Tag Archives: Investing

Should You Be a Passive Apartment Investor?

Many people today are unhappy with the returns they’re getting from their current investments and are looking for alternatives. Of course CDs and savings accounts don’t return enough to keep up with inflation and the stock market is such a roller coaster that it’s hard to feel comfortable putting your entire retirement nest egg there.

With so many homes in foreclosure, some folks have tried buying a house to fix up and resell. If you know what you’re doing you may be able to work on it for a few months and sell at a profit. This strategy does come with obvious risks, but with proper training, mentorship and a good team, you can make a tidy sum on each property. However, unless you want to make a career of it, doing fix and flips requires a lot of time away from your regular job.

If you’ve been looking for alternative investments you’ve probably read about the opportunities in commercial real estate. One way to get in on these investments is through a Real Estate Investment Trust, or REIT. Investing in a REIT is a lot like buying a mutual fund, but the managers are acquiring portfolios of apartments, office buildings or shopping malls instead of stocks. You can get quarterly distributions based on the cash flow produced and are a part owner of the properties.

In today’s economic environment, both offices and retail centers are dealing with high vacancies. Since all real estate is cyclical, these property types should rebound sometime in the future, but apartments are doing well now, since everyone needs a place to live.

One reason investors favor apartments right now is the continued growth in the 18-34 year old age group, which makes up the bulk of apartment residents. In addition, houses are no longer viewed as the great investment people thought they were a decade ago. Not only have thousands lost their home during the economic downturn, but the banks have tightened up the lending requirements so much that even people with decent jobs are having trouble qualifying for a loan.

Even if you believe apartments may be a good place to invest, you may not be attracted to the returns and control of a REIT. Unless you’re very wealthy, it’s not practical to buy an apartment building yourself. Is there another way to participate safely and wisely in this current boom without having to deal with tenants and toilets?

As a matter of fact there is. You could pool your money with other investors to buy, manage and sell an apartment property. But what if you don’t personally have the knowledge, experience and team to pull this off? Now what?

You may be lucky enough to have a friend or family member who does these kind of deals who can offer you a spot in one of their syndications. A syndication is a group of investors who go in together on a project that none could pull off by themselves. Hollywood movies are often the result of a syndication, but they can be assembled for many purposes, including the purchase of commercial real estate.

Before putting your money into Uncle Bill’s syndicate, there are several things to consider. First of all, do you already believe in commercial real estate as an investment tool? Specifically, do you think the need for affordable housing will continue to grow? Have you seen that new construction has not been able to match the current demand, leading to lower vacancy rates and rising rents? I’d suggest that you don’t let anyone fast-talk you into this model if you don’t already believe in it yourself.

Once past this hurdle, there are several more to go. First of all, do you feel comfortable with the promoter/sponsor of the deal? You will be partners for several years, so you absolutely must not only trust, but actually like, this person. You will be putting some substantial cash into their hands, so pay attention to your gut feelings. Sometimes the best deal you ever do will be the one you avoided. At the same time, they will be judging if they want to be tied to you for the length of the project. If you’re hard to get along with, or are a micro-manager, they may well decide it’s not a good match to have you in the group.

You also want to consider the sponsor’s experience with this type of project. If they’ve done similar deals and they’ve worked out well for the investors, that’s all a plus. Everyone has to do a first deal, so if that’s the case, you need to feel that their experience in smaller real estate endeavors has prepared them for this specific offering. If they’ve owned and operated several fourplexes, you may feel comfortable trusting them to pull off a smaller apartment complex, but maybe not one of several hundred units. It’s your call.

Make sure they have a professional team in place. No one does this alone, so they should let you know about their real estate attorney, securities attorney, management company, commercial broker, accountant and title company. Feel free to call them as a reference.

Consider your timeline for this type and size of investment. Most apartment projects will need you to commit your funds for several years. If you think you may need your cash back sooner than the projected holding period, this is not a good investment for you.

Once you feel good about all these considerations, it’s time to get more information about the specific offering being presented to you.

If you are looking for current cash flow, make sure the property is throwing off enough cash to provide your required return. The sponsor will probably provide you with a spreadsheet that projects expected gross income, less all the operating expenses. This number is the net operating income, or NOI, and it’s the basis for figuring the value of the property. After that, the mortgage payments are subtracted and the result is the before tax cash flow. This should be greater than what has been promised to the investors so that you can feel comfortable that even if things don’t go exactly as planned, you will still get your promised return.

The group of investors will most likely be promised a percentage of ownership in the deal. You will collect your pro-rata share of this once the property is sold. The combined result of distributions from ongoing cash flows, plus the chunk you receive at the end is called the Internal Rate of Return, or IRR. You’ll want to make sure this number is substantially higher than what you are getting with your current investments.

Even though apartments seem to be a great investment today, all investments come with some risks involved. Don’t invest any money you can’t afford to lose, and whatever you do, don’t take out a loan to put into any investment, including the “can’t fail” deal Uncle Bill has for you.

Before you send in your check, be sure to read any and all legal documents the sponsor provides. Most apartments are purchased via a Limited Liability Company, or LLC. You will be a member of the LLC and will actually own a membership in the LLC, not a portion of the real estate itself. Be sure to read and understand the LLC’s Operating Agreement, as it spells out in great detail how the project will be run from start to finish. I recommend you have your accountant, attorney or financial advisor review it and answer any questions you have. If you’re not comfortable with the risks and benefits, don’t do the deal.

If you go to a luncheon put on by a promoter, or are otherwise introduced to one you don’t know personally, proceed with caution. Most likely putting a group purchase together creates a security, so SEC regulations must be followed to the letter. They require the sponsor to have a substantial personal or business relationship with you before presenting you with an offer to invest, so make sure you’ve had enough time to get to know them and their history, and they know enough about you to feel good about your ability to participate in this kind of opportunity.

Real estate syndications can be a great way for a sophisticated or accredited investor to participate safely and profitably in a commercial real estate deal. If you understand and follow the suggestions put forth here, you’re well on your way to a successful investment.

First Quarter 2012 Multifamily Investing News for Colorado Springs

“The local economy showed its strongest growth in two years. The Business Conditions Index stands at 106.91, its highest value since June 2008.” Thus begins the January 2012 version of the Quarterly Updates and Estimates report published by Fred Crowley, Senior Economist at the University of Colorado at Colorado Springs (UCCS).

http://www.usafa.af.mil/cadetFocus/cadetPhotos...

In the report’s section on the multifamily market, we learn that the average rent for an apartment in September was $779, and the vacancy rate was 6.2%. The author expects the market to remain tight through 2012 as troops returning to Fort Carson will outnumber the new apartment units in the construction and planning stages.

The report also states that unemployment dropped for six months in a row compared to the previous year. The rate stood at 9.37% in December 2011.

In other local news, Seagate Properties of San Rafael, California has bought its third apartment complex in the city in the last ten months. The latest acquisition was the 310-unit apartment complex known as Sunset Creek Apartments. Located at 5400 N Nevada, it is across the street from the UCCS campus and next to the University Village shopping center. Part of the Pikes Peak Greenway trail system goes right by the complex. The new owners plan to build a new swimming pool and clubhouse, as well as upgrading the tennis and volleyball courts among other improvements both inside and out.

Seagate now owns five properties in the area totaling 685 units. The others include Copper Chase, Cascade Park Apartments, Boulder Crescent Apartments and the Fillmore Ridge Apartments. They plan to buy a total of 2,000 units in Colorado in 2013.

U.S. News & World Report recently named Colorado Springs as one of the Top 10 “Best Weekend Getaway” destinations in the country. We made the list at the number six spot largely for our “prime picture-taking real estate” as well as for being home to the United States Air Force Academy and the Olympic Training Center. The top three recommended places to visit were the Garden of the Gods, Manitou Springs and the top of Pikes Peak.

In late-breaking news, Frontier Airlines has recently announced they are making Colorado Springs one of its first “focus cities”, a term they use to represent their new focus on local markets. In January, the airline announced new non-stop flights to Phoenix, Los Angeles, Seattle and Portland, starting in May. Part of the strategy is to use larger, newer, more fuel-efficient planes on these new routes.

“They clearly see the potential in this market,” said Dave Csintyan, interim CEO of the Greater Colorado Springs Chamber of Commerce and Economic Development Corp. “I think they see this as an underserved market.”

As the economy continues to improve and more troops and visitors return to Colorado Springs, it’s looking more and more positive for investors in the region.

Related Stories:

 http://csbj.com/2012/03/08/seagate-purchases-third-complex-in-10-months/

http://coloradospringsapartmentinvestor.com/new-apartment-sales-and-construction-in-colorado-springs

My First Real Estate Syndication: Lessons Learned

I recently closed on an 18-unit apartment in my town using money from a syndication I put together. There were so many unexpected twists and turns getting to the closing table that I realized others just getting started could benefit from my experience. Perhaps my story will help you better anticipate, and therefore avoid, some of these bumps in the road.

This article won’t address finding or analyzing your project. You’ve gone through the home study course, attended a bootcamp (or two) and hopefully have a mentor who can help you with all that. This will start with the assumption that you will need to pool funds from investors to make the deal happen.

First of all, when writing up your offer, try to put the closing date out further than you think you’ll need. Try for 75-90 days, and if you can only get 60, add in an option for a 30 day extension, even if you have to pay for it by letting part of your earnest money go hard. Unless you already have the down payment in the bank, count on  delays that will have you sweating bullets and losing sleep.

As a corollary to this rule, examine the calendar and try to avoid going through major holidays before closing. I first started working on this apartment deal in early October, and was thrilled when I had a signed contract by October 26. Little did I realize, a 60-day closing put us at December 26, the day after Christmas. Not only was this a holiday, since Christmas fell on a Sunday, but people start taking time off in the week before. Not much gets done between Christmas and New Year’s for that matter. You may be willing to give up family time to get the deal done, but it’s just not as critical for lenders, title companies or brokers. Also, Thanksgiving was in there and took at least another five days off the schedule. Luckily for me, the seller was willing to push the closing to mid-January, but you sure can’t count on that.

If your investors will not be actively running the project with you, but will depend on your efforts to make a profit, you’ve probably created a security. In that case, you’ll need to hire a securities attorney to draft your Private Placement Memorandum, Subscription Agreement and Operating Agreement. You won’t begin that process until you have a signed contract and the clock is ticking. Count on 30 days to get that back. With a 60-day closing date, you’ll only leave yourself a month to get these to your investors, with barely enough time to read through and understand the docs, run them by their accountant or financial advisor, make a decision and get the money into your account.

It’s very important to have more investors interested in working with you than you’ll actually need. I had a list of 26 folks who had expressed interest in being commercial real estate investors, but in the end, only six actually signed up and sent in their money. If it had only been five, I would have been in a tough spot. If you don’t close, you not only lose your upfront cash, you also lose credibility with the investors who now get their money back. Good luck in getting them interested in your next project, and try not to think about how they may represent their experience with you to their friends.

One way to mitigate some of this is to have a range of funds you’re going to raise. Your PPM can let you break impounds (start spending your investors’ money) when you’ve raised enough to cover the down payment and closing costs. Then you have an upper limit you can continue to raise, even for several months after closing. That’s the money that will pay your syndication fee and build reserves. I’m still waiting on one investor’s money to come in, but at least I had enough to close.

The reason his money hasn’t arrived yet is because he recently found out his so-called self-directed IRA custodian wouldn’t let him invest in real estate. So at the last minute, I had to help him roll his IRA to a new custodian that allows this kind of investment. If any of your investors will be using their retirement fund to get into your deal, make sure you know the custodian allows full self-direction of funds, and expect it to take longer than just writing a check. The custodian won’t give their OK until they’ve seen your PPM and Operating Agreement (at the very least).

Finally, when you’re recruiting investors, see if they’re fine with submitting their financial statement and tax returns to the lender, and then signing personally on the note. Most banks will want this from you, as well as anyone who will own 20% or more of the LLC. Even if everyone is below that threshold, they may want at least one of them to sign as a guarantor on the loan. Don’t be surprised if they want their spouse, and yours, to sign personally on a full-recourse loan as well.

I wish I had know all this back in October when I put this together. I would still have done it, and plan to do it again, but at least I wouldn’t have had so many surprises coming at me so quickly. I hope this will help you as you move into your first syndication. Good luck!