FAQ
Multifamily investing involves purchasing residential properties that contain multiple units, such as apartment buildings. Investors generate income by renting out these units to tenants.
There are several benefits to multifamily investing, including potential for higher cash flow compared to single-family properties, economies of scale, diversification of income from multiple units, and the ability to build wealth through appreciation, tax benefits and rental income.
Common investment account options include individual accounts, joint accounts, tenancy in common, entity accounts (such as trusts, Limited Liability Companies, Limited Partnerships, and both C and S corporations), as well as individual retirement accounts.
Absolutely, you have the option to invest using your IRA. In case you already possess a self-directed IRA, it’s advisable to verify with your present custodian whether they authorize investments with us. If you haven’t transitioned from a traditional IRA to a self-directed one, you’ll need to reach out to a custodian who can guide you through the process. Should you require a recommendation, we can facilitate a connection with someone capable of assisting you.
Upon being a partner in the LLC that acquires the properties, you will be issued a K-1. A K-1 is a tax form employed by partnerships to furnish investors with comprehensive details concerning their portion of the partnership’s taxable income. This encompasses the partnership’s income, gains, losses, deductions, and credits. K-1s are dispensed annually to investors, enabling each individual to incorporate the K-1 amounts into their tax return.
A private real estate fund gathers money from various investors to invest in real estate properties. Managed by professionals, these funds provide access to diverse real estate projects that individual investors might not access directly.
Distributions are scheduled on a quarterly basis.
An accredited investor, for an individual, encompasses those who:
- Have earned income exceeding $200,000, or a combined income with a spouse surpassing $300,000, in each of the last two years, with an expectation of maintaining similar income for the current year, OR
- Possess a net worth over $1 million, either individually or jointly with a spouse, excluding the primary residence’s value.
Furthermore, various entities including banks, partnerships, corporations, nonprofits, and trusts can also be deemed accredited investors. Depending on the entity and specific circumstances, the following factors might apply:
- Any trust with total assets surpassing $5 million, not specifically formed for purchasing the mentioned securities, under the guidance of a sophisticated person.
- Any entity wherein all equity owners are themselves accredited investors.
In this context, a «sophisticated person» indicates an individual who possesses, or the company/private fund offering the securities reasonably believes possesses, adequate knowledge and experience in financial and business matters to evaluate the advantages and risks of investment.
No, it is not mandatory. At present, we offer investment opportunities that are accessible to both accredited and sophisticated investors.
This implies that the individual is confident in having substantial knowledge and familiarity in financial and business domains, enabling them to thoroughly assess the advantages and risks associated with the potential investment.
Investors are allowed to visit the property before investing and during the life of the partnership.
Key Terms
These are loans provided by the government-sponsored enterprises (GSEs) Fannie Mae® and Freddie Mac®, also known as the ‘agencies’. They provide some of the best loan terms on the market.
Typically, Agency loans have more advantageous terms and stricter guidelines for borrowers than non-agency lenders.
Paying off a debt over time in equal installments.
How much value your house gains over time, or the opposite of depreciation.
Obstacle(s) that prevent entering a real estate market or industry. Some barriers to entry for real estate are; regulations, cost to build, no land available, restrictions on new projects, politics, geographic restrictions like oceans, rivers, mountains, and major cities.
Barriers to entry are one of those things that makes a property more valuable over time because it becomes more difficult or impossible to get a project done at the same or similar location.
A real estate broker is a person who has obtained a professional license to directly act as an intermediary in the business of selling, buying, and renting real estate such as houses, buildings, and offices. The main difference between a real estate agent and a real estate broker is that brokers have obtained a higher-level license.
To a real estate investor, capital is the money needed to invest in more projects and cover the day-to-day transactions of their business, both short or long-term. It also includes the money in the bank and assets that can be exchanged for cash, it might also be any proprietary systems or inventions.
Money that is spent to acquire, repair, update, or improve a fixed company asset, such as a building, business, or equipment. A CapEx is different from an everyday business, which falls under the operating expense category.
The cap rate is the most popular measure through which real estate investments are assessed for their profitability and return potential. The cap rate simply represents the yield of a property over a one-year time horizon assuming the property is purchased on cash and not on loan. The capitalization rate indicates the property’s intrinsic, natural, and unlevered rate of return.
This number is the HOLY grail of asset management and should always be POSITIVE.
Cash Flow = Effective Gross Income – Operating Expenses – Debt.
It is the amount of money remaining after a rental property owner satisfies financial obligations related to the property. When you’re discussing real estate cash flows, you’re talking about money that’s generated by the property (i.e. rental income) and money that’s spent in association with the property.
This is the rate of return based on the cash amount initially invested in the asset by the investors.
Cash-on-Cash = Net Operating Income ÷ Initial Investment Amount
Property classes refer to a property classification system used to determine the potential of an investment property based on a combination of geographic, demographic, and physical characteristics. Real estate property classes are determined by a variety of factors, including location, age, and overall condition of the property (and it’s important to consider each of them during your estate due diligence process).
Classes of property can be A,B,C and D.
Class A
- Generally, garden product built within the last 10 years.
- Properties with a physical age greater than 10 years but have been substantially renovated.
- High-rise product in select Central Business District may be over 20 years old.
- Well merchandised with landscaping, attractive rental office and/or club building.
- High-end exterior and interior amenities as dictated by other Class «A» products in the market.
- High quality construction with highest quality materials.
Class B
- Generally, product built within the last 20 years or an older property recently renovated.
- Exterior and interior amenity package is dated and less than what is offered by properties in the high end of the market.
- Good quality construction with little deferred maintenance.
- Commands rents within the range of Class «B» rents in the submarket.
Class C
- Generally, product built within the last 30 years or an older property recently renovated.
- Limited, dated exterior and interior amenity package.
- Improvements show some age and deferred maintenance.
- Commands rents below Class «B» rents in submarket.
- Majority of appliances are «original».
Class D
- Generally, product over 30 years old, worn properties, operationally more transient, situated in fringe or mediocre locations.
- Shorter remaining economic lives for the system components.
- No amenity package offered.
- Marginal construction quality and condition.
- Lower side of the market unit rent range, coupled with intensive use of the property (turnover and density of use) combine to constrain budget for operations.
Closing costs are the expenses over and above the property’s price that buyers and sellers usually incur to complete a real estate transaction. Those costs may include loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed recording fees, and credit report charges.
A commercial real estate broker works with clients to buy, lease, sell, or rent nonresidential properties, such as office or retail space.
In multifamily, the deal refers to the particular asset, its financial characteristics, location, and purchase agreement terms.
Debt is something, usually money, borrowed by one party from another. Debt is used by many corporations and individuals to make large purchases that they could not afford under normal circumstances.
The Net Operating Income of the asset secured by the debt (NOl) divided by the Annual Debt Service (principal and interest payments). The higher the number the better. This measures how well the cash flow your investment property will cover and pay off your debt on that property. In a down economy DCR determines whether you stay afloat or lose it all.
Debt yield is the return that a lender would receive if the borrower defaulted on the loan and the lender had to foreclose on the subject property.
A down payment on a property is the cash that the buyer pays upfront in a real estate transaction.
Economic occupancy takes the physical occupancy and measures it against the total possible income it a property is 100% occupied and tenants are paying the full market value in rent.
Effective gross income (EGI) is the Potential Gross Rental Income plus other income minus vacancy and credit costs of a rental property. EGI can be calculated by taking the potential gross income from an investment property, add other forms of income generated by that property, and subtract vacancy and collection losses.
The difference between the worth and the amount owed on a piece of property.
A multifamily exit strategy refers to a comprehensive plan put in place by real estate investors or property owners to determine how and when they will sell or otherwise dispose of a multifamily property they own. This strategy outlines the steps and considerations for exiting the investment while maximizing returns and achieving predetermined goals. It takes into account various factors such as market conditions, property value, financial objectives, and investment timeline. The goal of a multifamily exit strategy is to ensure a smooth transition out of the investment, whether through a sale, refinancing, or other means, while optimizing the potential for profit and minimizing risk.
The cost of operations that are incurred in maintaining a property. Property Management Expenses means the costs incurred in managing the Underlying Asset, including, but not limited to property management fees, property taxes, payroll, maintenance, insurance, utility costs excluding interest cost, depreciation and cap expenditures.
Total Operating Expenses ÷ Gross Operating Income.
A floating interest rate is one that changes periodically: the rate of interest moves up and down, or «floats”,economic or financial market conditions. Often, it moves in tandem with a particular index or benchmark, or with general market conditions. It can also be referred to as an adjustable or variable interest rate because it can vary over the duration of the debt obligation.
The result of subtracting the credit and vacancy losses from a rental property’s gross potential income.
A financial metric used to evaluate the amount of income that a property could potentially produce. Gross Potential Rent is calculated as the amount of rental income a property could produce assuming all units were rented at market rates, and all tenants paid their rent on time each month.
This is the number of years it would take for a property to pay for itself based on the Gross Scheduled Income. The lower the number, the better the return, but it doesn’t mean it’s a better property.
Gross Rent Multiplier = Purchase Price ÷ Gross Scheduled Income.
The maximum possible annual income in rent collections generated by your property if it is 100% occupied, 100% of the time. 100% occupancy all the time will never happen, and if it does happen, your rents are too low. This is also known as Gross Potential Income or Gross Potential Rent.
A loan that allows the borrower to only pay the interest on the loan, without paying the principal down.
This is your ability to use debt to buy real estate, instead of paying 100% of the purchase price in cash. Using leverage helps you to increase your Cash-on-Cash return, as long as the property generates more cash than the interest paid on the loan.
When rents rise in a market, apartment values increase.
NOl = Effective Gross Income.
This is a VERY important calculation to understand. Banks and lenders care about NOI first. It is what determines the value of the property. The higher the NOl, the lower the debt, the more cash flow.
The number of the units occupied at the property or «heads in beds”.
All the other income generated from the property which could include parking, laundry, late payments, storage, etc.
Principal and Interest includes the interest on the loan amount plus paying down the principal monthly in the payments made.
This document is a projection of the revenue and expenses for the property. It can be projected 12 months or 5 years into the future.
Property Management Expenses means the costs incurred in managing the Underlying Asset, including, but not limited to property management, taxes, maintenance, insurance, and utility costs.
The price of the property plus all closing costs, legal fees, document fees, finance costs and rehab.
The process of paying off an existing mortgage loan using a new loan. In most cases, property owners will refinance current loans when interest rates drop and they are able to realize a significant reduction in either their payment amount or the loan term.
This is how much it costs to renovate and fix the building.
How much it would cost to build or rebuild a property.
This is the trailing three months of revenue and expenses for an apartment building.
This is also known as a trailing 12-month profit and loss statement or an operating statement. An important document showing ALL information about the last 12 months of revenue and expenses for an apartment building.
A process by which a real estate asset is evaluated.
- Gathering data about a property.
- Making assumptions about how the property is likely to perform in the future.
- Creating projected cash flows on the investment.
- Assigning a valuation to the property based on that information.
A value calculated as the percentage of all available units in a rental property that are vacant or unoccupied at a particular time.
A reduction in book value of an item (as by way of depreciation). A tax deduction of an amount of depreciation, expense, or loss.
