ReiAloha Monthly Updates & News – Update 2019.9

ReiAloha Monthly Updates & News – Update 2019.9

  1. Timeshares are the worse. Mostly because there is negative equity as soon as you purchase because you have to pay a huge sum of money to leave your monthly/annual commitment.Check out these tips from a timeshare lawyer that helps poor consumers exit these bad deals – SimplePassiveCashflow.com/timeshare
  2. Added a link to schedule a free tax/legal strategy call with my CPA in the Tax guide.
  3. Life Settlement Info Page – https://simplepassivecashflow.com/life-settlement-investing/
  4. New Most Popular SPC Page – SimplePassiveCashflow.com/top
  5. (Here is a cheaper service for cost segregations for single family homes or under $2M assets – but I am personally a little skeptic)
  6. Live Coaching Call w/ Non-Accredited Investor – SimplePassiveCashflow.com/155jason 
  7. 152 – Kyle Jones Apartment Investor & 7 lessons learned
  8. Update to Banking Guide – 

    Index Universal Life (IUL) Caps: Will They Rise When Interest Rates Rise?

    Normally when we are taking about a banking policy we are talking about a wholelife product however sometime an indexed universal life (IUL) is preferred which is why it makes sense to work with only people you (we) trust. The cap defines the upper limit of the policy cash value crediting rate.

    Typically (2014-2019) IUL caps have gradually fallen, leading some to wonder what would stop carriers from gradually dropping caps to the policy’s minimum guarantees. This concern is particularly common when the client is considering whole life as an alternative because whole life discussions begin with guaranteed performance enhanced by dividends. Legally this is possible, and advisors may need some clarity to make a decision.

    So, how valid and relevant is the concern that caps may fall to the level of policy guarantees?

    Cap levels are essentially driven by the amount of money the carrier has available to purchase long options in support of its IUL book of business. While option pricing is a combined function of option budget, market volatility, and the price of zero-risk products, data indicates it is the option budget that is by far the overriding driver. This is particularly true when considered over the medium to long term.

    It’s indisputable that the reason whole life dividends, universal life declared rates, and IUL caps have fallen over the last 20 years is the declining interest rate environment. As rates fall, the general account return must also fall because its portfolio is comprised of primarily fixed income investments. When rates rise, bond returns in the general account will increase slowly as the life insurance carrier replaces maturing bonds and adds additional bonds with new premium. The question is this: will the carrier keep the extra return instead of passing it on to the end client in the form of higher caps, dividends, or declared rates?

    The life insurance carrier would say that they take their profit in the form of money management fees, costs of insurance, and policy charges; thus regarding the improved yields as policy owner money. On the other hand, cynics would disagree and say the life insurance carrier will pocket the increased yield.

    Let’s assume for the moment the cynics are correct, and that carriers have no regard for policyholders and deal only in their own self-interest. Well then, is carrier self-interest positively served by such behavior? The answer is no. And here’s why.

    IUL products are mostly sold to clients below the age of 65 who will live for a long amount of time. If interest rates rise but caps do not, then an IUL product becomes less attractive compared to similar products issued by competitors with higher caps and higher client yields. Healthy clients, encouraged by agents and other advisors, will surrender their policy so that they can move to the more competitive products. Furthermore, this would create another problem for the original carrier because the remaining pool would be the unhealthy, and this would result in more early death claims and therefore further losses.

    Will the original life carrier care about these lapses? After all, they won’t be paying a death claim and have already booked profit, as we noted above. The answer is yes.

    One of the great advantages of life insurance is that as standard practice the carriers guarantee the mark-to- market value of the bonds that support the cash surrender value. This was not an issue in a declining rate environment because the carrier could sell the attractive higher-yielding bonds and pocket the gain. However, when rates are rising and especially if the rise is rapid, the reverse is true. Thus, clients induced to surrender by higher caps elsewhere create a significant mark-to-market liquidation loss for the short-sighted carrier.

    For example, if the insurer has a general account with an average bond maturity of ten years (typical for the industry) the losses would be a 9% loss on the cash value surrendered if there was a 1% increase in underlying market interest rates, and a 35% loss if there was a 5% increase. For a single client this is unpleasant but unlikely to break the carrier. However, if it happens on a large scale it creates an enormous loss that no senior management team is likely to survive.

    Given the potential for considerable losses and that the carrier hits its profit objectives by passing through the increase in general account yield, the carrier is incented to pass through improved yields to the client in the form of higher caps. By doing so, the carrier attracts more premium while simultaneously protecting prior profits. By not doing so, the carrier risks mass surrenders which could result in the loss of hundreds of millions of dollars.

    No one knows when interest rates will rise, but data and logic tell us that the life carriers will protect their profits. To do that they must pass on improved yields to the client in the form of increased caps and/or improved participation rates.

    I’ve been burned before with Life Insurance that was sold to me by a 24-year-old out of college salesperson and everyone says whole life insurance is a scam. What can I do with my old policy?

    Have no fear my friend you basically have three options:

    • Cash it out and just walk away with the cash that’s in it.. In that case you obviously no longer have a life insurance policy so the death benefit goes away.. Because of the way it was designed, it possible does not have enough built in cash value yet for there to be any tax consequence so you don’t have to work about that..
    • Borrow against this policy and use the money that way.. You can use it as a properly design self-banking instrument, the downside being that the it’s not a great cash building policy so there’s more cost in it than what you’d like to see and the loan rate may not be real favorable.
    • Open a new policy (one that is designed for cash build up) and do a 1035 exchange into and this time get a policy optimized for banking.. The nice thing here is that there would be little cash right up front to boost the new policy because we are using the old one.. The downside is just going through the process of getting a new policy with physical evaluation etc..
  9. Ep. 150 – Live Coaching Call with a Doctor going 45 to 75 MPH! 
  10. Ep. 150 – Apartments to Mobile Home Parks with Paul MooreTake the hint from other high level investors and be aware that MFH Apartments is where a lot of new syndicators are starting businesses and where all the gurus are teaching about the space. It might be time to look elsewhere other than Apartments and into mobile home parks. Learn more about the asset class here

  11. Episode 149 – QRP Retirement plans Follow Up Webinar – Follow up on QRP questions with Damion Lupo – Video

  12.  Additions to the Analyser

    What are these expenses?

    Taxes: In the beginning of the acquisition process you have to ASSume part the taxes as a certain percentage of the market price.  However keep in mind that every county calculates this differently and re-assesses the tax basis for properties especially when the property transfers ownership. Best tip is to get around other passive investors in that area to ask them what the change as been or to assume that taxes will go up 10-80%.

    Insurance: You can take a certain percentage outlined in the spreadsheet, ask the current owner (if you believe them), or what we suggest is to get one of our insurance referrals within the mastermind to give you an actual value.

    Management: This is typically 8-10% of the rental revenue plus 50-100% of the first months rent. The property management can also collect additional fees by splitting late fees or charge for renewing previous tenant leases. This is where it is important to have peers or a mentor to save you hidden dollars here. Also make sure you pick a good one with this guide.

    Vacancy/Turn-over Expenses: Typically it takes 2-6 weeks to do some touch ups around the property after a tenant moves out to when the new tenant moves in. 4 week vacancy is 1/12th loss rents and needs to be accounted for as a “Vacancy” expense line item. This is where most novice investors fail to account for.

    Maintenance: I have always been told to put aside 10% of the rents or 1 months rents as money set aside to fix random things in the property. Also remember that when you old tenant moves out you might have to fix a thing or two (or $20,000).

    Also don’t forget about contract services such as lawn/yard service, snow removal, pest control, or pool maintenance.

    Cap Ex: This is not in your net operating income for all you geeks (engineers) crunching numbers but this is another 10% or so going to a cash reserve account to pay for broken stuff down the 2-15 year road. This money is to pay for large ticket items. More info here. I say geeks because experienced landlords know that its very hard to predict this stuff and it is a waste of time to track and build models to predict this stuff. In reality the best thing you can do is spend your time not in Spreadsheet Land but find more deals to decrease your risk but making more cashflow! Easier said than done when you are limited with fund and getting started which is why you get a mentor to mitigate your risk and understand that these scary things is exactly why you should push forward because most people will back out and thin your competition.

    Utilities – In most single family homes the tenant is in charge of the utilities (electric, gas, trash, sewer, water) which makes you life easier. However in 2-4+ unit arrangements the responsibility is all over the place.

    HOA Fees – It worth mentioning but check if your property has this. Condo or townhouses typically have a HOA monthly fee and is why we don’t recommend them as investments in addition the face that it is a nightmare dealing with their governance system.

     

  13. Additions to the guide to People/Psychology guideWall of Shame (don’t make these mistakes)Deprival Super-Reaction TendencyPeople prefer avoiding losses over acquiring gains.  Most of us have a stronger reaction toward losing something we already own. I see this when people have made bad decisions in buying a non cashflowing piece of land or crappy turnkey rental and they just won’t sell for a loss even though they have no other capital to get themselves moving again. When I lost $40K in this deal… my first inclination was to just hold on (stick my head in the sand), but realizing this I sold at a lost and moved on and freed up my mental bandwidth to close on over 1,500 units in 2018.Excessive Self-Regard Tendency
    We overestimate our skills, which leads to overestimating the competency of our decisions, which leads to overestimating the value of our investments or assets.  While confidence is needed in investing, excessive self-regard results in people thinking they’re better at picking stocks or investments than they actually are.  I see this went I go to networking events and run into someone venturing over from the stock trading camp or someone who thinks they are super smart because they are a genius in the computer science universe.
    If you are doing well monitoring trends 28 hours a day awesome for you!
    Sometimes I have a call with someone and they argue with against starting out with a turnkey rental and cite the reason why MFH is superior because they have listened to 1,000 hours of podcasts (inception by Guru) but they don’t have any experience even running a SFH!
    Real estate is very simple and requires soft skills to acquire the network needed to excel. In that respect it is like playing ultimate frisbee where the playing field is leveled and the physically gifted don’t really stand out like a pick up basketball game would. If you don’t know what I’m talking about you should check out the sport, it could be your calling.Social Proof Tendency
    We tend to seek out people who think the same way we do, and we want to do something just because someone else has done it, rather than for its own merit or because we’ve done the research.  This leads to an unhealthy herd mentality.
    Example:
    Investor A tells Investor B that Operator C is a great operator. Investor A does not know anything (how to run the numbers) just investing in a few deals done by Operator Z. Now Investor B invests in Operator C’s deal.
    Charlie Munger’s example:
    “Big-shot businessmen get into these waves of social proof.  Do you remember some years ago when one oil company bought a fertilizer company, and every other major oil company practically ran out and bought a fertilizer company?  And there was no damned reason for all these oil companies to buy fertilizer companies, but they didn’t know exactly what to do, and if Exxon was doing it, it was good enough for Mobil, and vice versa.  I think they’re all gone now, but it was a total disaster.”
    Combine Excessive Self-Regard (rich people with investing track record or not) with Social Proof Tendency you get a recipe for group thinking. This is something I constantly see in my of the groups that I paid to be in and as I grow my own mastermind.Consistency Avoidance Tendency
    Just because something has worked in the past does not mean that markets do not change. It is difficult to be objective and move against your past operating system. This is why in the podcast we always ask guests what is something they once thought, put their ego aside, but they realized was wrong.Envy/Jealousy Tendency
    Its no doubt that its impressive when someone says they own 2,600 units or whatever. Not going to lie, its definatly a pissing contest.
    You might see a 310-unit deal come by and a 424-unit come by and want to invest just to increase your unit count. Just know to keep to your underwriting standards and not compromise.
    Deals are like airplanes. Everyone is waves goodbye in great admiration and fanfare when the airplane takes off but once it disappears into the horizon no one knows if the plane made it to the end goal.
    Sometimes it is clear that some planes leave the origin with a quarter tank of gas or a drunk pilot.
    It is often the deals that you don’t do (even though it costs you $50,000 of earnest money) are the best deals you make because you prevent the drain of money and more important life energy.
    People prefer avoiding losses over acquiring gains.  Most of us have a stronger reaction toward losing something we already own. I see this when people have made bad decisions in buying a non cashflowing piece of land or crappy turnkey rental and they just won’t sell for a loss even though they have no other capital to get themselves moving again. When I lost $40K in this deal… my first inclination was to just hold on (stick my head in the sand), but realizing this I sold at a lost and moved on and freed up my mental bandwidth to close on over 1,500 units in 2018.Excessive Self-Regard Tendency
    We overestimate our skills, which leads to overestimating the competency of our decisions, which leads to overestimating the value of our investments or assets.  While confidence is needed in investing, excessive self-regard results in people thinking they’re better at picking stocks or investments than they actually are.  I see this went I go to networking events and run into someone venturing over from the stock trading camp or someone who thinks they are super smart because they are a genius in the computer science universe.
    If you are doing well monitoring trends 28 hours a day awesome for you!
    Sometimes I have a call with someone and they argue with against starting out with a turnkey rental and cite the reason why MFH is superior because they have listened to 1,000 hours of podcasts (inception by Guru) but they don’t have any experience even running a SFH!
    Real estate is very simple and requires soft skills to acquire the network needed to excel. In that respect it is like playing ultimate frisbee where the playing field is leveled and the physically gifted don’t really stand out like a pick up basketball game would. If you don’t know what I’m talking about you should check out the sport, it could be your calling.Social Proof Tendency
    We tend to seek out people who think the same way we do, and we want to do something just because someone else has done it, rather than for its own merit or because we’ve done the research.  This leads to an unhealthy herd mentality.
    Example:
    Investor A tells Investor B that Operator C is a great operator. Investor A does not know anything (how to run the numbers) just investing in a few deals done by Operator Z. Now Investor B invests in Operator C’s deal.
    Charlie Munger’s example:
    “Big-shot businessmen get into these waves of social proof.  Do you remember some years ago when one oil company bought a fertilizer company, and every other major oil company practically ran out and bought a fertilizer company?  And there was no damned reason for all these oil companies to buy fertilizer companies, but they didn’t know exactly what to do, and if Exxon was doing it, it was good enough for Mobil, and vice versa.  I think they’re all gone now, but it was a total disaster.”
    Combine Excessive Self-Regard (rich people with investing track record or not) with Social Proof Tendency you get a recipe for group thinking. This is something I constantly see in my of the groups that I paid to be in and as I grow my own mastermind.Consistency Avoidance Tendency
    Just because something has worked in the past does not mean that markets do not change. It is difficult to be objective and move against your past operating system. This is why in the podcast we always ask guests what is something they once thought, put their ego aside, but they realized was wrong.Envy/Jealousy Tendency
    Its no doubt that its impressive when someone says they own 2,600 units or whatever. Not going to lie, its definatly a pissing contest.
    You might see a 310-unit deal come by and a 424-unit come by and want to invest just to increase your unit count. Just know to keep to your underwriting standards and not compromise.
    Deals are like airplanes. Everyone is waves goodbye in great admiration and fanfare when the airplane takes off but once it disappears into the horizon no one knows if the plane made it to the end goal.
    Sometimes it is clear that some planes leave the origin with a quarter tank of gas or a drunk pilot.
    It is often the deals that you don’t do (even though it costs you $50,000 of earnest money) are the best deals you make because you prevent the drain of money and more important life energy.
  14. Additions to the Syndication Guide – To be a General Partner you need to find the deal, run it, bring a large portion (25% of the total capital), and answer annoying questions from the bank like this:https://youtu.be/WHC7LmUrnKEUltimately the reason I decided to not do a 4-50 unit by myself was because of the leading options under $1M are horrible and full recourse. Check out with these options for debt that the pros use which are typically out of reach from mom & pop investors.What is Syndication?
    A syndication is pooling of capital to invest in an opportunity. The benefit of putting capital together is that it might make it possible to purchase something that one person or small group may not be able to on their own with a Joint Venture agreement. We use syndications to get into opportunities to get away from the mom and pop chaotic and highly competitive space of under $1M-$2M deals. In addition, we try to stay under $10M-$20M purchase price sizes so we do not compete with larger institutions or hedge funds who are mostly interested in capital preservation not optimizing equity growth.
    You can syndicate anything from a shave-ice store to a multi-million dollar development. I just try to stay in my lane and focus on cashflowing real estate where tenants demand is high.
    Video version of this article with extra commentary:<a href="https://youtu.be/z5WHIa5FFng%5B/embed%5D" target="_blank" data-saferedirecturl="https://www.google.com/url?hl=en&q=https://youtu.be/z5WHIa5FFng%255B/embed%255D&source=gmail&ust=1559113668961000&usg=AFQjCNGZ6g95TgHv60sX47JIVtQukfua1Q">https://youtu.be/<wbr>z5WHIa5FFng

    My Experience with Syndications
    In 2016, I paid over $30,000 to get the mentorship to be an apartment operator/investor. What I learned in the process was that I did not need to be a General Partner because I had enough income and net worth to invest as a Passive investor (LP). After doing 
    turnkey single-family homes from 2009 for 7 years I was ready to graduate to bigger deals as a passive investor.
    Technically, I paid $40,000 on this fiasco too.
    Since then I have been General Partner and Limited Partner on over a dozen deals from 2017-2018.
    Webinar – What are Syndications/Private Placements? – https://youtu.be/n_qsZHBOCS4

    <a href="https://youtu.be/n_qsZHBOCS4%5B/embed%5D" target="_blank" data-saferedirecturl="https://www.google.com/url?hl=en&q=https://youtu.be/n_qsZHBOCS4%255B/embed%255D&source=gmail&ust=1559113668961000&usg=AFQjCNHHCbdHxFEcFUoGDeKsGPRzh8Ynig">https://youtu.be/n_<wbr>qsZHBOCS4

    Two Types of Syndications
    There are two forms of syndications:

    1. A single (of finite number of assets) that are going to be put into the ownership entity. For example we are going to syndication the purchase and rehab of a 200-unit apartment complex at 123 Main Street. The assets are identified before capital is raised. This allows sophisticated investors to vet the deals on an individual basis.
    2. A Blind Pool Fund (like a real estate fund) where capital is raised based on the sponsor’s vision, track record, and reputation. The capital is raised first the sponsors will then go out and acquire properties.

    What are the Various Roles in a Syndication?
    Whenever you are learning something new like ball room dancing for example its best to learn the definitions first. Then once you understand those we will build up on the concepts. Remember mastery only happens with the right 
    Mastermind and actually jumping into deals.

    Sponsor/Lead/Co-Sponsor/Manager/General Partner (GP)/Syndicator
    There are many terms for this person or company that organizes this investment and that is responsible for managing the whole operation on behalf of the investors. They are interchangeably known as the Sponsor, Lead, Manager, Operator, or Syndicator. Being in over a dozen different arrangements I can tell you that sometimes there can be a lot of dead weight in a GP however if you are looking to be in the GP you need to help with the deal with 1) finding it, 2) doing the grunt work, 3) bringing in a lot more capital than a typical Limited Partner.
    The loans (financial liability) is guaranteed by the Loan Guarantors or Key Principals (KPs). You guessed it! Typically a “rich dude/gal” with a net worth of over $2-5M is signing on the debt for the entire GP and Syndication. You can get compensated for this but every case varies which determines if it is a good risk reward. If you are a “rich dude/gal” we should probably connect and you should enroll in my mastermind with over 50% accredited investors too. But for the rest of you under $2M net worth keep reading…

    Investors
    Investors are known as Limited Partners (LPs). Not giving you any legal advice here of course but 80% of my investors invest in deals via their personal name because as the name implies there is limited liability because the liability goes through the GP first and the loans are guaranteed by the KPs.

    Legal Structures
    As mentioned before, the syndication may be created with a certain tax and legal structure. It is usually created as a Limited Partnership (LP) or a Limited Liability Company (LLC) to own the property on behalf of investors.
    Accredited Investors
    An accredited investor is a defined by the United States Securities & Exchange Commission as someone who makes a minimum of $200,000 ($300,000 if filing jointly) or has a net worth of 1 million dollars excluding personal residence. The significance of being an accredited investor is that you can invest in things that those with less money, cannot. You can also be something called “a sophisticated investor” which has a much more nebulous definition but essentially says you know what you are doing even if you don’t have that much money. These laws were put in place long ago to “protect” the average person from predatory activity. The irony of this all is that there is no protection for the average Joe, or pension funds for that matter, against investing in a wildly bloated stock market at record valuations. Every major trader out there knows we are in a bubble but there is no protection for individuals dumping money into their retirement accounts to buy mutual funds. It’s an archaic system which makes little sense. Certainly, there has been some recognition of this fact. The 2012 JOBS act made it easier for Main Street America to participate in “alternative” investments via crowdfunding and made it easier for sponsors to advertise previously unknown opportunities. However, we have a long way to go. I would advise you that you need to know the lead syndicator personally. None of this “we met at a local REIA and he pitched me his deal”. If a guy does not have a list of solid investors they must lack the track record. Also I did a podcast with Amy Wan a syndication attorney talking a lot about this topic.
    It is a misnomer that syndications are only for accredited investors. 97%-90% of deals out there also accept non-accredited investors it just that you are not personally connected to any of these people.

    Two Typical Syndication Methods
    Most deals are put together with the following structures which follow the SEC’s governances.

    1. Regulation 506B – 97-90% of deals our there accept non-accredited investors and the GP cannot openly market the deal to a non-private list (no TV, Radio, social media ads for example). Investors (LPs) will self certify if they are accredited or non-accredited.
    2. Regulation 506C – the minority of deals following the new rules where you can advertise into the free world but the SEC says if you do this you cannot bring in non-accredited investors. Investors (LPs) will need a third-party letter from lawyer, accountant, or third party site like Verify-Investor validating Accredited status.

    The Process
    The following is how the process typically works.

    1. Someone finds a deal.
    2. GP ties up the property up in a contract and starts building their GP team. (This is where they call me and see if the Hui Deal Pipeline Club is interested in the deal).
    3. The GP performs their due diligence and in parallel they get the syndication lawyer (not another run of the mill person who happen to pass the BAR) to create an investment package typically referred to as a Private Placement Memorandum or PPM. The PPM includes details of the property/deal, terms, sponsor contribution, equity splits, projected returns (proforma), fee structure, payout structure, and other marketing. The PPM is a heavy document over 100-pages. In most cases it scares new investors because it discloses all the risks that can happen. In the end it does two things: 1) Signs the GP up to be fiduciary to no lie, cheap, steal, and run the investment to the best of their ability and 2) Signs the LP up to minimize their ability to sue the GP incase the deal does not go well after all in everything there is risk and sophisticated investors know this.
    4. The GP will then go about raising money from investors (LP). They will decide a minimum investment amount based on the downpayment needed, cash reserves, capital needed for extra construction, fees/compensation for putting the deal together. Experienced GPs will always write the PPM to allow some wiggle room incase an extra 5-20% of capital is needed so they don’t have to spend another $10,000 for another irrevocable PPM. I am mentioning this because a common question from LPs is why does the PPM say the max raise is $4M and the sponsor just told me their take get is $3.5M? As a LP it is important to understand the rough breakdown on what the initial capital raise is being used for. Beware if capital is being raised to pay out investors in the first year. This is technically a semi-legal Ponzi Scheme but is not a good best practice by a GP and a way of tricking unsophisticated LPs.
    5. Once there is enough capital and the financing is worked out, the property will be purchased and the sponsor manages and operates the property. This is always a monumental movement as millions of dollars are being wired in from dozens and dozens of LPs in just a matter of days.
    6. After the property is acquired the fanfare and excitement goes away and the GP rolls up their sleep and gets to work. Distributions and profits are given as outlined in the PPM. In a way the LP courting stage is over, the wedding was a blast, and now we see how well this marriage lasts/goes.

    Why did I focus on being a LP
    Again for me, it was simple math. The assumption was that my money would grow at 15-20% a year in part cashflow and equity & forced appreciation. The syndications that I do are not BS REITs and RE Funds where you know the people running the deal for you and you don’t have layers of people taking hidden fees.
    I get all the pass-through tax treatment and depreciation and interest expense. In fact it is stronger than my direct ownership rentals because of cost segregation and bonus depreciation. See our tax guide.
    What I give up for control (most of which is an ego thing) I gain in diversification (multiple partners, markets, business plans, and asset classes). And the property management is typically a lot more professional than the property managers in the residential (1-20 unit) world.

    What are the downsides of a Syndication?
    Syndications as a LP are for people with money. If your net worth is under $250K its cool to learn but you really should not think about investing in one. Being an LP is more of an end game strategy or once you have hit your critical mass point.
    Lack of liquidity. Should something happen in your life like someone kidnaps your child or your spouse wants you holdings its almost impossible to get the money out. Again not for broke people.
    Lack of control. The GP calls the shots and you are on for the ride. Then again most LPs are amateurs and at some point its better to give the wheel to the pros.
    Costs and fees can be misleading. We break these down in our MastermindYou have to find another deal when it exits. Although I find this fun!

  1. [Resource MFH info page] Physical Occupancy vs. Economic Occupancy in Apartment Investing – Note this is mostly used as an example of what LP’s should be aware of. In most cases LP’s either know too little for example they just look at the Pro-Forma returns and don’t look at the assumptions that the operator used to get there. Or they spend so much time evaluating things that have little impact to the numbers for example running away when they hear of minor foundation issues or rodents that can be remediated with a few thousand dollars of seller concessions. In the Passive Investor Accelerator & Mastermind we try to focus on what is really important but obviously that is not free (but going into a bad deal is costly too). Vacancy in apartments decreases top line income and getting occupancy as high as possible is the goal. There are two different types in apartment investing 1)Physical Occupancy and 2) Economic Occupancy. Physical occupancy (number of units that have a tenant with a signed lease, occupying a unit) is what most people are familiar with in apartment investing and what is often overlooked when a passive investor reviews the underwriting assumptions of a syndicator. This is shown on the rent roll with the tenants name next to the unit number which also needs to by physically audited with boots on the ground verification. Physical occupancy is a percentage calculated by dividing the number of occupied units by the total number of units for example a 100 unit apartment with 8 units vacant has a physical occupancy is 92% (92 ÷ 100).Pay attention here… if a rent roll shows a unit is occupied, doesn’t necessary mean it’s also generating income. A tenant might be a deadbeat or the nice way of putting it there might be “loss to lease.”Economic occupancy is the amount of money of actual rents received as related to the occupancy. This also takes into account tenants who don’t pay the full rent and also things like concessions ($200 move in specials, discounts to motivate tenant prospects). This is the net rents received (not including other income). The net income will deduct for bad debts/loss to lease. The economic occupancy is calculated by dividing net rent received by the gross rents possible.On the same 100 unit apartment, assume each unit rents for $1000/mo. There’s a gross potential of $1,200,000/year (100 units x $1000 = $100,000/mo x 12 = $1,200,000/year). Using the same physical example say there are an additional 10 deadbeats (that the previous seller stuffed in there right before the sale) and 10 people only able to pay half the rent… then you are looking at an economic occupancy of 75%.This might be a little too much info for a LP but Economic occupancy can be a sign of the following:Bad Management and bad collection practices
    Bad tenant qualification practices
    PM stealing money
    Bad rent collection practices
    Lack of maintenance, causing tenants to leave
    Or a clear sign of opportunity!

Why Invest as a LP in a Syndication?

1. Minimizing PITA (simplepassivecashflow.com/pita): No more managing tenants, vacancies, maintenance and the managing the manager (who is a $12-20 dollar employee who’s compensation structure us not aligned with your goals) By passing the control of the day to day operations to true experts who are literally partners (direct alignment of compensation and motivations), you can assure the investment is being optimized while you spend your time on what you want which is 1) making more money at your day job, 2) spending time with your family or 3) finding that one off deal that you want to do one your own while pairing with a Limited Partner strategy.

2. Asset Diversification:  Many commercial real estate investments have high acquisition prices (think $10M+) where most people don’t  have access to. You want to get away from these other Mom and Pop invests like these 1-40 units. When I was a syndication newbie and thought I could do everything by myself and did not trust anyone. I then realized in a few months that 1-40 unit deals had horrible pricing because all the amateurs were involved and the ones that looked good from a per unit price prospective were under 80% occupied and had ISSUES.  Investing passively in a group can allow you to invest in multiple asset classes (apartment/mobile home/assisted living), in multiple locations and with varying business plan duration. 

3. Avoid Credit and Liability Risk:  Investing passively allows one to avoid being exposed to credit or liability risk.  No W2 documented income no problem!  You do not need to personally guarantee multi-million dollar loans and and be the fall guy. Plus now you can get into all the travel hacking credit cards and tradelines you want (Simplepassivecashflow.com/tradelines).

4. Cash Flow:  The goal of a LP syndication investor is to create a “ladder” of investment that create accumulated cashflow and cash out (refinance or sell) at different times. It’s like your grandpa’s CD ladder strategy but with 10-30x returns.

5. Taxes: All the deprecation benefits of single family home being your DIY direct investing but even better! Bigger deals are able to pay for a cost segregation to squeeze out even more depreciation. More info Simplepassivecashflow.com/costseg

  1. What is an example of an investor split on a Development deal?

    First off most development deals are higher risk and higher returns. Whereas I tend to invest the majority of my portfolio in cashflowing stabilized assets. Development deals have two huge “ifs” which are what the property sells for and how long construction will take. Typically there are huge promote fees on both acquisition/funds raised and during construction.

    Here is one example using a sponsor’s proforma, the manager is at 5.88% of gross on fees + 50% equity.
    Manager profit ration of 38% with a client return of 14%. [That seems greedy to me given the client return and risk.]

    Manager Fees

    3.3% dirt + build ($12.05m) = $397,650
    1% sale ($16.27m) = $162,700
    3.5% build ($11.32M) = $396,200
    50% equity Class A/B; 65% equity Class C
    Gross margin: $4,217,712
    Duration 24 months (build to sale) – this is the largest variable other than what the property sells for.

    To Class A shares or the LP portion ($10.60m raise)

    Preferred return = $2,226,000 10%
    Remainder margin = $1,991,712 * 50% = $995,856
    Total = $3.22m
    $10.60m -> $13.86m ~ 14% return
    To Manager:

    $956,550 fees + $995,856 margin = $1.95m
    Manager/Class A = 60%
    Manager/Margin = 37.7

  2. What are some things that most LP’s over look:
    1. Many general partners put up substantial amount of money that is non-refundable after a certain point in the diligence phase. This is called your money going hard. It’s a dirty little secret that many operators will force a deal to happen with loose underwriting rather than pull out of the deal and eat $50,000 to $200,000 of their non refundable earnest money.
    2. It is good to look at the how the capital raised is being used. The largest amount of money will be used for the down-payment and then for the capital expenses. Then the fees (rightly so) and cash reserves to mitigate a cash call but not too much to dilute investor returns. Be careful if there is extra money raised to pay out investors in the beginning stages of the investment. I am not an attorney but I believe that may be a Ponzi scheme but is definitely not a best practice in borrowing from the future to pay investors out of. The cashflow should come from the income minus expenses generated.
    3. Where are LP’s in a capital stack? Sometimes there may be a preferred equity partner in the general partnership that is gaining better treatment before LPs. Something to be aware of and understand how profits flow to investors.
    4. Anyone have “the talk” with their parents? Any insights to add to this article to help others in our community? 
    5. Additions to the Crowdfunding guideChicago company that was recently shut down for allegedly running a Ponzi scheme.They promised investors returns of 15% to 20% on Chicago real estate. This is a huge red flag in my opinion. Those returns are extremely tough to achieve in Chicago, even in “high yield” areas.https://www.housingwire.com/articles/46567-sec-shuts-down-equitybuild-claims-company-is-135m-real-estate-ponzi-scheme
    6. Additions to the 1031 Guide – Delayed Sale TrustGood for people selling very large assets such as a $5M dentist franchise due to high costs.
      Defers taxes on the sale of a primary home. Unlike a 1031 Exchange, the proceeds from the sale do not have to be invested in “like- kind” property in a very short timeframe to achieve tax deferral. Moreover, a DST can be used to “rescue” a 1031 Exchange that is in danger of failing.Doing this converts an illiquid asset, like a business or commercial real estate, into a diversified portfolio of liquid investments. Now you get diversification from a variety of asset classes or geographical locations like how we are investing syndications.There is an added benefit of being able to split partnership interests and outside of taxable estates at the close of the DST ($11M and $22M married). Here is one firm that we have a relationship with.
      Additional reading: IRC 453, Installment Sales
    7. Additions to the QRP & Retirement Plan GuideCan a Roth IRA be converted directly into a QRP? And if so, can a Roth IRA be converted into a regular IRA first and then immediately converted into a QRP as a way to get around this rule?Converting Roth IRA into Traditional IRA is called “Recharacterization”. It is not as common as Traditional IRA –> Roth IRA, due to the tax benefit of Roth IRA.In 2018, as part of the Tax Cut and Jobs Act, recharacterization of Roth IRA conversions from traditional IRAs and qualified plans (e.g., 401(k)) was repealed. As a result, all Roth conversions taking place on or after January 1, 2018 are irrevocable. But recharacterizing Roth contributions is still permitted. For instance, a traditional IRA contribution can be recharacterized to a Roth IRA contribution and vice-versa.Prior to January 2018, an investor had four available recharacterization options including: (1) traditional IRA contribution to a Roth IRA, (2) Roth IRA contribution to a traditional IRA, (3) conversion of traditional, SEP, or SIMPLE IRA and (4) qualified plan (e.g., 401(k)-to-Roth IRA conversion to a traditional IRA). Under the new rules, the list of options has been reduced.According to the IRS, a Roth IRA conversion made in 2017 may be recharacterized as a contribution to a traditional IRA if the recharacterization is made by October 15, 2018. A Roth IRA conversion made on or after January 1, 2018, cannot be recharacterized, the IRS says. For details, see “Recharacterizations” in Publication 590-A, “Contributions to Individual Retirement Arrangements (IRAs).”https://www.lordabbett.com/…/roth-recharacterization…
    8. Additions to the Turnkey Rental GuideWhere do I get a loan?
      First off do not go to a big bank lender like Chase, Bank of America, Wells Fargo. Even worse they use the same guy that got them their primary residence. Don’t use those guys cause now you are buying a remove non-owner occupied rental!
      You are getting an investment property that you are not going to live in. It is a going to be a little different and a typical residential owner occupied property and the drone working at those big banks will just mess it up as the file gets passed from the sales guy (the one you interact with) to the underwriters (people who cover the banks butt).
      Not all lenders are created equal. And it always preferred to work with a lender who is an investor too or works with other sophisticated investors to draw the best practices as opposed to it being a blind leading the blind experience.
      If you are serious buyer let me know and I’ll connect you with who we use.Who are you using and I’ll let you know who I recommend.If you would like a referral to a turnkey provider or broker let us know here.
    9. Additions to the Newbie Money GuideSaving rate versus investment returns?Albert Einstein supposedly once said that compound interest is the eighth wonder of the world. But Einstein was an employee never understood leverage in government subsidized real estate loans x compound interest.What matters more: your saving rate or your investment returns?Accumulating Wealth in the Early YearsIf your goal is to achieve a net worth of $1 million (bad goal since it should be more a cashflow per month number) and you invest $10,000 every year and earn a 7% annual return on your investments — which is a reasonable assumption for long-term stock market returns — you’ll accumulate $1 million in about 30.7 years.
      The pixelated chart below shows exactly how long it would take to reach every $100,000 net worth milestone, using the assumptions of a $10,000 annual investment earning a 7% annual return:Notice how each $100,000 net worth milestone takes less time to reach than the last.Take away 1: We are told the normal stock market stuff grows at 8-10% a year. But what happens if you direct invest in deals and make 25-35% a year? What about a conservative 15%?You might find these charts discouraging if you’re someone who has yet to save their first $100,000.The numbers don’t lie: The first $100,000 takes the longest to accumulate. Warren Buffett’s longtime business partner Charlie Munger even once said, “The first $100,000 is a bitch!”I’m not a rocket scientist (did go to Space Camp) but it takes a large portion of the fuel to get the Space Shuttle off the ground a few inches. The rest is just momentum. In a real estate investor’s progression we call this the law of the first deal where its not going to be that great but as you stick to it you learn and more importantly your network grows (or join these others on the journey) and your ability to attract better deals improves.Have you ever tried to court a cat? You need to attract it! That’s how good deals are… they come to you.SimplePassiveCashflow.com is meant for high(er) net-worth, wait correct that… not-broke people who are responsible with their money and hard working professionals. We are real estate investors and you need money to invest.If you are aiming for financial independence (especially while working a full-time job) focus on variables you can control. Those ingrained in the the FIRE (Financial Freedom Retirement Extreme) movement focus on saving money. Never having a $5 Simple Passive Cashflow Latte. We astute investor responsible use debt to maximize returns (and be smart with how we spend money).
      Personally I live by the Fat FIRE life style which consist of:

      1. I don’t buy anything I don’t really need
      2. Focus on experiences and get out of trading time for money
      3. And BTW I drive a Mercedes (only after my cashflow allowed me to do so)

 

  1. Freddie Mac Predicts 8 Percent Increase for 2019 Multifamily Loan Origination Volume – 19.08.13 REBusiness – “According to the report, vacancy rates are expected to inch upward as new supply comes on line. The U.S. Census Bureau reports five-plus unit multifamily completions are on pace in 2019 to exceed the previous few years. Freddie Mac’s updated forecast calls for multifamily developers to add up to 365,000 units in 2019, compared with the 345,000 units completed in each of the prior two years.” – [More steady supply of Class A new builds]
  2. 2Q19 UNITED STATES MULTIFAMILY CAPITAL MARKETS REPORT
    Sales Volume Quarterly sales volume totaled $43.2 billion, representing a 15.9% quarter-over-quarter increase and an 18.5% year-over-year increase compared with second quarter of 2018. Additionally, this marks the ninth consecutive quarter in which the multifamily sector has been the top recipient of sales volume of all major property types.
    Cap Rates Cap rates compressed 3 basis points year-over-year to 5.39% nationally. Over the past 12 months, cap rates in non-major markets have compressed 6 basis points as investors chase value-add product in well-positioned suburban markets.
    Rent Growth Annual effective rental growth accelerated to 3.2% nationally, while markets such as Las Vegas and Phoenix experienced rental growth of 7.8% and 7.5% respectively.
    Supply and Demand Demand remains remarkably strong as 196,847 units have been absorbed year-to-date, compared with 135,710 new units delivered nationally. Charlotte and Nashville experienced inventory expansion of 4.2% and 3.6%, respectively. Despite the uptick in inventory, absorption remained strong over the past year, as demand outpaced new supply in emerging markets such as Charlotte and Nashville.
    International Capital Direct acquisitions by international capital sources totaled $15.7 billion over the past 12 months, representing a 7.5% increase year-over-year. Canada remains the top buyer of US multifamily, accounting for 58.3% of acquisitions.
    Debt Markets Mortgage debt outstanding for multifamily grew to $1.4 trillion, a 1.3% quarter-over-quarter increase as debt capital remains plentiful. Debt outstanding for GSE lenders experienced the largest nominal change on a quarterly basis, increasing $12.3 billion.

    Soooo I asked the question and the gods wrote this article for me the next day…Is Multifamily Overbuilding? – 19.08.14 ALN

  3. “All told, there are 18 markets across the country with more units currently under construction than have been absorbed in the prior three years. Once currently vacant lease-up units are added in, that number rises to 52 markets. This means for about 30% of markets, average occupancy will fall without an uptick in demand. Another 27 markets will need to maintain their current level of demand as these units hit the market to maintain current average occupancy.Economic indicators like wage growth, job growth and unemployment have looked promising this year, but there are also causes for concern. The trade war is beginning to have an impact and equity volatility has ramped up.”
  4. Top 5 Hot MFH markets (just based on occupancy growth)5. HUNTSVILLE, ALA.
    Known primarily for its aerospace and defense industry, Huntsville, Ala., is diversifying its economy by also focusing on the tech and manufacturing sectors. Both Facebook and Google are developing data centers in the metro, in two separate investments totaling more than $1.3 billion. Additionally, Mazda-Toyota is investing $1.7 billion in an upcoming manufacturing facility where the company is expected to hire as many as 4,000 people. Unsurprisingly, Huntsville’s overall occupancy rate increased 90 basis points year-over-year as of April. The metro’s population grew 6.3 percent between April 2010 and July 2018.4. MCALLEN, TEXAS
    Image courtesy of Anthony Acosta via Wikimedia Commons
    Image courtesy of Anthony Acosta via Wikimedia Commons
    The economic and demographic boom of the border metro of McAllen, Texas, shows no signs of stopping, following a 120 basis point uptick in its overall vacancy rate year-over-year through April. Between April 2010 and July 2018, almost 100,000 persons settled here, an 11.3 percent surge. Meanwhile, developers added 4,680 new units to the metro during that time. McAllen had had a consistent occupancy rate of more than 93.0 percent until the end of 2017, when 1,100 units came online, almost three times as much as in 2016. However, the new inventory has been quickly absorbed and the occupancy rate surged back to 93.2 percent by last July. Of the five metros on this list, McAllen had the lowest average occupancy rate in April, 93.4 percent.3. TALLAHASSEE, FLA.
    Tallahassee, Fla., has seen unprecedented population gains since 2010, a 4.2 percent surge as of July 2018. As a result, construction activity picked up pace in the metro over this period and increasingly so in 2018, with 1,003 units delivered, a 129.5 percent increase from the previous year. In 2019, developers are expected to complete nine projects totaling 1,442 apartments, the highest level in more than two decades. But as supply couldn’t keep up with demand, the metro’s occupancy rate jumped 1.3 percent year-over-year as of April to 95.0 percent, on par with the national average.At the beginning of the year, Carter Multifamily expanded its Florida footprint with the acquisition of a 262-unit community in Tallahassee.2. COLUMBUS, GA.
    The metro benefits from a strong employment market, up 1.6 percent year-over-year as of March to 191,000 total jobs, and an estimated unemployment rate of 3.8 percent as of April, the lowest level on record. Demand greatly outpaced supply, as developers completed fewer than 100 units since October 2017. As a result, the metro’s occupancy rate increased 1.3% year-over-year through April. Unsurprisingly, the overall rent grew 3.7 percent during the same period, 110 basis points above the national average.1. WILMINGTON, N.C.
    One of the country’s top markets for multifamily rent growth, Wilmington, N.C., is outperforming every other metro in the state— in terms of growth in occupancy rates, as well, with an increase of 3.2 percent year-over-year through April. An astonishing turnaround, considering that two years ago Wilmington was among the country’s top markets with the greatest occupancy loss, following the record completion of 844 units in the first two quarters of 2017, nearly double the total deliveries of 2016.According to the latest U.S. Census Bureau population estimates, the metro’s population increased by 15.5% between April 2010 and July 2018, placing it 49th in the country. During this period, developers added about 3,500 units to the metro, keeping the average occupancy rate consistently above 92.0 percent and as high as 96.5 percent this January.
  5. What is this China Trade War?Potential higher costs for goods.President Trump raised tariffs again on $200 billion worth of Chinese imports, from the previous 10% increase to 25%.Most believe its good in the long run but short term it’s a bit of a head-to-head hunger strike (where the US should prevail)May 13th China put higher tariffs on about $60 billion of American goods.The Dow plunged as much as 700 points. (China impacted stocks Apple and Boeing impacted most) Other Articles: NYT – Reuters – CNBC 
  6. Yardi Report – 19.08.13 – [No major findings] – “The average U.S. multifamily rent increased by $3 in July to $1,469. Year-over-year growth increased to 3.4%, up 10 basis points from June. Rent growth has remained at the 3.0% level or higher all year. In this prolonged positive cycle going back at least six years, the consistency and geographic di- versity of rent growth remain the most remarkable elements. Fast-growing metros in the South and Southwest, metros with strong technology industries, established metros in the Northeast and Midwest—all are producing healthy gains. “
  7. CNBC – What is the yield curve — and why it matters – 19.08.15 – “Yields on 10-year US Treasury bonds dipped below the yield on the US 2-year bond Wednesday. It was the first time the 10-year yield was below the 2-year yield since 2007 — just before the Great Recession. Both were hovering around 1.58% as of late Wednesday afternoon. In another worrisome sign, the yield on the 30-Year US Treasury fell to a record low Wednesday of about 2.01%. This is significant. When shorter-term rates are higher than longer-term bond yields, that is known as an inverted yield curve. The 3-month US Treasury already inverted versus the 10-year this spring. Yield curve inversions have often preceded recessions and are a sign of just how nervous investors are about the immediate outlook for the economy. They are demanding higher rates for short-term loans, which is not normal.”
  8. CNBC – Janet Yellen says yield curve inversion may be false recession signal this time – Markets should place less weight on this yield curve inversion, former Federal Reserve Chair Janet Yellen said Wednesday.”
  9. FOX – Wall Street regains momentum after worst day of year – Wall Street rallied Thursday morning, after a severe routing on Wednesday that saw all three major indices notch their biggest declines of the year on fears of an impending recession. Trump reignited tensions between the two sides earlier this month when he said he would impose an additional 10 percent tariff on $300 billion of mainly consumer goods imported from China, starting on Sept. 1. Earlier this week, the White House said it would delay taxing some items until Dec. 15. Trump blamed the Federal Reserve for Wednesday’s market dive, branding Fed Chairman Jerome Powell as “clueless” for not easing monetary policy as central banks in other countries have done. With the economy as the central focus of his re-election campaign, Trump has continually berated Powell for not slashing rates sooner, despite the Fed’s quarter-point-percentage cut last month. While some market observers concede that the Fed should trim rates, Trump’s chaotic and sometimes contradictory trade rhetoric has left many U.S. businesses struggling to find clarity — a situation that will become all the more critical as the holiday season approaches.” – [Wow]
  10. Commercial Property Executive – 19.08.16 – What the Inverted Yield Curve Means for CRE -“Typically, when you see a yield curve invert, banks begin to tighten lending standards, and they make fewer loans,” said Sweet. “You can see that already beginning to happen with some lending in CRE mortgages.” – [We have gotten personal emails from our contacts at Freddie Mac that they have already hit their lending quota for the year]
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