A Limited Partner is a passive investor in Multifamily Real Estate syndication. By definition, the limited partner is basically responsible for bringing capital to the deal.
My conversation with Lane Kawaoka, host of the podcast Simple Passive Cash Flow , takes an honest look at multifamily real estate investing from the limited partner view.
Lane started in single family real estate and quickly realized that in order to grow enough cash flow to replace his W2 job he needed to scale. He recognized that Multifamily real estate was the answer, but did not know how.
In Multifamily, you can go it alone, partner, joint venture, or syndication. Syndication is a group of investors that pool their money to purchase a larger property that is likely out of reach if they tried to purchase alone.
A syndication has two level of partners,: General Partner and Limited Partner.
The General Partner (GP) is the quarterback. They are responsible for qualifying the market, connecting with local brokers, finding the property, coordinating the prospectus, attracting investors, operating the property. For this work, the General Partner is compensated for operation and performance of the deal.
The LImited Partner (LP) supplies the capital needed for the down payment and capital expenses. They have no duties regarding the acquisition nor operation of the property other than providing the capital. This is truly a passive investment for the LP.
When you are an LP, it’s your job to find an opportunity and a GP, operator, that you feel will do a good job and provide solid returns on your investment. So, what are you looking for in a General Partner?
A qualified General Partner, individually or his team, will posses a proven track record. “Past performance does not necessarily predict future results”, however, it does give you a chance to judge if the GP and team are qualified.
Things to look for in a General Partner:
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Prior CREPN episode:
Multifamily Syndication is a team sport. You will multiply your success when you create a winning team.
Vinney Chopra has successfully purchased over 26 multifamily properties through syndication. In this interview he describes the members you need on your multifamily syndication team for success.
Relations at all levels are key to your success in all real estate investing. For newer syndicators, you can overcome a lot when you have experienced professionals on your team.
Once you have selected an emerging market to invest in, you need to find the following members for your team.
Partner: this is the person you identify with that shares your vision and can share in doing the work that needs to get done. Someone with a different skill set that compliments you tends to work best. There are numerous jobs that need to be taken care of and together you can divide the work and conquer. One thing to consider is a partner with strong financials. Chose your partner wisely because you will likely be working together for multiple years.
Commercial Real Estate Brokers are essential to success. Due to the nature of commercial real estate, having relationships with multiple brokers can pay dividends. Brokers have the relations with the local property owners, know the market, the properties, owners and who is a potential seller. You will do best if you present your specific buying criteria so they know exactly what you are looking for.
Loan Broker is your source of funding. The amount you will qualify is dictated by the networth of your general partners. An experienced loan broker will know the various programs available and be able to find you the best funding.
Attorneys are critical to the legal structure needed for your success. The attorneys will form the LLC entity for the property and your operating company. You also need a securities attorney to prepare the private placement memorandum, operating agreement and subscription agreement. Each of these are critical your ability to raise money and stay out of trouble.
Property Manager has the critical needed experience managing multifamily properties. The property manager will also help recognize issues during your inspection that need to be addressed with the seller. An experienced property manager has will convey confidence to lenders and your investors. A good property manager has relations with contractors, knows the laws and has systems to deal with most situations. Their experience is key to the profitable operation of your property.
Investors: Start talking to everyone as soon as you decide you will be investing using syndication model. You must have a prior relationship with your investors who invest in your syndication. Without investors, you will never buy a property.
CPA: Your CPA will prepare the annual financials you need to communicate the property’s performance to your investors. Your investors will expect your numbers to be presented in a standard accounting format.
Contractors of all types. The good news is that with multiple units, you have the chance to achieve economies of scale. When you find a quality contractor that provides the best service and price, add them to your “preferred vendors” list. These are your go to solutions when a problem arises. Let the contractors know that there will be additional work in the future and see if they can recognize this future work in their pricing.
For more go to:
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Prior episodes with Vinney Chopra
Multifamily due diligence can be a black hole for real estate investors.
Nathan Tabor has learned expensive lessons from flipping multifamily properties. He shares some lessons and what you can do during due diligence to avoid learning the hard way.
Remember, the object is to learn all you can before you close so that you have no surprises. Here is a short list that every real estate investor can use.
Before you spend any money on physical inspections, contact the local authorities. When possible, go to the building permit authority in person and confirm that the property is zoned for the current usage, and future usage if you have construction plans.
Find the local Housing Authority. It may be the city or county, but usually there is an advocate for tenants to complain to. Look for complaints against the property. Google the property to see what comes up. If the property is not well taken care of, tenants will likely complain. Find out if any complaints have been filed before you close. They will be your responsibility after the property is yours.
Look for the eviction court record. How many evictions have been filed against the tenants at the property. If there are a lot of evictions, you have a very unstable property.
Crime records; how many times have the police been called to the property and for what. You can renovate a property, but it is really hard to renovate a neighborhood.
If the above issues check out, it’s time to move to the physical property due diligence.
Older properties can be an endless opportunity for unplanned cost. Some things Nathan has learned to check for.
Know the entire Electrical system. Check every plug to make certain there is power. Ask questions about the wiring. Is there any aluminum wiring? Are there fuses or circuit breakers. If circuit breakers, what brand of electrical box? All of these can significantly affect the insurance you will be able to get for the property and the cost.
Trip and fall hazards. Inspect the parking lot, walkways and stairs for cracks and uneven surfaces. If there are issues, you need to identify them now and the cost to fix. If you don’t and the insurance company inspection is unfavorable, you could lose your insurance.
The plumbing system. Sit on every toilet to see if the sub flooring is solid. Scope all of the waste lines for any blockage or failures. Turn on the water in multiple fixtures at the same time and see what happens. Is there a fire hydrant on the property, if so is it yours or the city’s? Find out the answers and get estimates for needed repairs.
If you pay to much, you can lose you can mess up your future opportunities to invest in real estate. Your offer price cannot be more than the property can support. A good way to avoid paying too much is to back into your offer price. How much you want to make? What are the estimated repair cost, carrying cost, etc? Add all of these together and you will know the maximum amount you can offer. Leave no stone unturned.
When you get your loan offer, be sure to read the requirements for insurance. If the loan allows for a maximum deductible of $5,000 and your insurance quote has a $25,000 deductible, it will cost you to buy the lower deductible.
Verify the Sellers numbers. Verify the Rent Roll with the bank statements to see if the rent deposits match the rent roll. You can also ask for tax returns. The seller may inflate the rent roll, but will likely not inflate rent collected on his taxes.
For more go to: nathantabor.com
The Rent Roll Triangle is a simple underwriting calculation to determine if the property has potential for a value add strategy.
John Wilhoit is an experienced asset manager. He takes us through how you can utilize the rent roll triangle so you can determine how the current income of a property compares to its potential.
The rent roll triangle compares the collected rent to the gross potential rent to determine how the property is currently performing against its potential. Once calculated, you will know if there is an opportunity to increase the rents. If you are looking in a particular market, you can look at multiple properties to determine which property to submit a letter of intent on.
Numbers needed to calculate the Rent Roll Triangle:
How to calculate the Rent Roll Triangle:
Divide: Annual Collected Rent / Annual Gross Potential Rent
Annual Collected Rent: $80,000
Annual Gross Potential Rent: $100,000
$80,000/$100,000 = 80%
The property is rented to 80% of its gross potential, or
there is a chance to increase rents by 20%.
From here, you will need to determine how significant of a value add is needed to raise the rent. Is it a simple matter of increasing the rents, paint, or do you need significant capital improvements? How long will it take to earn back the cost of the upgrades?
There is an endless number of calculations real estate investors can use when evaluating an investment property. I have found that experienced investors focus on a couple of measurements when investing.
Use the Rent Triangle to quickly determine the income potential of your next value add real estate purchase. Regardless if you are buying a duplex, apartment building or office building, this easy to use calculation will show you a property’s potential upside.
So, if you are looking for an easy calculation to determine if there is more underwriting needed, consider using the Rent Triangle.
For more go to:
Joint ventures are an option every real estate investor should know.
Growing your real estate portfolio is capital intensive. Eventually you will run out of your own money. When real estate investors reach this point, you have to look for other people’s money, OPM in order to keep growing.
Jeff Lerman, the Real Estate Investors Lawyer, works with real estate investors. He takes us through the benefits of joint ventures compared to syndication.
A joint venture is the coming together of two or more parties to achieve a goal. It is the cheapest, easiest, fastest and safest way to do real estate deals with other people’s money.
The members of the joint venture must take an active role in the work to meet the goal. Investors cannot be passive. Roles must be defined, and records must be kept in order to satisfy any legal challenge of the legitimacy of the joint venture.
In all cases, joint venture or syndication, pick your partners wisely. Set it up right. The last thing you want is to get tied up in some lengthy, costly litigation that tears apart the wealth you have worked so hard to build.
For more go to:
Multifamily Syndication is a great option if you are looking to scale your real estate investment strategy.
Real estate investing takes tremendous amounts of capital. When you run out of your own money, do you stop, or try to keep going?
Vinney Chopra is an experienced deal sponsor who has purchased over 38 properties through multifamily syndication. Today, he takes us through the why, what, who, how it works.
When you run out of your own money, your ability to grow your real estate portfolio will stop. Unless, you learn how to attract other people’s money, OPM. Syndication is an investment vehicle that allows unrelated investors to pool their capital together. The combined funds allow you to purchase larger, more expensive multifamily properties than you are likely to qualify for on your own.
The syndication forms an entity that has two general groups; general partners and limited partners.
The general partners are the sponsors, or the syndicator, of the deal and are responsible for finding and actively operating the multifamily property. Additionally, the general partners attract investors. The investors are passive and join property purchasing entity as limited partners.
Because you have investors trusting you to take care of their money, the SEC requires multiple documents that make clear to all parties the risk. The documents also make clear how the entity is to operate, responsibilities of the parties, and how the money will flow.
You will need a securities attorney to prepare the Private Placement Memorandum, Operating Agreement and the Subscription Agreement for each syndication.
Rule 506 B or C
There are multiple vehicles for raising capital. The two most common for multifamily investing are 506b or 506c. Both allow for you to raise capital from accredited investors. The distinct difference between the two is based on whether or not you have a pre existing relationship with the investor.
Regulation 506b requires that all investors have a pre existing relationship you the deal sponsor. You can also have up to 35 “sophisticated investors” participate in this structure.
Regulation 506c requires no pre existing relationship. Additionally, you can advertise far and wide and attract any accredited investor to participate in your deal.
Click the link for a FREE EBook about multifamily syndication.
Call / text (925)766-3518
How will Blockchain Technology disrupt your real estate investing business?
You’ve heard the word blockchain, and maybe associated it with a cryptocurrency like bitcoin. It is true that bitcoin uses shared ledger technology, but it would be wrong to assume that cryptocurrency is a blockchain.
Joe Snyder, the CEO of Lannistor Holdings, takes us through what a blockchain is and how it will be used in real estate investing in near future.
The simplest description of a blockchain is:
All users with access to the ledger can see the in real time, exactly what is the current status. Because there is not one central point, the opportunity for a hack or corruption are reduced.
Every major industry, government and education institution is looking into how they can employ blockchain technology. They are looking at how using a shared ledger can result in cost savings and loss mitigation.
It is estimated the next 36 months shared ledgers will be introduced and become the standard for many current paper systems.
You are a real estate investor asking how will Blockchain affect your real estate investing. A couple of easy applications are chain of title and lender investor records, ie mortgage backed securities.
For your real estate investment, a clean title is a must. If your title has a hidden lien, no lender will lend, and you will not be able to transfer ownership to a willing buyer. Shared ledger technology would allow for the local government, seller, buyer and lender to determine with certainty if there are any claims against the property instantly.
Do you remember the mortgage meltdown and the mess created by mortgages that were packaged, securitized and resold? There were multiple stories of homeowners losing their homes because the bank or loan servicing company was selling the home because they could not identify performing mortgages from non performing .
A blockchain would have provided instant identity for the homeowner to stop the sale, and or the lender to recognize the loan was performing.
These are just a sample of how shared ledger technology will affect real estate investing.
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Learn how you can reduce your Multifamily Operating Expenses by using micro water meters.
The ability to increase your net operating income and property value can be affected by either increasing your rents, lowering your expenses or both.
When you use micro water meters to measure your building water usage, you have instant actionable performance data that you can immediately respond to and correct the leak. Your ability to timely stop your leak can reduce your operating expense, save money and water.
Jack Howell with ION Energy Solutions, monitors over 800,000 micro water meters daily. Because ION measures so many units, they have the experience and data benchmarks to recognize instantly when one of your units has a leak.
The average cost of a gallon of water is $.01. The average usage of a two bedroom apartment is 100 gallons per day. If one toilet flapper chain gets hung up and the flapper does not close, and the toilet fills for six to seven hours, that toilet can waste as much as 3,000 gallons in one day. That’s more water in one day than should be used in one month. If that one toilet leaks for 30 days, it’s easy for the cost of wasted water to add up.
Water leaks have little to do with gallons and everything to do with time. An average medium leak will waste 1,000 gallons per day. How long would it take for you to determine you have medium leak? How much will your medium leak cost you over 3 months?
There are multiple reasons to consider installing micro meters. The primary reason are financial. Less water used, results in a lower water bill. Additional reasons include that the micro meters qualify for Green Loan Incentives. Use of micro water meters can also fulfill some of your reporting requirements for Low Income Housing Tax Credits.
If you own multifamily property and are looking for ways to reduce operating expenses, you need to know about the savings available through the use of micro water meters.
For more go to: www.IONENERGYSOLUTIONS.com
To master the art of Commercial Real Estate Investing is to recognize and understand that investing is more than just the numbers.
Investing is much more subjective than objective. Each deal lis different. You have to recognize and understand what is important to the parties in the deal. You have to be a good communicator, ask questions and listen in order to understand what is really in play.
Doug Marshall of Marshall Commercial Funding has just released his book Mastering the Art of Commercial Real Estate Investing. He provides some insight about the book and what he has learned as a commercial mortgage broker and real estate investors.
There is so much to learn about real estate. Most investors focus on the numbers. If they go it alone, they learn the hard way, and make avoidable mistakes. Investing in commercial real estate is not something to do for a fast buck. To invest in real estate you have to take a long term view, 5 - 10 years.
Key takeaways from Mastering the Art of Commercial Real Estate Investing
Inside the book you will learn how to:
Inside the book, you will learn how to go about getting commercial real estate financing:
For more go to: http://marshallcf.com/
Multifamily Real Estate Investing is proven to be one of the best ways to create generational wealth.
Vinney Chopra is a multifamily syndicator and previous guest on CREPN #118. Together, over the next several weeks, we will make the case for investing in multifamily real estate. So, if you are not yet convinced, listen and subscribe so that you catch the following episodes.
Single family real estate investing can be deceiving. Each house is its own business. One source of income and multiple potential expenses You may think you are making cash flow. However as soon as an unexpected repair or vacancy comes up, your cash flow can be wiped out instantly.
Multifamily property is its own business. You have economies of scale. There are multiple income streams, one from each resident and considerably fewer shared expenses.
Single family property are valued by the price per square foot that the neighbor received in a recent comparable sale. You have no control over the value.
Multifamily property value is based on the net operating income, noi, earned by the property. This number is divided by the local capitalization rate, cap rate, for the type of property. If the seller has not kept up with rents, or you identify expenses that can be reduced, you can improve the noi and the value of the property.
When financing a Single Family property, the bank looks at you the borrower. Each property has its own loan and as your portfolio grows, your debt to income ratio increases. This rising debt to income ratio will cap your ability to add additional properties and grow your portfolio.
Multifamily financing looks at the property and its ability to generate income. Rents minus operating expenses. This number needs to be at least 125% of the cost to service the debt or the bank will not lend on the property.
Ordinary income vs Capital Gains.
Depreciation is a paper loss you recognize when you file taxes. For residential properties there are two options; straight line over 27.5 years or accelerated through a cost segregation study. Depreciation provides a paper expense against the income generated by the property. This paper expense improves the overall cash flow by reducing the taxable income and thus the income taxes due from the multifamily property owner.
Upon sale, assuming the property sells for more than the purchase price, the depreciation is recaptured. Additionally, investment real estate held over two years is subject to capital gains tax rate instead of ordinary income tax rate. The tax rate for capital gains is lower than the individual ordinary income tax rate.
For investors wanting to defer the taxes, they can elect to defer the taxes by using a 1031 exchange as long as they follow the rules and invest in a replacement property.
For more go to:
Call / text (925)766-3518