Passive Investing in Multifamily Syndication is ideal for any investor who lacks the time or interest in dealing direct with the challenges but seeks the benefits of real estate.
James Kandasamy was trained as an engineer, but is now a full time real estate investor. He started investing in what he knew, single family homes. But, soon he realized the difficulty to scale when investing in single family homes. First, the lenders cap the number of loans you can have at 10. In order to grow beyond this arbitrary limit, you have to get creative and either put some loans in your spouse’s name, or get a commercial loan.
Then you have multiple locations, which require multiple regular trips to check up on your properties. Don’t forget your insurance policies, which typically will have a separate effective date and bill for each property. All of this makes it difficult to grow and scale your portfolio. His desire to grow and scale caused him to give up on single family and pivot to multifamily.
Real estate has a physical location, so determining where to invest is important. Some investors make a science out of determining where to invest, while others invest in their backyard, because they know the neighborhood.
James is physically located in Austin, TX, where the current growth rate is 150 new people arrive each day. Texas has no state income tax and is attractive for employers. The pro business attitude is attracting tech companies and start-ups, which hire and attract millennials. The question of where to invest was a simple for James to answer. He knows the local area, and that it is growing, which equals demand for housing and specifically, multifamily real estate.
Value Add strategy is when you buy a property and positively change the net operating income, which increases the value of the property. There are many different ways to increase the value of the property, from simple to involved.
The strategy you chose is usually determined before you purchase the property during due diligence. This is where you are able to look at the sellers numbers and operation and determine what needs to be done to increase the value. A simple case may be just raise the rents to the current market rate. The more involved strategy will likely include significant renovations, or rebranding to breath new life into the property and attract residents willing to pay more.
There are multiple real estate investment strategies you can employ. One benefit that commercial real estate has over single family is the ability to directly affect the value of your property, regardless of your neighbors. Repositioning a property to increase its value, is the strategy that is referred to as “Value Add”.
Operational expenses are key to determining the value of your property. James company, Achieve Investment Group has a distinct advantage as a vertically integrated company. They provide property management, asset management and construction management all in house. The three disciplines allow them to quickly identify opportunities to add value.
Property management is able to quickly review the operation expenses and identify any numbers that are suspect. Suspicious number are most evident when the seller uses a third party management company. The vertical integration model provides James and his investors with additional, direct control. James has found that inside management typically saves him and his investors around 10% on expenses.
If you are not vertically integrated, you can partner with other providers like a property management firm to help analyze the operations of a property you are considering for purchase.
Mismanagement is very common, and easy to fix with the right team. For the management professional who is familiar with the asset class and market, they can easily identify expenses that are either unnecessary, or out of control. This can significantly improve your net operating income.
If your value add strategy involves significant renovations, these will require additional capital. How much capital is determined through your contractor estimates based on what your vision for the property is. It is critical to have a well defined plan, budget and timeline so that you can raise the amount of money you will need to create the value you are projecting. Your passive investing investors will expect you to hit your numbers.
Achieve Investment Group controls over 1300 units in central Texas. All of these units have been acquired through syndication. In order to acquire so many units, James has networked with accredited investors.
James wrote Passive Investing in Commercial Real Estate to help educate investors on what to look for when selecting a passive investment. Selecting the deal sponsor is key, and finding one that you can trust is the most important.
Passive investing with accredited investors provides the syndicator, Achieve Investment Group, with needed capital. The investors get the opportunity to reap the rewards of real estate without having to be actively involved in the acquisition and daily operation of the property.
The typical hold time for an investment property that Achieve acquires is 5 years. This allows the time needed to improve the property and positively affect the improvements. A year of market rate rents in the improved property provides the financial proof of value needed for sale. When investing passively, investors look for capital preservation, positive return, and the return of their investment capital.
Keys to Successful Value Add
The keys to executing a successful Value Add strategy start with the purchase. It cannot be stressed enough, that in order to have a successful deal, you have to “Buy Right”. Failure to buy right will make your impede your success. You have to buy right.
Next, you must operate the property in a way that maximizes the value. If your due diligence revealed, low rents, or high expenses, it is up to the property management and asset management to correct and improve the property value.
This includes training your tenants. If prior management allowed slow payment, and did not enforce the lease, your management will have to set the new tone early and guard against the tenant training management.
A successful track record of acquiring, repositioning, selling and providing positive returns to passive investors will attract additional investors. Passive investing for the investor is based on the ability to trust the deal sponsor. A sponsor with a proven track record, will be more appealing than one without success.
Benefits of Passive Investing in Real Estate
Passive investors can lower their tax liability when investing in real estate. The US tax code is pro real estate investment.
Tax Benefits of passive real estate investing are impressive. Positive cash flow from a passive commercial real estate investment is off set by the three deductions; depreciation, mortgage interest and the loan cost.
- Depreciation is an annual percentage of the building value that is lost through use. This is an accounting exercise that is calculated and claimed when you file your taxes.
- Mortgage interest currently is an expense that can be deducted when filing taxes.
- Loan fees you pay when obtaining a mortgage are an expense you can deduct when filing your taxes.
At year end, the sponsor, or syndicator, will provide you with a K1 to use when filing your taxes. The K1 will show both income and deductions. Most likely, the deductions will exceed the income in the early years of your investment. The unused deductions are not lost, but rather carried forward and can be used to offset the capital gain and depreciation recapture due at sale of the property.
Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”
BIGGEST RISK: I think the BIGGEST RISK, is not doing due diligence properly either on the physical property inspection or even on the you know the business plan right. To make sure your business plan is correct. Because when you buy a deal we always have to make sure that we understand everything about the deal.
We’re buying multi multi-million dollar deal that we are syndicating we have passive investor money in the line. Our money is on the line and we want to make sure that we do as much due diligence as possible. So, that because it is our list that I fear is always likely did I miss out something. I’m always checking and checking and checking and double checking triple checking and making sure that I know everything that I do.
For more go to:
Website: Achieve Investment Group
Podcast: Achieve Wealth Podcast
Face Book: Multifamily Investors Group
Linkedin: James Kandasamy
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