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There is a shift in multifamily investing we recognized last year, and are moving forward with again this year...Funds! With all of the current, and even more so, upcoming opportunities, NOW is the time to be positioned to move quickly to capitalize on them.There are some key advantages being in a fund provides us as investors:
#1: Primed to Strike - By joining our Blue Lake Multifamily Fund, you will be in the company of investors that understand the power of having capital ready to deploy into opportunities as they arise in the multifamily sector. This is a strategic and advantageous position to be in.
#2: Better Negotiating Power - While cap rates are higher, multifamily assets are taking a hit to their valuations. This means we are more likely to find discounted or more accurately priced assets in the market more so than the inflated valuations we saw through 2020-2022. Cash is king, and sellers are more likely to take a lower offer from groups that can close faster and provide a stronger assurity of closing, even if they are not the highest bidder.
#3: Minimized Risks through Diversification: A Fund relies on the combined performance of multiple assets across multiple markets, instead of all your "eggs in one basket" with a deal by deal approach.
#4: Capital Preservation and an Inflation Hedge - With inflation at the forefront of the economy, multifamily assets are one of the best ways to preserve your capital and generate passive income to grow your wealth.There are several other advantages I would like to share with you, and in particular, how my company Blue Lake specifically manages and enhances the performance of our multifamily investments.If you're ready to learn more, please join me for a LIVE investor webinar where I will present this opportunity and strategy in greater detail, as well as address any questions you might have.
Register here: https://lnkd.in/e5KSnV5d
Any multifamily deal can be made to look good, so how can you protect yourself as an investor to know which are truly good deals and which aren't? Join us for a live demo to learn what factors are most critical when sponsors underwrite. This will help to ensure you are equipped to ask detailed questions when evaluating opportunities. While this demo won't make you an underwriting expert, it will equip you to know just enough "to be dangerous".
Join us for an innovative and game-changing webinar: "How AI is Revolutionizing Multifamily Deal Sourcing," featuring CEO of Archer, Thomas Foley.
Discover how AI now offers real estate professionals predictive software that is revolutionizing real estate acquisitions by condensing weeks of work into mere minutes and greatly sharpening your competitive edge. Join us to learn:
- How to identify the best markets
- Uncover the strongest deals in line with your criteria
- Execute lightning-fast and accurate underwriting
AI is changing the game for multifamily, and we're excited to show you how!
Sponsored by Blue Lake Capital
Join our exclusive webinar, "How to Deal With Uncertainty When Investing in Real Estate," where we delve into the dynamic world of real estate investment and equip you with the tools to navigate uncertainty with confidence.
In this thought-provoking session, Blue Lake Capital's Founder & CEO, Ellie Perlman, will share valuable insights on mitigating risks, adapting to market fluctuations, and making informed decisions in the face of uncertainty.
Another option to consider along the same line as a DST is an IST (Installment Sales Trust). The key is to make sure it's set up correctly.
@Ashish Rizal when it comes to vetting sponsors, some investors ask to speak with my current investors, or our projections vs actuals report.
Many investors are talking about the new eviction moratorium, and worry about the potential and immediate impact on multifamily. On the surface, it does sound troubling, but I have read the new moratorium and also witnessed the actual impact on my multifamily properties. Before we start talking about the actual impact, let’s dive into the new eviction moratorium basics. The original eviction moratorium expired on August 31st and included a broad cross section of tenants regardless of their income, as well as the loss of employment whether or not it was due to COVID-19. In most cases, eviction depended on the state where the property was located. Some states had a more inclusive moratorium, while others had a loose moratorium or didn’t have one at all.
The truth is that some tenants tried to take advantage of the moratorium and failed to pay rent in a timely manner before COVID-19 came along. The original moratorium was much harder on landlords than the current one, because with the original moratorium, you couldn’t even start the eviction process. The main difference between the old and new eviction moratoriums, which many investors are unaware of, is that now you can actually evict tenants who are not paying their rent. Moreover, the tenants who want to be shielded by the moratorium need to take some actions, which we will discuss later, to stop the eviction.
So, how does the new eviction process work today? It starts, of course, with an eviction notice. Individual states and counties have their own unique rules and regulations, with some requiring a 3-day eviction notice to tenants and some requiring a 30-day notice. Once you provide notice, it’s up to the tenant to research, find, and sign a declaration form that claims that they will become homeless if evicted, and that they have loss of income due to COVID-19. With the original eviction moratorium, tenants didn’t have to do anything when they didn’t pay their rent. Managers or staff would often knock on doors, and tenants would choose not to answer the door or their phone, avoiding the eviction process entirely.
Major Differences Between Eviction Moratoriums
With the new eviction moratorium, the burden is on the tenant to sign a declaration stating that they’re not paying rent due to the COVID-19 and are requesting that the landlord stop the eviction process. Previously, the tenant didn’t have to do this.
With the new moratorium, the tenant is declaring that they’ve used their best efforts to secure government assistance for rent or housing. They are also declaring that they are unable to pay their full rent or make full housing payments due to substantial loss of household income, loss of compensable hours or wages, layoffs, or extraordinary out-of-pocket medical expenses due to COVID. This was not included in the original eviction moratorium.
In addition, tenants now must declare that they are making less than $99,000 per year (individual) or $198,000 if they file jointly. Most tenants in Class C and D properties will likely meet that income requirement. For tenants renting in Class A and some B properties, it’s more likely than not that they will be making more than the maximum allowed under the new eviction moratorium.
Now, once the tenant signs the new declaration, they’re doing so under the penalty of perjury. This puts the tenant at risk of being sued by the landlord and the state if any false statements are made.
The CDC Created the New Eviction Moratorium
It’s interesting to note that the new national eviction moratorium for the balance of this year didn’t come from Congress or the Department of Housing and Urban Development. Instead, it came from the Center for Disease Control. So, why would the CDC be involved in issuing a halt in residential evictions? According to their director, Dr. Robert Redfield, evictions could end up being detrimental the measures used to control public health, as well as increase the potential spread of the COVID-19 virus. Some of the wording in the declaration that the tenant must sign is designed to call attention to that aspect of the moratorium. This includes declaring that being evicted might lead to homelessness, or being placed in a shelter where many other people will also reside. Both of those scenarios would increase the potential for acquiring COVID-19.
The new eviction moratorium was written under the Public Health Service Act. As you would imagine, a tenant can still be evicted from their residence if they engage in any criminal activity on the premises, are found to be threatening the health or safety of other tenants, being in violation of any health ordinance or building code, or posing an immediate and significant risk or damage to the property.
Putting Things in Perspective
Landlords are not responsible for instructing tenants on how to deal with the new eviction moratorium or how they should proceed with the new declaration that is required. The burden is now on the tenants to gather all of this information and submit it to the landlord. Because the declaration is comprehensive in what it includes, and that it explicitly states that signing it makes one subject to perjury if they aren’t truthful, helps to reduce those who have previously used the COVID pandemic as a reason to avoid paying their rent, even if they could afford to pay.
The truth is most tenants are unaware of the declaration form and how to stop eviction. I can tell you that on my properties, once we’ve sent eviction letters, tenants actually paid right away, which means, that the new eviction moratorium has a low impact on multifamily. Of course, this is only my experience as an operator, and some states have a more expansive statewide eviction moratorium.
Many tenants don’t realize that while they will avoid eviction during the moratorium for not making full rent payments, once they submit a declaration, they will still be liable for paying their full rent when the moratorium ends. The landlord can, if he or she chooses, ask for the entire amount in arrears when the moratorium ends. This can put an undue burden on many individuals and may discourage them from signing the declaration.
Additionally, the tenants may be liable for fees, penalties, or interest payments as a result of the failure to make their rent or housing payments in full on a timely basis. Currently, the moratorium is scheduled to expire at the end of this year. If you have tenants who have submitted a declaration, it’s important to encourage tenants to continue to communicate with you if their situation changes, as well as encourage them to continue to pay what they can in rent. This shows that they are making their best efforts to pay and will also help when the moratorium ends for the amount due in arrears. There are also some creative ways to handle non-paying tenants, which you might want to consider.
Here are 3 tactics that can help make your deal work that I've discovered. If you have any others you have found that are helpful, please share!
1. Reallocate your Funds
During the pandemic, lenders have increased the reserve required to finance a property. Today, lenders have increased their required reserves, which amount to 9 to 12 months of debt payments. To cover that amount of money, some sponsors raise more capital. As an example, instead of raising $3M, they raise $3.5M, if $0.5M amounts to 12 months of debt payments. However, that could impact your returns because you’re raising more capital than the deal actually needs, and may dilute your investors.
One creative way that I discovered to make the deal work is to use some of your capital expenditure (CapEx) budget to pay the debt, assuming you don't have an immediate need of 100% of the budget. For example, if you've budgeted $750,000 for capital expenditures, which might include renovating units, improving landscaping and new paint, etc., you can reallocate some of that money and use it for your escrow requirement. After 9 to 12 months you'll have the money back in your CapEx budget because the lender will be taking your funds from the escrow account. This way, you are not diluting investors and don't need to raise more than you need in the 12 months after closing. Just be sure you're not using 100% of your CapEx budget because you'll always have some unexpected expenses.
2. Adjust your Fees and Splits
Another creative way to make a deal work is to consider reducing your fees. For example, instead of taking a 2% acquisition fee, you can charge only 1.75%, so investors can receive a yearly return that makes sense. You’ll still be making money on the deal, albeit slightly less. However, you must remember that 1.75% of some dollar amount is far better than receiving 2% of zero dollars, so if the deal doesn’t make sense with a 2% acquisition fee because investors make only 5% cash on cash, it might be better for you to lower your fees so the deal is lucrative for your investors. It’s the same with equity splits. Instead of having a 70-30 equity split, where 70% of the income goes to investors and 30% goes to the sponsor, you could have an 80-20 equity split, which reduces your income. While you will be making less money on your deal, you will at least have a deal that works.
You can also decide on the split at the time of sale. You can keep the same equity split or change it – it’s up to you as a sponsor. Just play around with the numbers to make sure that the deal works for everyone. The point is to not be fixated on specific equity splits or fees, because with some adjustments, you’ll be able to make any deal work if you’re willing to be flexible.
3. Getting a Collection Guarantee
When you’re underwriting a deal and you approach it conservatively, you take into consideration that rent collections may drop in the next 6 to 12 months. The reason is simple: as unemployment increases around the country, more and more people are not going to be able to pay their rent. However, if you approach the seller and ask to look at the average rent collections over the past 3 months, say for example, the 3-month average was $100,000, you can require that the seller provide you with a collection guarantee.
With collection guarantee, if rent collections fall below a certain threshold (in our example, $100,000 average amount over the next 10 months), then the seller would pay you for the difference between your actual rent collections and a certain threshold ($100,000 3-month average in our example). This approach was applied during and after the great recession of 2008, and it helped make many deals work. The seller can put the money in escrow, and it will be released to the buyer after a pre-determined time period.
For commercial real estate investors, syndicators and others involved in the field, investment terminology can appear to be an alphabet soup of mysterious acronyms. There are three in particular that are related to the return on real estate investments, and each has its own unique meaning and purpose.
They include CoC, which stands for Cash-on-Cash Return, IRR, which is an abbreviation for Internal Rate of Return, and Average Annual Return, which is self-explanatory. I'll explore all three, and discuss the differences of each and how they apply when exploring real estate investments.
CoC [Cash-on-Cash]
Cash-on-Cash Return is the simplest way to evaluate the performance of a real estate investment. It utilizes a formula to calculate the return on investment by taking the property’s annual net cash flow and divide by the investment’s down payment, and is expressed as a percentage.
One important detail to keep in mind is that Cash-on-Cash Return doesn’t include the property’s appreciation or any principal debt payments. Appreciation is only taken into consideration when it is realized after the property is sold. It also doesn’t include principal debt payments.
Suppose you bought a property and your net cash flow was $5,000, and the cash invested in your property was $50,000. Using that example, your Cash-on-Cash return is 10% ($5,000/$50,000). The net property investment is usually the down payment — which is the property’s cost minus the amount you borrowed.
It’s a simple formula, but it’s critical to know how to calculate cash-on-cash return in order to be a successful investor. Just be sure it’s not the only measure you use to evaluate a potential real estate investment. Take a good look at factors like vacancy rates, operating expenses, debt service and any pre-rental improvements and repairs. All of those numbers will give you a good overview of the potential investment.
Cash-on-cash measures are best when evaluating a property's first year performance, or when used to project a property's first year performance that you're considering buying. Here's why: after 12 months the actual cash invested that you use in the formula to calculate the ROI will be changing as the loan is paid down, or when property improvements and repairs are made.
The main issue with CoC as a metric, is that it doesn't take into consideration the time value of money; so if, for instance, you invested $1M in two deals and received $100,000 back (in addition to your initial investment), but in investment #1 you got the money back after 3 years while in investment #2 it took you 10 years to make the same profit — CoC will still be identical, even though it's clear that investment #1 is better.
As a metric for a potential investment, you're probably wondering what a "good:" cash-on-cash return would be. The problem is that the experts in the real estate investment field disagree on what constitutes a "good" CoC investment. Some look at a return of 6–8% as "good" while other experts would expect a CoC return of 10% or more. The bottom line is that "good" is subjective and is based on your willingness to take risks.
IRR [Internal Rate of Return]
When looking to analyze potential real estate investments, there are different metrics available. We've discussed the CoC, or cash-on-cash measure, but IRR is going to take things up a notch. Learning what IRR is — and isn't — will help you improve your analytical ability when it comes to making investments in commercial property.
IRR is quite popular as a way to measure investment performance. But popularity notwithstanding, you'll need to hone in on what the IRR really does. That's because it's widely misunderstood, and because of that we'll start with learning about the common misconceptions so you have a clear understanding of how IRR works.
Don't be alarmed by the following definition, because this isn't advanced calculus, but IRR simply put is the percentage rate earned on each dollar invested for each period of time that it's invested. Others simply call this interest. Whatever you call it, you're comparing different investments based on their yield.
Another way to look at this is to think of IRR as the rate needed to convert the sum of all future cash flow to equal your initial investment. IRR takes into account the time it took an investor to receive his initial investment (and profit) back. The best (and frankly the most sane) way to calculate IRR is in Excel.
For example: You invest $100,000 in a deal. The property generated cash flow of $40,000 in year 1, and $50,000 in year 2. At the end of year 2, the property is sold and the initial $100,000 is then returned. The total profit is $90,000 ($40,000+$50,000). CoC is 9% ($90,000/$100,000), but since two years have passed, the return percentage is negatively impacted. In this example the IRR is only 6%. The timing of when cash flow is received has a significant and direct impact on the calculated return. In other words, the sooner you receive the cash, the higher the IRR will be.
IRR is one powerful metric in helping to choose an investment, but you need to keep in mind that it doesn't always equal the annual compound rate of return on an initial investment. Why is this important? As stated above, the IRR measures the internal investment amount remaining in an investment for each period it’s invested. But an internal investment can go up or down over the holding period, and IRR doesn’t address what happens to capital that is taken out of the investment. That’s why the IRR doesn’t always measure the return on the initial investment.
When looking at a "good return" you simply want to ensure that your return reflects a sufficient amount based on the risk of your investment. If you're investing in a stabilized asset your IRR will be lower than if you're investing in a property in an unproven area or one that requires renovation or repositioning. . In today's market, many multifamily deals are closed between 11%-13% IRR, while y minimum is 15%, and that's why most deals don't work for me today.
AAR [Average Annual Return]
Average annual return, or AAR, is another metric used by investors to look at the overall historical performance of a specific investment. This could include residential or commercial real estate, stocks, bonds and other investment types. It is the average amount that is earned each year over a given period of time. Most investors look at an average annual return in a three, five and ten-year performance. Just be aware that average annual return is not the same as average annual rate of return.
In its most basic mathematical formula, you take the sum of the return rates of your investment over a specific number of years and divide it by the number of years. Let’s say you want to calculate the average annual return over five years; the return in each year was 4%, 5%, 7%, 6% and 8%. Your average annual return would be 6% (30% divided by 5 years).
As an investor looking at a commercial building, for example, you'd want to know the potential investment's current annual return as compared to its historical return. It's just one more measure of the investment to consider as part of your due diligence, along with the CoC and the IRR.
Doing Your Homework
Now that you have a basic understanding of CoC, IRR and AAR, let's take a look at the differences between them. The key difference between CoC return and IRR is time. Let’s say you hold your investment for one year — at that point CoC and IRR are pretty much the same. But if you hold your investment for over a year, IRR will provide a more accurate view.
We’re starting with these because when looking at a syndicator’s deal, these are the two measures you’d want to see. Just be aware that each metric has its limitations. the limits of using internal rate of return is that by itself it isn’t a great measure of an investment’s overall profit potential. And because cash-on-cash return measures are generally taken as an average of the period of operation of the underlying property, the cash flow can vary greatly.
AAR is a historical look at a property's performance, so it really can't be compared to CoC or IRR numbers. The historical look is usually a 3-year, 5-year or 10-year analysis, and CoC and IRR are current performance numbers.
The main thing an investor needs to remember is that no single measure will provide the guidance needed to assess an investment property’s potential. You need to use multiple measures to determine the viability of a potential investment, along with the track record of the key investor or syndicator, the area the property is located in and many other factors. Doing due diligence in all of these areas is the only assurance that you have really done your homework before you invest your money. Working with a syndicator who truly understands these metrics is a smart way to go if you don’t have experience with commercial real estate investments. Here’s more on how to find a top syndicator if you don’t currently have one.