This is a YouTube video titled "Will Real Estate Income Continue To Be Covered By Depreciation? - RE Webinar DLP YQA 2023-4" containing a webinar discussion from March 22, 2024. The content features multiple speakers discussing the tax implications, performance, and management challenges of a real estate housing fund, including topics like depreciation, tax law uncertainties, property underperformance, and operational complexities in multifamily real estate investment. The discussion is detailed and technical, aimed at informing investors or interested parties about the fund's financial and operational status.
Now, so far, the income from the housing fund has been completely covered by depreciation. No taxable income has been distributed. Under what circumstances can or will that change in the future?
It's a great question. I'd say there's a number of things that could happen. None of us know what tax law and what tax code is going to be in four years or eight years or 12 years. Could capital gains laws change? There's talk about it every political cycle. Could the rules around depreciation change? It could. There's a lot of things that could happen down the road from tax code standpoint that could make a difference. In addition, if we do even better in this cycle than we did in Covid and generate really incredible returns, we could hit a certain return level that we can't cover all the income through tax, which is a really good problem to have ultimately, if returns significantly, you know, outpaced our ability to cover those earnings through depreciation. So far, and not just in this fund, but all the equity funds we've done over the past 10 plus years, we've been able to cover all of the income through depreciation largely. And there's other benefits to PRI. Our funds are private REITs. We get some, a number of unique REIT benefits, including unlimited what's called qbi, qualified business income. We also have the ability to sell assets within the fund and do 1031 exchanges and fully defer gains. We have a number of, I'll call levers we can use. And so our expectation is that we'll be able to continue to defer tax for all investors while they're invested in the fund. Can't and don't make any, any promises or guarantee that that will be the case, that tax law won't change. But we think, you know, we'll be able to be in a position, this fund to be as tax friendly, as tax advantageous as virtually anywhere else you can go, certainly compared to any other real estate vehicle, which generally speaking, real estate is one of, if not the most tax friendly, you know, asset class.
Now, while the funds have never lost money, I'm sure some of the properties in the fund have not performed as well as you had hoped. While what's been your biggest disaster in that department and what did you learn from it?
Yeah, and you know, every quarter we produce, you know, full reporting on the, on the fund and we, we mark every one of our properties. Is it performing to, you know, to budget, Is it overperforming? Is it underperforming? And I don't think there's been a quarter yet. Maybe the first quarter or two. I'd have to go and look back, But I don't think there's been a quarter or two yet. That there hasn't been at least, you know, one or two properties that are underperforming. And that's one of the benefits of being in a fund that today, as mentioned before, owns over 60 properties over 18,000 units is you can have a couple properties underperforming and still exceed investment targets. And that's as we've done over the last number of years. But there could be a wide variety of reasons that a property underperforms. And sometimes it can underperform on the short term, but still overperform over the life of the investment. Maybe we bought a property and we thought in year one we were going to generate a certain amount of cash flow and we realized, hey, there was more work that needed to do. Or maybe we made the actual decision that we're going to do more renovations than we originally planned because we realized it would generate a better overall investment but hurt us on the short term. We have that flexibility to adjust within perform on the short term, but still overperform over the life of the investment. Maybe we bought a property and we thought in year one we were going to generate a certain amount of cash flow and we realized, hey, there was more work that needed to do. Or maybe we made the actual decision that we're going to do more renovations than we originally planned because we realized it would generate a better overall investment but hurt us on the short term. We have that flexibility to adjust within the fund because it's evergreen and we can adjust based on what's going on the market, based on what's going on in the asset and its local market. But, you know, managing multifamily real estate, despite what a lot of sponsors out there may lead you to believe over the last number of years, it's hard you're dealing with. You know, as I mentioned before, we have 40,000 plus people that live in our properties, right? We have thousands of new people moving in every year. We're literally painting and renovating and dealing with plumbing issues every single day. Right? Thousands of them a year. We deal with tens of thousands of work orders a year across the assets in the housing fund. You know, we have companies go out of business. We may have an employer who employs a good percentage of our of our employees that goes out of business and affects that local market. We have things like Covid come about where you know, the government essentially tells residents they don't need to pay their rent, right. And where courts shut down and you can't evict anybody because you can't get through the court system. Right. There's a million different volatility, you know, and things that can happen, that can, that can affect the performance of an asset, especially in, you know, in one month or one quarter over a short period of time. And, and so you have to work through it. It's every, every day, you know, challenge. We had a property that had maintained 90 plus percent occupancy for four or five years and all of a sudden we had a really tough quarter. It was a local market issue, a small market, and occupancy plummeted down into the high 70s. And I just got a report yesterday, we're back into the 90s, but it took four or five months of heavy work and focus and our corporate leadership team being out there and enhanced marketing efforts and really hands on work. But there's always challenges and that's why it's so important that we're vertically integrated and we're very, very hands on in working through the many challenges that come about and dealing with neighbors and roofs and plumbing and people. It's a lot of work.
The hosts of the White Coat Investor podcast are not licensed accountants, attorneys or financial advisors. This podcast is free entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.
