What investments are working in 2023 (part 2)

In todays email:

🤑 What is working in 2023.

What investments are working in 2023

In today's newsletter, I will continue to discuss what's working now in today's market. There are many ways to make money in real estate but not all things work at all times. You have to be aware of the macro cycles and keep updating yourself on the constant change in the real estate world. In this newsletter, I will discuss the last 3 topics in red below. The prior 4 were discussed in the last newsletter.

• Single Family Rentals

• Private Lending

• Mortgage (Deed of Trust) Notes

• Owner Financing 

• Syndication Investing as LP (Limited Partner)

• Fix/Flip

• Short Term Rentals

SYNDICATION INVESTING AS LP (LIMITED PARTNER)

First, let's talk about exactly what investing as a limited partner in syndications is all about. Here is a simple explanation of investing in real estate syndications as a limited partner:

• A real estate syndication is when a group of investors pool their money together to invest in a larger real estate property, like an apartment building. This allows them to invest in properties they may not be able to afford on their own.

• The group consists of a sponsor, or syndicator, who finds the property and raises the capital, and passive limited partners who provide most of the investment money.

• As a limited partner, you do not have control over the investment or management of the property. Your involvement is passive - you simply invest money.

• The limited partners receive regular distributions (usually monthly or quarterly) from the income produced by the property, after expenses are paid.

• You make money through these distributions and the appreciation in value of the property over time. When the property is sold or refinanced, you receive a share of the profit.

• Syndications allow passive investors to invest in real estate and diversify their portfolio. But there is also risk involved if the investment underperforms.

• It is super important to research the sponsor/syndicator before investing to understand their background, previous success, and the details of the specific deal.

Here are some typical requirements to invest as a limited partner in a real estate syndication:

• Accreditation - Most syndicators require investors to be accredited, meaning you have a net worth of over $1 million (excluding primary residence) or income over $200k as an individual or $300k jointly with spouse. This is due to SEC regulations. Now some syndications have a limited availability for non-accredited investors as well.

• Minimum Investment - Often around $20k-$50k minimum, but can vary by deal. The more you invest, the greater your share of ownership and profits.

• Limited Partnership Agreement - You'll need to sign an LP agreement outlining the details of the investment terms, profit split, duration, etc.

• Passive Involvement - As a limited partner, you are strictly an investor and do not participate in managing the asset. You rely on the general partner/syndicator to operate the deal.

• Holding Period - Many deals require a 3-10 year holding period before the property is sold and you receive your distribution. You need to be comfortable with long-term investments.

• Funding - Proof of funds readily available to wire your investment amount is often required. Syndicators want to work with credible, vetted LPs.

There are typically several key documents you will need to sign as a limited partner investing in a real estate syndication:

• Private Placement Memorandum (PPM) - This long-form document provides full details on the syndication investment including the property, fees, risks, returns projections, and more. Thoroughly reviewing the PPM is crucial before investing.

• Limited Partnership Agreement - This legally binding agreement outlines the rights and responsibilities of the limited partner (the investor) and general partner (the syndicator). It will detail ownership percentage, distribution of profits, length of partnership, etc.

• Subscription Agreement - This agreement finalizes your investment amount and signals your intent to invest in the syndication. It will specify your capital contribution and distribution terms.

• Electronic Signature Authorization - This allows documents to be signed electronically rather than with wet ink signatures. It's faster and more convenient.

• Tax Forms - You'll need to provide W-9 for tax purposes.

Take time to thoroughly review all documents with your advisors before signing. Ask the syndicator questions. Investing as a limited partner requires due diligence just like any investment.

Examples of syndications investments that I have in my portfolio.

1. Apartments: Value Add and New Build

Here's an overview of how value-add apartment syndication investments work:

• The sponsor or general partner identifies an apartment community that is being undermanaged and has potential for improvement.

• The business plan is to acquire the property and implement upgrades and renovations to units, amenities, and operations. Things like new flooring, cabinets, appliances, paint, clubhouse additions, etc.

• These capital improvements allow the new ownership to increase rents and improve operational efficiencies. Unit upgrades command higher rents. Better management decreases vacancies.

• The value-add strategy aims to force property appreciation by improving both physical assets and management/operations. The improved net operating income and lowered cap rates boost property value.

• Risks include execution challenges, delays, contractor issues, overbudget renovations, and market conditions limiting rent growth potential. Proper underwriting is crucial.

My apartment investments include:

Value Add: 700+ units mostly in Oklahoma

• Projected IRR: 23%

• Projected CoC (cash on cash): 9%

• Hold time: 3-5 years

New Build: 180 unit apartment in Idaho

• Projected IRR: 19%

• Projected CoC (cash on cash): 7.75%

• Hold time: 3-5 years

2.  Distribution Centers

A distribution center, also known as a distribution facility or distribution warehouse, is a critical component of the supply chain management process. It is a central location where products from manufacturers or suppliers are received, stored temporarily, and then shipped out to retailers, wholesalers, or directly to customers. The main purpose of a distribution center is to efficiently manage the movement of goods, ensuring that they reach their intended destinations in a timely manner.

My distribution center investments include:

New Build: Distribution center in Oklahoma City.

• Projected IRR: 27%

• Projected CoC (cash on cash): None in 1st year. Looking to sell asap.

• Hold time: 1-3 years 

3.  Debt Funds

A private debt fund for real estate is a specialized investment vehicle that focuses on providing financing to real estate projects and developments, typically in the form of loans. These funds are managed by professional investment firms and offer an alternative source of capital for real estate developers, property owners, and other real estate entities.

Private debt funds for real estate can offer investors a way to access the real estate market without directly owning properties. However, potential investors should carefully review the fund's investment strategy, track record, fees, and risk factors before committing capital, as these funds can have varying levels of risk and return potential.

Investors in debt funds receive payments in the form of interest income, which is generated from the interest payments made by the borrowers of the underlying debt securities held by the fund. Most debt funds have no upside from the property increasing in value.

I am an investor in several debt funds. Some are focused on fix/flip lending, some on commercial lending, some on new construction lending and some on buying mortgage notes. Below are the average numbers but each varies.

• Projected IRR: 9-13%

• Hold time: 1-3 years

• Some have splits above a certain percent. For example, a private lending fund pays 9% plus 50:50 split above 9%.

FIX/FLIP

First, here is a simple explanation of what it means to "fix and flip" in real estate investing:

• Fix and flip involves buying a house that is distressed or needs significant repairs, fixing it up, and then selling (flipping) it for a profit.

• The goal is to add value to the property by renovating, remodeling, or repairing issues. This allows it to be sold for more than the purchase price plus renovation costs.

• Fix and flippers look for discounted properties to purchase, often from foreclosures, auctions, or motivated sellers. The lower the purchase price, the more room for profit.

• Once the fixes are complete, the investor looks to quickly sell (flip) the home for a markup from their costs into it. Most flips happen within 6 months of purchase.

• The key is buying right and enhancing value through repairs and renovations. Market analysis is crucial to target profitable deals and determine realistic sales prices.

• It can be risky if repair costs exceed estimates or the local market slows. But done correctly, fix and flips can yield decent returns on the capital invested in each deal if the cost basis is low enough.

First, I am not a fix/flip person. I don’t purposely target or look for properties that I can fix/flip. The only rehabs that I'm doing are obtained through the non-performing notes that I purchase and get back as an REO (after foreclosure). These properties normally need some work to get them up to speed to be able to sell them to retail buyers. I have done rehabs in about 20 different states and it is very difficult to manage long distance.

I don't think the fix and flip business model is one that is scaleable unless you have a dedicated crew of contractors working for you. You have to constantly be finding houses that fit your criteria and then you have to find the proper contractors and materials to get the job done quickly. A lot of things can happen during the process and I'd rather spend my time on buying notes, buying pretty houses, buying rentals, etc.

In addition, it is becoming increasingly difficult to find properties where the profit margin is high enough to make it worth your time. The margins on fixing flip are getting compressed. This can change in the future, but today's market is not right for fix/flip.

SHORT TERM RENTALS (STR)

Here is a general overview of how short-term rental properties work:

• Short-term rentals refer to furnished properties that are rented out for brief periods of time, usually ranging from a few days to a few months.

• Typical short-term rental properties include vacation rentals, corporate housing, etc.

• Owners list and advertise their short-term rental units on listing sites like Airbnb, VRBO, etc. to attract renters.

• Renters browse these sites to find suitable short-term accommodations in their desired location, for the dates they need, at a price they're willing to pay.

• Once a renter requests a booking, the owner confirms availability for those dates and finalizes the rental agreement, often via an online platform.

• Renters pay for the full rental upfront at the time of booking. Platforms like Airbnb collect payment on behalf of owners.

• Owners are responsible for preparing the unit in between rentals - cleaning, laundry, restocking supplies, maintenance. Some hire cleaning crews.

• Each rental platform has its own fee structure. Hosts pay a commission fee, often 3-5% of the total rental rate.

I am not an investor in STR. Why? Here are some potential downsides or risks to investing in short-term rental properties that are worth considering:

• Regulations - Many areas are imposing restrictions on short-term rentals through zoning, permits, taxes, etc. These regulations can impact profitability.

• Bans - Some communities have banned short-term rentals altogether. Investing right before a ban goes into effect could be devastating.

• Seasonality - If the rental is in a seasonal destination, you may experience very high and very low demand cycles, leading to inconsistent occupancy.

• Turnover - Frequent turnover of guests can be disruptive and leads to ongoing cleaning/maintenance costs.

• Competition - Popular markets get saturated with short-term rental options, making it harder to achieve full bookings. The market is becoming saturated and the margins are going down.

• Liability - There are risks associated with having a continual stream of strangers staying on your property.

• Property management - These investments can require hands-on management, maintenance, cleaning if you don't hire help.

• Noise complaints - Short-term renters on vacation may party more, generating problems with neighbors.

• Short-term guests may not treat a property as carefully as long-term tenants, leading to more wear and tear.

While short-term rentals can certainly be lucrative if done properly, the risks and responsibilities are real. I prefer more of the hands off approach.

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