All Forum Posts by: Rick Martin

@Paul Azad. It's difficult to predict in this environment for multifamily. I would say 15% IRR with an 8% pref is pretty standard. Getting the COC% to meet that pref has become increasingly difficult with interest rates, rising insurance and taxes. We have entered "tax abatement" deals into our strategy, which greatly reduces expenses and increase NOI and cash flow. I imagine we'll need to be creative for the next few years, but the future does bold well, as supply will tighten next year (boosting rents), and interest rates will (hopefully) continue to trend downwards.

@Sateesh Kumar "owner-occupied" makes it different, but if it's an investment property (rental property) vs a syndication investment, it's the same. You are furnished with a K1 through the syndication that allows you to write off all the expenses that you mentioned, but only against passive gains. It's important to understand that. You can only write off passive losses against passive gains. Not portfolio income (stocks, bonds) or earned income (unless you or your spouse are a real estate professional). This goes for whether it's a syndication or any real estate investment.

@Andres Mata the negative press will steal the headlines and become the front-page news. When it’s smooth sailing, we tend to float along, feeling good about ourselves and our investments in real estate, the stock market, crypto - any asset class. 

We learn about a person’s true character when faced with adversity. It’s no different when it comes to syndication. That’s when a team has a chance to prove its metal or run away and hide.

You probably do not hear the stories of how most syndicates are finding creative solutions to protect investor capital. When your stock or crypto is tanking, no one will be there to help you. For syndicators, it's their livelihood, and speaking for myself, I have relationships with many of my investors. Investors aren't numbers - they're people who are known and cared about. "It is a relationship business."

The right team will do everything possible to right the ship in the storm - which we faced last year.

Timing the market is never a good idea, but personally, I see it as a much improved time to buy, as pricing is down, some sales are distressed and sold at a discount, and interest rates appear to be heading in the right direction. Plus, teams are finding creative ways to increase cash flow in the face of these higher rates.

Make sure the market metrics are fundamentally sound and you know the true story of the deal. Understand the underlying assumptions of the underwriting (rent growth, revenue increases,  comps, exit cap), and ask all the questions you can.

Above all else, do your homework on who you invest with.

 Pulling that equity out allows you to stack more equity. It's a beautiful thing.

 Thank you @Buddy Holmes. Keep your eye on the upside!

@Solomon Rosenberg it's a tough call. You want to confirm their plan for those extra funds from A - Z. It needs to be more than a bandaid. Will it be enough to accomplish their goal? Do they have a rate cap and are escrowing funds to purchase the next cap, which is probably 10x as expensive?

The worst case scenario is the bank reclaiming the asset and the investors losing their principal. Have they exhausted all other avenues? They should be looking at all possible loan sources, including a pref equity partner. Your ownership would be diluted, but better than losing your principal.

Sorry to hear. These are tricky times, and the only way to weather these storms is to be well-capitalized.

Isn’t it better to be in 2 real estate deals than 1, 10 deals than 5, or 20 deals than 10?

You make your BIG money on the buy, then the sell. Cash flow is nice, but chances are you won't get rich on cash flow alone.

Syndication investors (and investors in general) must take advantage of the opportunity to redeploy their capital once they receive their refinance proceeds.

It's true when you receive, let's say, 50% of your capital back, you are now earning a preferred return on a smaller amount of money, so you're getting less cash flow in that deal (even though it is likely your COC% went up - more efficient)

But if you take that 50% that you received back, and reinvest it in another deal, now you are earning cash flow in two deals, but what is more important, you are now sharing the upside in two deals, not just one.

Refi and Redeploy.

Don't get so hypnotized by the set-it-and-forget-it mentality that you don't continue to make your money work.

Take advantage of the opportunity to build massive equity and grow your wealth.

When you get that money back from a refinance, redeploy it.

Agreed @Paul Moore. It is done, but I don’t think it is in the best interest of the investor. To me it amounts to a high risk loan, and the vast majority of the risks occurs during that repositioning period prior to the refi. 

Do you stay in the syndicated deal once a refinance occurs? There is trepidation amongst limited partners that a refinance means getting bought out or having one's shares diluted. This can happen, so ask the operator how a refinance affects your ownership.

I cannot speak for all syndicators, but when we refinance, the limited partners stay invested in the deal. The total amount they receive from the preferred return distributions does drop because they are now earning their preferred return on the less principal they have in the deal. Their equity split – let's assume a 70/30 split – remains; thus, they still receive 70% of the profits.

Example:

If you invested $100,000 into a deal with an 8% preferred return, you'd expect to receive $8000 annually. After a refinance- let's propose a 30% return of capital - you are returned $30,000, so you have $70,000 of your original principal invested in the deal. The preferred return is 8% on the remaining $70,000, or $5,600. You can still earn above the 8% preferred, but whatever remains is split 70/30 with the General Partners. 

If you earned $7000 in a year, the first $5600 would be your 8% pref ($5600 ÷ $70,000 = 8%). The remaining $1400 would be your 70% cut/split of the remaining cash flow for that year.

Since the refinance doesn't affect the profit splits, you'll still get your 70% split of the profits after a sale. So if there were $10M profit after a sale, $7M would go to the LPs.

There are many ways to structure a deal, so make sure it aligns with your interests. I hope it helps.

Afraid not @Adriel Cisneros. An LP can only defer their basis if the entire LLC (the syndication) is 1031'ing the proceeds from that sale.