
Access to Large Investment
A syndication allows the aggregate of capital among other investors to invest in otherwise unobtainable, high-value apartments with high returns. Over 90% of multifamily purchases are made through syndication.
Diversify
Investment in a syndication typically starts at $50,000 and could be as little as $25,000. The relatively modest investment in a particular syndication allows you to access several properties and markets when investing in multiple deals.
Protection
Each syndication purchases the multifamily asset through a Limited Liability Company (or Limited Partnership). An LLC provides its members with personal legal protections against lawsuits and personal financial liability.
How does a multifamily syndication work?
Over 90% of multifamily purchases are made through syndication.
Multifamily Syndication - In a Few Words
The Sponsor, also called General Partner or Managing Member, offers Investors to be Members, also called Limited Partners, in a commercial real estate multifamily property. The Sponsor is usually a group of entrepreneurs and with the experience and financial strength to meet lender requirements.
Investors bring most of the funding for the acquisition down payment, repairs and closing costs.
The Sponsor finds the property, analyzes it, structures the investment, obtains financing, coordinates the acquisition, and then runs the day to day operations.
For illustration, Limited Partners will own 80% of the property and General Partners will own 20% of the property.
For the property acquisition, the Sponsor raises private money from qualified Investors typically under Rule 506 of Regulation D exemptions 506(b) or 506(c). An SEC lawyer will prepare a Private Placement Memorandum describing the business plan that is provided to the Investors.
The Investors' investment will correspond to a number of shares of an Limited Liability Company (LLC) who owns the property. The LLC operates as described in the Operating Agreement that the Investors and Sponsor sign. Investors will have voting rights on major events such as resale or re-finance.
For illustration, if the Sponsor raises a total of $1,000,000 and, as an Investor, you invest $100,000 with a split at 80% for Limited Partners and 20% for General Partners, then your $100,000 investment represents 8% overall ownership of the property.
Cash flow money (income minus expenses including the loan repayment) will be distributed proportionally to the Investors' ownership every quarter.
The same principle applies in case of resale or refinance of the property: any profit made will be distributed proportionally to the Investors' ownership.
Conclusion
If you are an investor looking for high returns, low risk investment and if you have limited time to spend on finding the right fix and flip deal or buy and hold property, then Passive Multifamily Real Estate Investment in a Syndication is a great option to consider.
That being said, the best advice is for you to get informed on all the investment options available, weigh the pros and cons and decide what is the best fit for you.
What is your investment choice?