All Forum Posts by: Ellie Perlman

Overbidding is the opposite of being a conservative investor. It happens when you buy above the market rate, compared to similar properties in the same general area. Another telltale sign of overbidding is when you purchase a property at a higher cap rate than market cap rates.

Capitalization rates (which are calculated as net operating income divided by purchase price) show what your return would be if you paid cash for the property. The lower the cap rate, the higher the price you’ll pay for the property. Higher cap rates usually lead to higher returns, but a cap rate that is too high can be an indicator of risk in the investment. The national cap rate for multifamily is 5%.

Here’s something to think about: You may be overbidding on a property if you ignore signs that you should be more cautious in your investment approach. This can happen when an investor is new and inexperienced, and only sees the upside to a real estate deal while ignoring inherent risks.

A Closer Look At The Current Cycle

Has the multifamily cycle peaked? Some experts think it has. But there is still a strong demand for multifamily properties, along with a shortage of quality properties available for purchase. The factors that pushed multifamily property prices higher and caused investors to start overbidding are still in place. These factors include more retiring baby boomers electing to rent rather than purchase new homes, and millennials who are also choosing to rent rather than buy single-family homes.

So Why Do We Still Witness Overbidding?

Throughout my career in real estate, I’ve witnessed several key reasons why investors still overbid at this late stage of the cycle. Foreign investors are still bidding on U.S. properties, which is helping to drive up the price on multifamily properties, as well as contribute to overbidding. For foreign investors, making 3% cash-on-cash is better than 0.5% in their home countries. Institutional investors are also driving up prices by purchasing properties at higher prices, not only in the primary markets that they’re used to, like New York, Los Angeles and Chicago, but in secondary markets as well. They mainly make money on fees, and they have the power to lower their investors' expectations when it comes to returns. Hence, they are able to overbid.

Interest rates are at historic lows, which makes financing more attractive, and that fact allows investors to offer higher prices. In addition, novice investors are overbidding simply because they want to own real estate, and they are willing to do whatever it takes to acquire properties.

Another factor driving prices is the 1031 exchange. This tax-deferred exchange permits a seller to trade their asset for a similar one and defer their capital gains tax until the sale of the next asset — or even further down the line. So sellers are under pressure to acquire new properties and will do whatever is necessary to buy one, including overbidding, so they won’t have to pay high tax on capital gains.

Lastly, many investors are overly optimistic, thinking that higher rent premiums will help to justify the price they’re willing to pay for the property. That’s simply not the case. Many investors and apartment owners will attest to the fact that when rents are raised beyond the market average, tenants will elect to move.

There is no question that many people have built their wealth over time using multifamily real estate investments. Likewise, many people have amassed significant amounts of money by investing in the stock market. So in a strategic showdown, which investment takes the prize — multifamily real estate investments or the stock market?

I can tell you from personal experience how I fared, because over the years I’ve invested in both multifamily properties and stocks. Historically, the average return on stock market investments since the 1950s is 7%. Certainly, some years are higher, and some are lower. In contrast, the average internal rate of return (IRR) I've seen on multifamily property investments over the past year was 16% to 18%. Of course, there are pros and cons to each type of investment, so let's take a look at those before deciding the winner.

Liquidity

If I woke up tomorrow and read some negative news about one of the stocks in my portfolio, I could sell the stock before it dropped significantly. On the other hand, if I read some bad news about a real estate market where I own properties, there wouldn’t be much that I could do about selling a property in my real estate portfolio in one day — or over a longer period of time, for that matter.

Stocks have the advantage in liquidity. You can buy and sell as you deem appropriate, even on the same day if necessary. Real estate, on the other hand, takes time to list, show to potential buyers and ultimately negotiate a price. This process can take months if the right buyer doesn’t come along immediately.

However, if you are a passive investor in a syndication, your investment can be liquid. When you invest in a property as a passive investor, you're actually buying shares in a limited liability corporation (LLC) that holds the property. After the first 12 months of owning those shares, according to SEC regulations, you are able to sell those shares to anybody. It’s not as easy as selling shares in the stock market, because you’ll need to find buyers, and it also depends on whether the syndicator you work with allows it, but generally speaking, your investment is liquid after 12 months.

Advantage goes to: Stocks

Leverage

With stocks, you can have leverage by purchasing stocks on margin. That means you will buy a stock using 50% of your own cash, and up to 50% of margin that you are “borrowing” from the broker. The minimum amount of a margin account is $2,000. Of course, you will pay interest to the brokerage firm for lending you the margin money.

Let’s say you buy 100 shares of XYZ Corp at $100 a share. That’s $10,000. But with margin, you can purchase 200 shares, because the brokerage firm will cover the cost of the additional shares with margin at 50%. If the stock goes up, you’re fine. If the stock drops, you will get a margin call to bring your account back to the 50% level. If you don’t put in cash, they will sell stock to cover the amount. It’s a higher-risk proposition than simply purchasing stock for cash.

With multifamily properties, you can use leverage as well. You don’t have to come up with 100% of the equity, and you can leverage up to 70-80% of the cost of the asset. When buying a large multifamily property (five units or more), you’re eligible for interest rates from governmental agencies with rates as low as 3–4.5%. Leverage is better with multifamily compared to stocks, since you can use greater leverage (70-80% compared to only 50% in stocks).

Advantage goes to: Multifamily properties

Tax Benefits

When you sell stocks, you’ll pay 100% of long-term or short-term capital gains (short-term is when you sell a stock within one year). You’ll pay short-term capital gains tax based on your ordinary income. And if you have a long-term gain, you’ll pay approximately 15% tax.

With multifamily properties, you'll pay very little or even zero tax on profits. Here's why. There are two types of profits for multifamily investors: profits during the hold period (as long as you are the owner of the property), and profits from the sale of your property.During the hold period, you can get property income, such as rents, which you can deduct against expenses and lower the taxable income. Expenses include utilities, repairs, salaries, etc. You can also use capital expenditures (CapEx) for bigger-ticket items, such as a new roof or HVAC system, to deduct from your taxable income. Finally, there is depreciation, which you're able to accelerate using cost segregation.

Most properties depreciate over 27.5 years, but with cost segregation, assets can be depreciated a lot faster, and you can use that depreciation to offset income. Cost segregation studies examine all of the various parts in the property, including the doors, roofs, floors — in fact, just about everything. Based on the analysis, the depreciation can be accelerated to five, seven or 15 years, versus the 27.5-year depreciation that the IRS places on the building. This way, owners can depreciate a larger amount in a shorter period of time instead of spreading the depreciation over 27.5 years.

When the property sells, you can avoid paying taxes by using a 1031 exchange, which means you can defer paying capital gains taxes on the sale as long as another “like-kind property” is purchased with the profits from the sale of the property and the purchase is completed within 180 days.

Advantage goes to: Multifamily properties

According to Yardi Matrix most recent publication, “COVID-19: A Game Changer for Multifamily", nationally, rents have dropped by 0.4% since the arrival of COVID. This past week I decided to focus on some key areas of data: which markets have seen the largest increases and decreases to rents during the onset months of COVID-19, as well as the current unemployment rates and demand for apartments within those respective markets. Factors such as employment and demand are two key components to take into consideration when evaluating which markets to invest in, as you well know. I thought you might find the data helpful in keeping up with current market trends. Interpretation can of course go in several direction, but what’s most interesting about this current trend is it seems the markets with less demand for multifamily housing display a more direct and severe impact, which is why you are more likely to see operators being forced to lower rents. Remaining vigilant of market conditions can allow you to modify your strategy, and adjust to ensure you can still achieve your overall investment goal even in challenging circumstances!

The 5 Least Impacted Markets:

5. Omaha, Nebraska

· 2-Month Rent Change Post C19: +0.8%

· Current Unemployment Rate: 6.5%

· Percentage of Renters: 40%


4. Huntsville, Alabama

· 2-Month Rent Change Post C19: +0.9%

· Current Unemployment Rate: 5.1%

· Percentage of Renters: 42%


3. Memphis, Tennessee

· 2-Month Rent Change Post C19: +1.3%

· Current Unemployment Rate: 7.2%

· Percentage of Renters: 42%


2. Mobile, Alabama

· 2-Month Rent Change Post C19: +1.3%

· Current Unemployment Rate: 12.6%

· Percentage of Renters: 44%


1. Portland, Maine

· 2-Month Rent Change Post C19: +1.7%

· Current Unemployment Rate: 10.2%

· Percentage of Renters: 55.7%


The 5 Most Impacted Markets:


5. Boston, Massachusetts

· 2-Month Rent Change Post C19: -1.5%

· Current Unemployment Rate: 16.3%

· Percentage of Renters: 51%


4. Nashville, Tennessee

· 2-Month Rent Change Post C19: -1.7%

· Current Unemployment Rate: 15.2%

· Percentage of Renters: 46%


3. San Jose, California

· 2-Month Rent Change Post C19: -1.7%

· Current Unemployment Rate: 5.0%

· Percentage of Renters: 26%


2. San Diego, California

· 2-Month Rent Change Post C19: -1.8%

· Current Unemployment Rate: 13.9%

· Percentage of Renters: 39%


1. Midland-Odessa, Texas

· 2-Month Rent Change Post C19: -8.6%

· Current Unemployment Rate: 12.4%

· Percentage of Renters: 30%

Sources:

Yardi Matrix

US Bureau of Labor Statistics

RentCafe.com

According to Yardi Matrix most recent publication, “COVID-19: A Game Changer for Multifamily", nationally, rents have dropped by 0.4% since the arrival of COVID. This past week I decided to focus on some key areas of data: which markets have seen the largest increases and decreases to rents during the onset months of COVID-19, as well as the current unemployment rates and demand for apartments within those respective markets. Factors such as employment and demand are two key components to take into consideration when evaluating which markets to invest in, as you well know. I thought you might find the data helpful in keeping up with current market trends. Interpretation can of course go in several direction, but what’s most interesting about this current trend is it seems the markets with less demand for multifamily housing display a more direct and severe impact, which is why you are more likely to see operators being forced to lower rents. Remaining vigilant of market conditions can allow you to modify your strategy, and adjust to ensure you can still achieve your overall investment goal even in challenging circumstances!

The 5 Least Impacted Markets:

5. Omaha, Nebraska

· 2-Month Rent Change Post C19: +0.8%

· Current Unemployment Rate: 6.5%

· Percentage of Renters: 40%


4. Huntsville, Alabama

· 2-Month Rent Change Post C19: +0.9%

· Current Unemployment Rate: 5.1%

· Percentage of Renters: 42%


3. Memphis, Tennessee

· 2-Month Rent Change Post C19: +1.3%

· Current Unemployment Rate: 7.2%

· Percentage of Renters: 42%


2. Mobile, Alabama

· 2-Month Rent Change Post C19: +1.3%

· Current Unemployment Rate: 12.6%

· Percentage of Renters: 44%


1. Portland, Maine

· 2-Month Rent Change Post C19: +1.7%

· Current Unemployment Rate: 10.2%

· Percentage of Renters: 55.7%


The 5 Most Impacted Markets:


5. Boston, Massachusetts

· 2-Month Rent Change Post C19: -1.5%

· Current Unemployment Rate: 16.3%

· Percentage of Renters: 51%


4. Nashville, Tennessee

· 2-Month Rent Change Post C19: -1.7%

· Current Unemployment Rate: 15.2%

· Percentage of Renters: 46%


3. San Jose, California

· 2-Month Rent Change Post C19: -1.7%

· Current Unemployment Rate: 5.0%

· Percentage of Renters: 26%


2. San Diego, California

· 2-Month Rent Change Post C19: -1.8%

· Current Unemployment Rate: 13.9%

· Percentage of Renters: 39%


1. Midland-Odessa, Texas

· 2-Month Rent Change Post C19: -8.6%

· Current Unemployment Rate: 12.4%

· Percentage of Renters: 30%

Sources:

When most people think of owning multifamily properties, they believe that the cost would be prohibitive. After all, you can find solid apartment building in many markets, such as Texas, Florida and Georgia for $70,000–$150,000 per unit. So how could it be possible to own 100 apartments for just $100,000?

The answer is surprisingly simple: by investing as a limited partner in a syndication. Syndication lets you invest money in properties, along with other investors, and own a share of the asset for a fraction of its value.

What Is Syndication?

If you’re not familiar with real estate syndication, a quick explanation will help. In syndication, a general partner, or syndicator, brings together investors to purchase a real estate property. By pooling their resources, they can leverage their funds to purchase a property that they otherwise wouldn’t be able to buy.

The syndicator does all of the work involved. That includes finding the property, finding the investors, negotiating the price, managing the property, and finding and securing financing. The investors, or limited partners, put up the down payment required to purchase the property.

Like most syndicators, I form an LLC, or a limited liability corporation, which owns the property. Investors then purchase shares in that LLC. They are called passive investors, because they don't need to manage or finance the deal, other than putting up funds. All of the details of the project, including the rights of the investors and the rights and obligations of the syndicator, are laid out in the LLC operating agreement.

Why Be A Passive Investor?

The best part of being a passive investor instead of an active investor in real estate is that you don’t have to know anything about real estate. The syndicator is responsible for having the knowledge and skills to do all of the hard work. Most passive investors simply don’t have the time or the knowledge to handle all the aspects of a multifamily real estate deal.

Just be sure to do your due diligence when it comes to vetting the syndicator. Make sure they have a successful track record with other properties. Most syndicators are happy to share references from other investors who have participated in their prior deals. If they’re not willing to share, that’s a red flag, and you should walk away.

Earning Money As An Investor

There are two main ways investors make money on real estate syndication. The first is rental income, which is distributed to investors either on a monthly or quarterly basis, based on the terms of the LLC operating agreement. The second way investors earn money is through appreciation. Over time the value of the property usually goes up, and when the property is sold, the money earned is distributed.

One thing investors should always do is participate in a preferred return investment. That means that any profits from the real estate project are first given to preferred investors. First in line to receive returns from the income of the property is a good place to be.

There are also tax advantages to being a passive investor that can significantly increase your profits. First, there’s depreciation on the property, and as an investor you’ll get your pro-rated share, which you can deduct not only against the income from the property, but from your other sources of income as well.You could also be able to defer capital gains when the property sells through a 1031 exchange. It simply means you exchange one investment property for another. Doing this helps your investment to grow tax-deferred over time. It’s definitely something to ask the syndicator about when examining the deal.

@Andy Mirza - every sponsorship is different, but for the most part, sponsors are charging 2% Acq fee, 2% Asset mgmt fee, and 0.25-1% disposition fee. There's also equity split of 30-70 after LPs are getting their preferred returns, which I am a big fan of, because I believe it shows good faith and helps with alignment of interest. From my experience, most LPs are not digging into GP compensation, because their main goal is to grow their wealth, and some have been burnt in the past by investing with sponsors that offered very low fees and a 90-10 equity split. There's a reason why fees/.equity splits are very low, and I believe that everyone should be compensated for their effort. Having said that, an equity split of 50-50 or 35-65 throughout could be a turn off for investors. 

It sometimes take $500-$1M in hard money, payroll and softwares to get a deal, pay pre-closing and post-closing expenses, find the deal and underwrite it. Acq fee compensates for the upfront effort, and the balance can be achieved by giving LPs preferred returns, and by investing passively yourself as both the GP and the LP in the deal. 

When it comes to multifamily properties, some investors stick with Class A properties and see them as the best asset classes in the multifamily sector. After all, they are usually fully leased with top tenants, fetch market-leading rents, require little if any repairs or renovations and have a stable monthly income. Since investors pay a high premium for Class A properties, cash flow is not as high as in other asset classes. Hence, appreciation is the main factor that drives profits in many Class A properties.

Those investors see a value-add deal, mainly in Class B and C properties, as a risky investment. In a value-add deal, the new owner improves the property and renovates the units and the amenities to justify rent increases. Class A investors see that strategy as less favorable. After all, nobody can guarantee tenants will be willing to pay premium rents, even if it means that they get nicer apartments. Yes, there is an inherent risk in a value-add strategy deal, but there are several ways to mitigate that risk and own a property that generates higher yields than those seen in a Class A.

The Value-Add Approach

Value-add strategies can include simple cosmetic fixes like painting, landscaping and signage, or extensive structural renovations like upgrades to kitchens and baths, new carpeting, or a new gym or clubhouse. The more extensive the renovation, the more it will cost. In addition, there are repairs to consider, like new roofs, HVAC systems or plumbing upgrades.

For the most part, Class A buildings are not good candidates for value add, since they are already upgraded and charging top rents. On the other hand, Class B and C properties — apartment buildings that were built decades ago — offer the most potential for increasing income by improving those properties. Value-add strategy is well worth the effort. The reason for that is that new improvements equal higher rents, and higher rents equal higher net operating income (NOI), and this, in turn, has a major impact on appreciation. By doing so, you can basically "force appreciation" because you improve the property and positively impact its value (in addition to organic growth in the market).

Boosting The Net Operating Income

Compared to building a multifamily property from scratch, investing in an existing asset that has ongoing cash flow is a smart move. An A property generally has a high property tax, which will increase the front-end building costs significantly. On the other hand, making value-add improvements like minimal exterior and interior changes to a Class B are relatively inexpensive.

The modest returns of a Class A property with single-digit to low-teen internal rate of return (IRR) just isn't enough when compared to the high-teen IRR results obtained when value-add is completed on Class B and C properties. After all, the goal of any multifamily investment is to increase the NOI, and this is accomplished by either increasing the property's revenue or decreasing expenses. Improvements made to value-add properties will significantly boost the NOI. That's because once the improvements are made, rent increases generally follow, and cash flow increases

Just how important is it to increase the NOI? Let's say your property has 100 units, and this year you're increasing rents by $40 per month. That amount represents an increase in revenue of $48,000 per year ($40 x 100 units x 12 months), as well as an increase in the NOI by $48,000. That is a substantial amount of money, and because of this additional revenue, the value of the property will increase as well. That's why I'm a strong advocate of value-add deals, because I've seen rent increases thanks to property improvements.

Rent growth is currently positive and still possible with Class A properties, but the slowing market pace will translate to lower organic growth, resulting in even lower returns for Class A buildings. And if the economy shifts to slower growth, some tenants will vacate their expensive Class A apartments for much more affordable Class B properties, and I anticipate Class A properties to struggle with higher vacancy rates than they face today.

Understanding The Cap Rate

The overall rate of return on any property is based on income. Capitalization rates are market-specific and depend on the type of property class that’s involved. The cap rates are used to calculate the value of a property by dividing the net operating income by the cap rate.

Cap rate is calculated by dividing the NOI by the price paid for the property. As a general rule, Class B and C properties have cap rates between 5% and 7%, while Class A properties have cap rates between 2% and 4%. When cap rates decline, the property value increases. As the cap rate goes up, so does the risk on the investment.

If you can purchase a property and lower your cap rate using the value-add strategy, your profit can increase. As an example, let's say your NOI is $50,000, and you purchased the property with a 10% cap rate. That equals a property value of $500,000 ($50,000 divided by 10% cap rate). If you can lower that cap rate to 8% by repairing and renovating the property, your property's value would increase to $625,000. That is a solid 25% increase in value!

The Bottom Line

With a Class A investment, you are limited in how much the property appreciates; however, you have more control over the appreciation of a B/C property, and in fact, you can force the appreciation. There is still some opportunity to get a solid Class A deal, due to a mismanaged property that results in higher expenses to rents priced under market, but those deals are rare.

Relying on market power to determine appreciation is risky. Since returns on the income of Class A are moderate, due to high expenses, the majority of the profit will come from appreciation. This limitation is not as severe in older properties, where a cosmetic fix can significantly improve NOI, along with the appreciation potential. This is one of the main reasons investors should focus on Class B/C properties.

Let’s start from the beginning. It’s a simple fact that most passive investors don’t have the time to put real estate deals together. The work involved in finding the right deal, negotiating the price and doing all the due diligence that goes into formalizing the deal can turn into a full-time job. Many passive investors often don’t have enough experience either. That’s why the best way they can make money by investing in real estate is through syndication.

Syndication has a sponsor or general partner who not only has the experience and real estate knowledge to put a deal together, they often have access to attractive investment opportunities. The sponsor analyzes deals, determines the best investment property, brings investors together and manages the asset once it’s acquired.

How Syndicators Earn Money

In exchange for their months of hard work, sponsors earn fees that include an acquisitions fee, an asset management fee, financing fee and a disposition fee (for managing the sales process when the property sells).

Some passive investors focus on the fees that sponsors earn as well as the equity split between the sponsor and the investors that is part of the deal. These equity splits are often defined as 70%-30% (which means that 70% of the property’s income goes to passive investors and 30% to the sponsor). Regardless of the percentage that’s agreed upon, the bulk of the money goes to the passive investors, or limited partners, while the smaller percentage goes to the sponsor. The reason: Passive investors put up the bulk of the money, so they are compensated appropriately.

Mistaken Emphasis On What Syndicators Charge

The reason some passive investors put too much emphasis on fees and equity splits is that they want to feel they’re participating in a deal that’s extremely favorable to them — and mistakenly assuming that lower fees and equity splits will contribute to the bottom line and increase their overall return. But it just doesn’t always work that way.

If passive investors are working with an experienced sponsor who has a successful track record and they are participating in a strong deal, then they will get the projected returns regardless of the fees or splits. After all, if you invest in a bad or even average deal, the fact that the fees were low or that the equity split was very competitive doesn’t mean you’ll get a higher return on your money. The quality of the deal and the sponsor is what matters — tot their fees.

Inexperienced sponsors often tend to offer lower fees and more favorable equity splits to begin building a track record. Unfortunately, if they don't perform, investors won't receive their projected returns. It's far better to have a 15% internal rate of return (IRR) with a 70%-30% split than a 9% IRR with a 95%-5% split.

I recently spoke to an investor who invested $100,000 in a deal that offered very low fees along with an 88%-12% equity split. An 88%-12% split is quite generous. Sadly, however, at the end of one year, he received one check for only $200. That’s a terrible return on his investment. He would have been far better off to work with an experienced syndicator who would have offered him a 70%-30% equity split.

Even more so, if the sponsor is not being compensated well, they might not be committed to the deal, meaning that their incentive to invest their time and effort in a deal they are not making money on could be compromised. Not all sponsors are like that, and some (and rightly so) will still be incentivized in the deal because they want to maintain their reputation — but if they are not well compensated, do you want to take the chance and bet that they still would be incentivized?

Before developing my automated system, I would make individual phone calls, send out individual emails, and wait until I had an actual deal before engaging in communication with investors. Those tactics are a prime example of how NOT to raise money as a syndicator. The issue is time, and there’s never enough of it during the day. Reaching out individually takes an inordinate amount of time from my day, and your day as well.

Instead, you should always be automating the selling process. Before you ever have a deal, you should be engaging with investors. You should also be engaging when collecting soft commitments from investors, once the deal is in place, and after the deal closes. I do this every minute of every day, because the more contact you have with investors, the more visible you will become and the more capital you will raise. It helps not only build a group of potential investors, it helps you manage your time more efficiently.

3-Step Plan to Automate Capital Raise

The automated process I’ve developed is a 3-step plan designed to automate raising capital. I’m happy to share it with you, with the hope it will help you manage your time and build your syndication business.

Step 1: Create a Thought Leadership Platform

Investors who don’t know you want to be sure that you have the experience and knowledge to successfully syndicate a real estate deal and provide a competitive return on their investment. A thought leadership platform helps you demonstrate that knowledge and expertise about real estate investing. Even if you’re just starting out, the fact is you know more about investing than the average person does. It also opens and expands your network beyond the people you know. Using a thought leadership platform, investors reach out to me from all over the U.S., Saudi Arabia, Spain, Germany, etc.

Start an Investing Blog

I recommend creating a blog, that will not only be informational, but educational as well. The key to success with a blog is to be consistent. I have a new blog on my website each and every week, without fail. That way content is fresh, timely, and shows you’re at the top of your game. When writing your blog, start by finding your voice in order to show that you are unique and set apart from other syndicators who publish blogs.

Brainstorm Topics and Content

Finding topics that appeal to passive investors is crucial to having a successful blog, as well as one that people look forward to reading. You can start writing about questions you often hear from investors. You can also view competitors’ blogs to gain insight on the topics they’re using and do keyword research to see what people are searching for when they go online.

I recommend using “Keywords Everywhere” – a browser add-on for keyword research. It provides keyword information you can use to gain visibility for your blog. You’ll be able to view the keywords people are using, what others are paying for cost-per-click and also get “people also searched for” informational data that will give you additional keyword info.

Hire Freelancers

If you have trouble writing a blog or aren’t sure about the best practices involved in putting one together, hire a freelancer. Websites like Upwork.com and Guru.com have professional providers who can write in your unique voice, using “I” and “we” when talking about your topics. You can view their profiles, view samples of their previous work and writing style, and learn how much they’re charging for their time.

Create a Lead Magnet on Your Website

A great tactic that I use is a lead capture program. Often referred to as a “lead magnet,” a lead capture program is designed to get email addresses of targeted people, in your case passive investors. With this program, you offer a person something for posting their email address in order to download the content that you’re offering. Just remember that you have to offer something of value at no charge in order to attract interest and get the person to provide their email address. It can be an article, white paper or an eBook that talks about a relevant topic, like purchasing value-add multifamily properties, top rental markets for investors, or other similar topics.

Speaking of your website, you should also create an investor form, so potential investors can reach out to you. Get all of their pertinent contact information and ask if they’re accredited investors, as well as how much money they’re planning to invest, etc. Finally, you need to automate the newsletter reminders for follow-up with investors. Use CRMs like HubSpot or Contactually that help you set up templates and reminders, helping to maximize your time. Remember, consistency is the key to success.

Another tactic is to promote your content on social media using an automated scheduler like Hootsuite. You will be able to target your audience with LinkedIn, Facebook, and other social media sites.

Create a Weekly or Monthly Newsletter

I recommend developing a newsletter to keep potential investors engaged while educating them about real estate investing. If you don’t want to do it yourself, hire someone from Upwork.com or Guru.com. Another option is to record short videos of yourself talking and post them as part of your newsletter.

In addition to investment content, your newsletter should also include personal information and stories about yourself and what you have been doing. This helps to personalize your newsletter and show you as a person, as well as a syndicator. Suggest recommended reading materials, including articles, books, and journals that talk about your area of expertise and include links to each one. Offer valuable content, because your goal is to add value to investors. Also include a link to your current blog posts in your newsletter, and direct investors to visit your website. Always have a contact link in your newsletter so the viewer can easily schedule a call with you.

Step 2: Automate your Marketing Process

This includes lead capture programs, automated email follow ups, social media and so much more. It also includes creating templates and other materials that enable you to communicate without having to reinvent the wheel every time you want to send something to investors.

Step 3: Automate the Investment Process

When you have a deal, handling investors manually can be a time-consuming mission, and a very inefficient process. Don’t send individual emails to each investor. Instead, send out an automated email using marketing platforms like HubSpot, Constant Contact, or Mailchimp. I also send an automated invite to my investors and invite them to a conference call. I hold it live and walk through the deal, allow investors to ask questions about the deal in real time, and then send the recording to those who couldn’t attend the call. It’s a tactic that basically cut the time it took me to market a deal in half, because you pitch the deal once to tens or hundreds of investors, instead of repeating your pitch every time you speak with an investor. You can use tools like Freeconferencecalls.com, Zoom, or WebEx.

When sending an email to investors with your new deal, you can also add a soft commitment button, and start building a list of interested investors. This is relevant before you are ready to get funded (when you are still finalizing the PPM, setting up the LLCs, etc).

When you are ready to take hard commitments and your investors need to sign the PPM, use DocuSign to sign investors, acknowledge receipt, and get their copy of the agreement. Other investment management platforms such as Groundbreaker or MSI can be helpful in automating signatures on PPMs and wiring funds.

If you look at the historical investment in real estate, it has been an excellent hedge against inflation. Most everyone is familiar with real estate, unlike the learning curve involved in investing in stocks. Real estate is also tangible — you can look at it and visit your investment if you like. Moreover, you can reinvest your return by either paying down the mortgage or by buying additional properties. It’s all about cash flow and the options that it provides.

Stocks

When it comes to investing in the stock market, you could go back in time over 100 years and despite the crashes, corrections and the ups and downs of the market, buying stocks and reinvesting the dividends is one of the ways to build wealth. On the other side, stock prices and values can fluctuate wildly. Also, most investors use dividends as income rather than reinvesting them, diminishing their overall return.

Choosing between real estate and the stock market depends on what you’re comfortable with in terms of the level of risk you’re willing to take, but I am a firm believer in real estate over investing in the stock market. Real estate is such a unique investment vehicle, with clear advantages over any other avenue out there. Here’s why.

1. Enjoy Income Immediately

Let’s look at stock dividends. Most dividend yields hover around 4% or even less on an annual basis. While that number is certainly better than the current savings account rate of 2%, it’s nothing to write home about. Sure, the stock price could increase over time, but until you sell it that money isn’t realized.

However, when you invest in a multifamily deal, you start receiving income almost right away. Investors are getting distribution checks every month, since the property is making money every month (mainly from tenants’ rents). As a sponsor, I wouldn’t go near a deal that had a 4% return, and neither would my passive investors — not when you consider that we’re looking at an average of 7% cash-on-cash return. Since multifamily return is realized almost immediately, this is a superior investment compared to the stock market. As a bonus, many properties may continue to appreciate in addition to the regular returns.

2. Easy Financing

When buying a multifamily property, you can secure a loan for the purchase at a very low interest rate. In fact, rates are now hovering at historic lows. This is simply not available when buying stocks. In addition, you can refinance the property in order to pull out equity tax-free.

3. Depreciation And Capital Expenditures

Unlike the stock market where you pay capital gains on profits, multifamily properties let you pay little to no tax on capital gains by reducing depreciation and capital expenditures (called CapEx) from the property's income. This can result in huge profits for investors. CapEx are funds that can be used to acquire, upgrade and maintain a property.

4. Add Value To Your Purchase

Value-add multifamily properties are those you purchase with the intent of making needed repairs or upgrades. Not every sponsor or investor has the ability to do this, but it’s one of the best reasons to consider purchasing a particular property. Adding value helps to justify rent increases, which adds income to your return. It also helps with the property’s appreciation over time.

There are many different ways to add value, from exterior improvements like landscaping and painting, to complete unit upgrades like new kitchens and baths. Adding new technology is another draw for renters, and adding amenities like in-unit washers and dryers is another way to increase rents.

Needless to say, purchasing stocks does not allow you to add any value to it, since you have no control over the company’s management and strategy.

5. Gain Leverage

If you purchase stock on margin, you’ll need about $50,000 in order to buy $100,000 worth of shares. The problem comes in if the stock loses value, which means you’ll have to come up with more cash or the stock will be sold to cover your position.

The beauty of investing in real estate is that you can participate with far less money than stocks. If the property’s value drops, for example, the only time it will be a problem is when the property is actually sold. However, with real estate, you can always buy and hold the property until such time that the value increases.