EP 8: But What Is The Process To Invest?

Are you frustrated watching your hard earned money ride the knee jerking Wall street roller coaster? Are you looking to diversify into alternate investments and set them on autopilot to achieve financial freedom? It's time to learn the ways of the wealthy. It's time to Think Outside the Stocks with your host Madhvi Jain, an immigrant from India and ex IT professional who will bring you industry experts to illustrate a passive and holistic financial approach to build not just passive income but but also your generational wealth. Madvi is on a mission to change the financial trajectory of one family at a time. And a thousand more to go. Are you going to be part of this vision? And now without further ado, here is the host of Think Outside the Stocks, Madhvi Jain.

Hey, hey, hey. Welcome back to Think Outside the Stocks. I'm your host Madhavi Jain and this is episode number eight. This is actually the continuation of our short course active income with passive real estate investments. But before that, what a great episode we had in episode number seven with Ben Frazier from Aspen Funds. I hope you learned about how to make inflation your friend and to be on the good side. If you haven't heard that episode, make sure that you listen to it. Let's jump in with commercial real estate syndication. What is the process? In our episode number six we talked about the GP syndication responsibilities. Starting from identify and evaluate the property, finance and acquire the property, get the investments on the board, maintain and manage it, renovate it, implement it and sell and distribute the proceeds. Let's take a look at sample investment that will give you additional clarity about what the real estate syndication truly is. Please keep it in mind that the numbers presented here are for example, only each individual investment and the market cycle can impact the numbers. We want you to have a simplistic understanding of this process. The investment type in commercial real estate that we are considering here is apartment complexes, also called as multifamily. We have all lived into apartment complexes. We have seen the property manager managing the property, the maintenance crew taking care of the property. This is what we are talking about as a syndication. We can purchase this entire property, all 100 or 100 plus units, and we can put that property manager and the maintenance crew and you as a passive investor can invest in it with the money you have. So let's take a look at a sample investment and what to expect in this case. This apartment complex, XYZ say Arbor Lake, it has about 212 units. It talks about the class of the property, it talks about the year it's Built, the price is about 20 million. The value add opportunity simply talks about the type of investment opportunity that the syndication team has identified. Say it has a loan of 4% for 10 years at 75% LTV. That's loan to value. And for the passive investors, they are projecting certain return assumptions. First, it is talking about 8% cash flow. It is talking about total returns of about 80%, that is equity multiple of 1.8x. And it's a 16% annual internal rate of return. Let's dissect a little bit. This is a lot of jargons, a lot of terms thrown your way. Let me simplify and explain it to you by saying the annual cash flow 8%. That means simply if you consider 100k as your investment, you are projected to get 8% of cash flow annually for the duration of the whole of this investment. Typically, this annual cash flow gets distributed to you either on a monthly basis or a quarterly basis after the stabilization of this property is done by the syndication team, which is about in 3 to 6 months with 8% cash flow, 100k invested. If you are getting the quarterly cash flow, expect to see about $2,000 every quarter in your bank account. As a complete passive cash flow, what do you have to do about it? Nothing. You don't have to manage the tenant base, you don't have to maintain the property, you don't have to do anything. We as a syndication team will simply manage this, get the income, manage the expenses and whatever is left over will distribute to the passive investors. We will distribute to the passive investors based on their initial capital invested in the investment. Let's talk about the returns, but also talk about what is the hold that we are looking at for this particular investment. The hold projected for this particular investment is five years, which is a very typical hold period. So after the five years hold, expect to see your total returns at 80%. That is what being projected for this investment. So if you invested 100k into this investment, your total returns are 80,000 plus your principal that is expected to come back to you. That's 180,000 projected to come back to you at the end of that five year period. Sometimes this projected return can also go up to 2x. That is if you invested 100k, that the 200k total with your principal coming back to you and at the end of the investment. Now, during the process of the investment, that five year hold, if you have received the 8% cash flow every single year, that's $8,000 every single year for five years. That's 40% of your cash flow. That is half of your return that you received during the process. At the end, when the syndication team sells this property and gets the proceed back, calculate the profit and return it back to investors. They're projecting to see the another 40,000 coming back to you from that equity growth. So in total 40,000 from your cash flow, 40,000. At the end, when the property is sold together, 1.8x is what is being projected for this property. Again, the typical hold is about five years. And the minimum investment for this 20 million property is 50,000. That is the kind of money busy professional, high income earning professionals like you will have in your bank accounts or in your retirement accounts that that you can participate from. So that 50,000 chunks can start creating one stream of passive income systematically for you. So to wrap it up, the projection for this particular sample investment, when you invest 100k it is projected to return your total of $180,000 including your principal in 5 years. And your minimum investment is expected to be about $50,000. Again, keep this in mind, these are projections and these are just examples. Every investment is completely different. Let's take a look at real estate syndication as an end to end process. The syndication team is identifying and evaluating these properties. The passive investors are coming in, they are reviewing this investment and if they decide to invest, that's their role. The syndication team is going to complete the financing and acquire this property. After their thorough evaluation of the physical condition of the property and the financials of the property, the next step they will manage and maintain. They will implement the business plan and they will implement the renovation. That is the fix and flip on the units that they have determined. Once that value is increased and their business plan is achieved, they are going to sell. And the sell proceeds again in the proportion of the investment are distributed back to the passive investors. I hope this makes very clear to you. This is also provided in the presentation format in our website. So if you are looking into visuals, please visit thinkoutsidethestocks.com and get an access to this presentation deck. As a passive investor, how can you invest? Like we said, a typical minimum investment is about $50,000 and typical hold period is about five years. Now let's talk about who can invest in these investments. There are certain regulations in place for this type of investments by the securities Administration SEC and they have created two types of buckets and based on the type of investor you are, you would be able to participate in these buckets. Now the SEC terms and terminology can be really really complex. As an as a passive investor. I do not want to confuse you, but I do want to highlight on how you can invest in these investments. There are two type of investors that SEC says can invest in these investments. One is accredited investor and the other is sophisticated investor. Sophisticated investors have limited possibilities and opportunities to participate in these investments. These are the investments called 506B.B stands for buddy. So you need to know the syndication team. You either are in their friends or family circle or you have a pre established relationship with the syndication team only then you can participate in in this investment. So if B that is for buddy. If you are buddies with the syndication team, you can participate in them. This is for the sophisticated investors. On the other hand, as an accredited investors, you have access to many more options. Accredited investor definition as per the SEC is based on two different criterias. One is an income based criteria and other one is the net worth based criteria. As per the income in past two years. As a single earner, if you are making 200k or more, you are an accredited investor. Or as a joint income earner, if you are making 300,000 or more, you are an accredited investor. The other criteria is based on net worth assumptions. If you have a net worth of $1 million or more, including your liquid assets, your rental properties, your retirement accounts and more, but excluding your primary home, then you are considered accredited investors. And as you can see, you can participate in both the buckets, the 506B for buddies and C for commun. Easy to remember. That way if you need any help in understanding this definitions further, just feel free to reach out to me anytime. Let's take a look at the investment process. When syndication team identify this investment and put in front of the investors. This comes as an investment announcement followed by a webinar. On the webinar the syndication team actually spells out multiple details about this investment. They talk about their track record, the property merits, the market merits, why they're going into that investment. They will talk about the business plan that they're planning to implement. Transparency is the key. They also talk about what are the partnership structures, what is the fees that they're going to make through this investment. So it is clear for a passive investors before they go into it that what this distribution structure is going to look like. This webinars give you plenty of information about what this investment is about so you can review them and see if it is the right fit for you. You also have this syndication team available at a phone call away to answer if you have any further Questions. Once you decide this is a potential investment that you would like to go in, there is a process called soft commit, which simply means that you are going to show that you are interested in investing in this investment and you will provide what is the amount that you want to move in. As an investor, this is a non obligatory step, but it is essential for you to raise your hand and stay interested because typically these investments are on first come, first serve basis only. Now if this is a type of investment that needs accreditation verification done as a next step, you will go through the third party accreditation verification, which is a very simple and straightforward process. In the step number four, the syndication team actually is going to send you legal documents. These are the legal documents that you need to review, take a look at, see what these partnership structures are. And once you have reviewed and signed it, this is a significant step to move ahead. The syndication team is now going to send you the details of the wire transfer so you can execute your investment. And all you have to do at this point is fund the investment by sending that wire transfer to the syndication team so they can start collecting all this investor's money together and get the loan from the lender and proceed with acquiring this property. Before I proceed to the next step, I do want to give a little bit behind curtain look on details of what this indicator role truly are when they are identifying, acquiring, managing and selling these properties, what is really going on behind it. In the identify and evaluate steps indicators like us, we are evaluating hundreds of properties, making offers on those who are satisfying the criteria, creating the business plan and creating that investment information presentation for passive investors like you. After we present this opportunity and start collecting the investment capital from passive investors like you, we are parallelly also evaluating the properties. In the finance and acquire step, we are completing the property evaluation, we are completing the financial evaluation, the physical units are being walked, the condition of the roofs is getting checked. We are also creating the legal structure of the entity. We are doing the massive coordination with legal tax and investor money and lender so we can acquire this property. In managing and maintaining this property, there's tenant management, there's managing the rents, the expenses maintaining the property, the repairs, the expensive expenses, managing the staff, managing the tenant turnover, eviction at times and any incidentals that's happening in terms of improving and selling this property, upgrading the internal units, rebranding this property by new name, new signs, upgrading the clubhouse so it has that great appeal, upgrading the exteriors by paint or siding repairs, increasing the rents, decreasing the expenses, so we have the Efficiencies and the value that we are continuously pushing up and then getting this massive property ready to sell, finding the right buyer and close with that buyer. So that's the immense amount of effort the syndication teams puts across so that the passive investors like you can enjoy their completely passive ride. So again, going back, what as a passive investor that you should expect after the close, As a passive investor, what you should expect after you review and invest in the property, after the stabilization, you start receiving the passive cash flow. You will also receive the periodic updates on what's going on with the property and you will receive the distribution and the sale. Now let's connect back to the benefits of the real estate and the risk that we had talked about in terms of the rental real estate being a landlord. So as a passive investor in the syndication, you have all the benefits of the real estate. It builds cash flow, it provides you true diversification. It provides you leverage in terms of the loans and the expertise of the syndication team. It also provides you many tax smart advantages, in fact, much better tax advantages than the rental property. It provides you net growth in terms of above average returns at the time of the sale of the property. And it also provides that risk managed capital preservation perspective, because that commercial real estate is going to stand behind your investment. That is a tangible real property that's always standing and not losing the value overnight. And in addition, the syndicated commercial real estate provides you many more benefits that are not even provided by the rental real estate. And that is number one, the loans. As a passive investors, your credit is not on the line, you are not even on the loan. It's just the syndication team who is going to be on the loans. So you are far, far away from putting your credit on the line. Secondly, in terms of the legal, since each of the syndication is done in the separate llc, from the legal standpoint of view, it provides you an automatic asset protection. The next advantage is that it is not tied to market cycles as much as the single family rentals are. And with the forced appreciation, which is a little bit complex concept to understand, this actually holds much better in value compared to the single family rental units. And now in terms of thinking of that scalability from the financial freedom point of view, can you imagine if you bring in that 50,000 and create one stream of passive income from one such investment, how easy it is for you to create multiple streams of income so you can create that systematic plan for financial freedom for yourself. And the last advantage that you cannot, cannot beat is this is a complete mailbox money. This is a complete, complete, complete passive investments for busy professionals like you. You do not have that time and effort, but you can leverage that time and effort from somebody else so you can stay completely passive. And this is, my friends, how you create active cash flow with passive real estate investments and the last module of this short course. I hope you enjoyed this course. If you need to get an access of visual aspects of this modules, please please go to Think Outside the Stocks and in the membership area you will have access to all this material. In episode number nine we have Ben Frazier from Aspen Funds back with us and he will talk about the deglobalization phenomena and how does it impact the industrial commercial real estate. The industrial commercial real estate is another type of investment where you can participate passively in the world of industrial and achieve tremendous growth of your money. Again, thank you so much for tuning in. I will see you in episode number nine.

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