All Forum Posts by: Jordan Burnett

Class B and C does incur more business plan implementation risk, which is one factor to consider. Meanwhile Class A incurs more new supply/development risk. 

The comment about Class A workers being able to work from home is definitely accurate. The other factor is that when people are spending more time at home they notice more things around the complex/area than they may if they were going into the office everyday (i.e. the things about a true Class B or C they may never normally notice they now notice because they're home so often). 

A lot of the big money is delving into development, which tends to put pressure on Class A and ends in a concession fight. One strategy to consider is investing in Class A where new development is very difficult or impossible to do (there are sponsors who specialize in that strategy). Those tend to be blue states where rent control might be in place, but there's a balance between rent control and new supply constraints. 

Hi Scott, you can definitely offset the distributions/cashflow during the hold period, but if you're investing as an individual not in a tax-advantaged way then you're subject to depreciation recapture upon sale of the asset.

Question for you Evan about this strategy. If you have multiple syndications, Property A is a 7 year hold with depreciation and Property B is a 3 year hold, both of which would give you passive losses, can the passive loss carryover from Property A (7 year hold) be used to offset the capital gains when the Property B (3 year hold) is sold? 

In that example let's say Property B is sold in 2023 and Property A is held until 2027. 

I know that when syndication interest is sold the passive losses are essentially forfeited, but I am not sure if the passive losses still being carried over from the 7 year hold can offset the capital gains (or if those are treated separately by the IRS). 

I guess the question is--can passive losses from depreciation on one syndication offset capital gains from another syndication? Or does it only apply to passive distributions? I'm assuming this would not be the case as even passive losses are caught up with depreciation recapture upon sale. 

Here is a great discussion of 1031 exchanges out of a syndication:

https://www.biggerpockets.com/...

From my research (not a CPA or lawyer), essentially all partnership equity must remain in the entity if a 1031 exchange occurs. This would mean that either all Limited Partners want to go forward with a 1031 exchange and do not need their capital out (unlikely I'm guessing), or that the LP equity is bought out by the entity so that all funds remain "in the entity."

I do think there is certainly a niche for a "1031 only" syndication and I'm sure they exist.

Personally I was never under the impression that having a few rentals and being the direct line/owner for property managers to contact was luxurious. I never pulled the trigger on single family rentals or small multifamily for that reason. 

I invest in larger multifamily syndications because the syndication provides an onsite property manager and dedicated asset manager who is responsible for managing the property manager. I understand there is a fee of asset management on top of property management, but that fee is (in my opinion) worth not having to deal with the issues that invariably arise from the property management to the owner. 

Higher cash-on-cash returns and 1031 exchange opportunities on exit are an added benefit to owning the real estate yourself, but typically owning your own SF rentals is like having another job.

Regarding stocks, one thing you'll often hear is that these types of fees aren't paid on public stocks or equities--which is incorrect. The fees may not be paid directly by you while holding the equity or index fund itself and reflected in an expense ratio, but in reality, these fees are paid on public stocks through the public company's line item expenses which affect earnings. The fees encompass things like company parties, salaries, bonuses, client dinners, etc. Vegas lives on these fees (AKA justifiable sales and marketing expenses). 

They're paid by the company prior to quarterly earnings and prior to any earnings per share. In the syndication space, you simply see the fees as a direct expense (like a normal small business operates).

Personally, I would put more emphasis on net migration, employer diversity, job growth, and absorption rate than simply the amount of population in a sub-market. A large population with a ton of supply and development doesn't make for a great investment market.

In general you do want to see a spread between your cap rate and interest rate. However, there are interest only loan products that can allow a property to cash flow for several years because the debt service doesn't include pay down of the principal. 

In multifamily, many standard or agency lenders aren't going to lend on a cashflow negative property. Look up Debt Service Coverage Ratio. They usually have specific criteria for DSCR ratios which means that the property has to generate enough cashflow to cover the loan.

This article covers cap rate to interest rate spread:

https://www.qreadvisors.com/re...

In single family, the way properties are valued is different (comps). You may come out of pocket $10K per year on a rental property's mortgage but gain $25K through appreciation in certain markets (i.e. California). Personally, if an apartment complex doesn't cash flow, you probably want to look the other way, because that's how apartment complexes are valued--they are valued based on cash flow and rents.

However, there are people who take advantage of a cashflow neutral or negative property (i.e. high vacancy, poor management, down units) that will be purchased as cashflow negative and quickly transitioned to cashflow positive. Typically they will use bridge debt or similar until they can achieve a DSCR high enough to transition to agency debt.

The cap rate of a property IS important, but it's important for new investors not to invest solely based on cap rate. If you are purchasing a property at an 7 Cap in a market where all properties of a similar vintage trade at a 5 Cap, that should cause concern--not be a green light to invest because it's a "better deal." 

Similarly, investing in a random sub-market where properties sell for an 8 Cap instead of a major market where properties trade at a 5 Cap doesn't mean your total return over 10 years will be better if the 8 Cap is in a market with flat or negative rents and the 5 Cap is in a market with 3-5% annual rent growth. 

A Cap Rate is generally used as just another indicator of market sentiment on a particular property's income stream. In some markets, properties will trade at higher Cap Rates because the expected growth rate of rents is very low. In other markets, properties will trade at low cap rates because the expected growth rate of rents is very high.

Additionally, interest rates DO affect cap rates--to an extent. If interest rates were currently at 6%, it would be highly unlikely to see properties sell at a 4.5 Cap. However, interest rates have gone down significantly (as low as 2.7%) which means the spread between your interest rate and cap rate can be as high as 1.8% on a 4.5 cap. 

See Brian Burke's article below for more nuances regarding price at sale: 

https://www.biggerpockets.com/...

Have you run the numbers on what the actual after renovation rent will be on the 2nd unit and compared that to your ROI of doing that investment versus renting it out as is?

As others have stated, listen to podcasts, network on LinkedIn, and network with other passive investors. Also, note that it's not frowned upon that you ask other passives either privately or via this forum what their experience has been with a certain syndicator. The fact that they present themselves well (even on the BP podcast as history has proven) does not mean that they are a vetted or reputable syndicator. 

I also have two recommendations BEFORE you even contact a syndicator:

1. Read Brian Burke's "The Hands-Off Investor"
2. Review Hunter Thompson's "111 Questions Passive Investors Should Be Asking"

Note: you should not actually ask these 111 questions, but you should know WHY these questions should be asked.

Good luck and feel free to message me with any questions! 

Given that you noted you can do construction yourself, that $50K is close to your entire savings, and that you are looking to replace your income with cashflow, I would recommend you NOT start with larger multifamily syndications. 

In general, if you're not an accredited investor, the syndicator should be vetting you to verify that if you lost your entire investment ($50K, which is typically the minimum) that it would not put you in a poor financial position. 

In general, investing in syndications is completely passive but the cash-on-cash return is typically not as high as it would be with that capital deployed to smaller single family rentals or vacation rentals. The tradeoff is work. 

SFR and vacation rentals are going to require more work on your part both initially and ongoing. However, you can see north of 15-20+% cash-on-cash return and the velocity of your deals can be way quicker with smaller multifamily or single family deals.

Currently, cash-on-cash returns for most multifamily deals are <10% and hold times are 5+ years. With single family, you can be in and out of a deal with a BRRRR property within several months. With $50K, depending on the area you could deploy that to multiple properties. $50K deployed to a typical multifamily syndication today would only likely yield you $416/mo which would be a 10% cash-on-cash (many deals only pay 7-8% cash-on-cash today). Look up some of Travis Watts' interviews and he'll tell you why he wouldn't have started with multifamily syndications as well.

When you have little capital, the goal for you should be velocity and growing that capital as quickly as possible. In the RE space, that means you need to be in and out of a deal quickly or refinance your principal out of the deal so that you can recycle that money in another deal (which is why the BRRRR strategy is so popular). Refinances can occur in the multifamily syndication space as well, but they typically take longer to occur than in the single family space.

After you've grown your capital to the $300-500K+ range and you no longer want to do the work, then you should start thinking about investing with a syndicator as a Limited Partner. That could put you in 6-10 deals all over the U.S. and provide you with fairly decent passive income. 

Finally, I do highly recommend that you do some research on syndications before you get started. Start by reading Brian Burke's "The Hands Off Investor" from BP, and then take some kind of online course or mentorship (there are multiple providers of these--Michael Blank, Rod Khleif, Joe Fairless, Jake and Gino). Your total investment should be well under $1,000 but it can save you thousands versus investing with an unscrupulous syndicator.