All Forum Posts by: John B.

@Ian Ippolito

- by end of year 1: rehab as much as possible, reduce vacancy and potentially increase rent

- by end of year 2: refinance and pay back investors (keep some reserves for larger capex) depending on the refi LTV

- year 3-5: investors still get cash flow

- year 5: sell at 8% cap rate, return capital to investors and split profits

The sponsor is flexible on the timing of this plan depending on the market, since there's no leverage or baloon payment or interest only mortgage there is less risk. I actually see it as some sort of debt deal structured as an equity deal at the end of the day... (perhaps I'm wrong)

Thanks

@Mark Robertson I believe for this specific deal:

- There is *no* acquisition fee (typically it's 1.5% PP)

- There is *no* asset management fee (typically it's 1-1.5% gross income)

- The 7% fee is the actual property management cost

- There is no debt service: equity investors fully own the property (the sponsor has some equity too by bringing some capital in the game), the long term goal is to fix it up and refinance

The sponsors of this crowdfunded deal also own the property management company (so it's not a typical syndicated deal), and that's how they make money on top of the split instead of the typical asset management fee/acquisition cost.

Considering that the property is not leveraged and the 8% preferred return to investors, the sponsor is hardly make significant money with the 25/75 split.

They bought at a cap rate of 10% and through renovation and fixing vacancy they're hoping to refinance at a 8% cap rate and then sell to get the 50/50 profit.

Does it still sound horrible? Appreciate your opinion

I did the same, I also want a large free pizza coming in every month :-)

Thank you everybody, in particular @Brian Moore

The implications of cap rates in MF deals are something I'm still trying to learn. I see most syndicators always project exit cap rates aggressively lower than the going-in cap rates (~2% lower is standard from the financials I'm seeing), which obviously increases the IRR quite a lot.

This deal was particularly interesting to me because of 3 things:

1) I know the area, as I used to live near Sacramento and I know it's a very interesting market that it's appreciating just by taking in all the incoming population burned out by the bay area pricing, and the employment opportunities are interesting

2) The debt terms of this deal seem very good

3) The exit cap rate lower than the in cap rate: with this one, I still don't understand if the syndicator is trying to be conservative and predicting a market downturn, or if there is something else I'm not aware of. I'll ask.

Thanks for the reply, and good point. This would be the plan to distribute the payments:

Distributable proceeds from operating cash flow and capital events are to be distributed in order as follows:

1 - Senior debt service payments

2 - Then, to all deal-level investors pro-rata and pari-passu until such investors have earned a 9.0% annual preferred return (compounded to the extent unpaid)

3 - Then, to deal-level investors until their initial capital balance has been reduced to zero;

4 - Then, 25.0% to the Sponsor and 75.0% to deal-level investors until such investors have earned a 19.0% annual internal rate of return (IRR) (compounded annually)

5 - Then, 50.0% to Sponsor and 50.0% to deal-level investors

Hi,

Through a syndication portal, I got access to this equity deal (as part of the 86% pool). It's a 52 unit in a B class neighborhood in the Sacramento area. On top of checking the financials, I took a look on craigslist and other places to make sure the current rents were comparable to the one advertised in the analysis put together by the sponsor. 

I am also fairly familiar with the area and know there's generally a strong demand. The sponsor is looking to bring the cap rate up ~1% and then sell in 2-3 years.

For someone who is not yet ready to go through the active way, would a passive deal like this be reasonable? I'm really not looking for a yes/no, to my "untrained" eye all the numbers seem ok (expenses don't seem under-estimated, the increase of ~250$/mo/door rent over 3 years seems reasonable considering the area, sponsor has some skin in the game and they have been in business in that area for a couple decades, ...), so I was looking to some more seasoned investor willing to share with me any clues as to how this deal might be bad (the only one I can think of is that returns might be very tight if a downturn occurs over the holding period, however since this one is not a class-A SFR property it should be more resilient).

I would be looking to invest about ~50k$ in this, which is a small enough portion of my net worth (< 10%).

Thank you.

@Matt R. out of curiosity, do you cherry pick your selection of REITs or stick to broad REIT indexes and such?

Thanks

Disclaimer: I own ~10% of my portfolio in publicly traded REITs.

My tentative answer to that is: public REITs are extremely correlated to the stock market rather than the real estate market, so if you already have a healthy portion of your savings in the stock market in index funds and such, a passive syndicated deal might be a good way to diversify. Not to say that if the stock market crashes 30% then syndicated deals wouldn't be affected, but certainly the correlation is lower. I think with public REITs an investor pays a "liquidity" price.

Also, tax advantages of public REITs are almost non-existent, to the point that it's foolish to be holding them in a taxable account, which is where the majority of aggressive savers hold their funds.

@Charles Worth I like all you said, I am in a similar situation and a followup question is: as an accredited investor, is it better (in your opinion) to invest time and find a good relationship with a sponsor you can invest with, or do your due diligence on the various crowdfunding websites you can find out there?

On the pros, by investing chunks of 10/15k, crowdfunded deals seem to offer diversification that is not easy to achieve by directly working in syndicated deals where you have to put 50k/100k/150k min.

On the other hand, the quality of the sponsors might be much lower, and without developing a real relationship one might end up with several lemons.

Thanks

@Nick Gupta exactly in your same boat, with a little bit more savings coming in on a good year.

I have done your exactly same progression of thinking. When I started studying, the TK options seemed like the best, I was so thrilled to have found out that alternative.

However, after researching much more on the topic and going through the exercise of evaluating a few deals, I came to the realization that the way to have a profitable passive investment is to assemble your own team, and buy yourself at a reasonable price, whenever a deal comes through. Otherwise, you're only banking on appreciation to offset the losses you'll get when you want to exit (and they'll eat into your extremely thin CF margin you built up over the years), and typically TK providers are in very stable markets, where you can't exactly count on that either.

I keep researching, but until then I'm sticking to 30% of my portfolio allocated to REITs global index funds (100% passive and 10% return over the past 5 years). Downside of that is you're exposed to the volatility of the stock market.

The next thing I'm going to research are syndicated commercial deals, it seems like with the right network of sponsors it should be feasible to achieve double digit returns in a completely passive way.

If/when there will be a market correction, I will be looking into buying SFR in my backyard (Northern CA) so I can assemble my team through BP references and always be within driving distance in case something happens and I have to manage my own investment. That has the potential for being a very financially rewarding strategy, because you can stay on top of everything and you'll have so many tax benefits.

It's probably not what you wanted to hear but after a couple months studying it's a pretty realistic vision at this point :)