To be or not to be a Passive Investor? Pros and Cons of Multifamily Syndication

Foreign. So welcome everyone again. My name is Madhavi Nadechen and I'm your host. To be or not to be a passive investor. That's, that's the topic of our discussion today. And this is actually the part to the continuation. What we just last time, last time we did focus on active cash flow using passive investments. Today we can just go dig deeper into the advantages, the pros and cons of being passive, especially focusing on multifamily syndication. So we will talk about different advantages as I'm not just going to talk about them, but I will also kind of go ahead and explain them a little bit. So, so just hang on tight, fasten your seat belt and just get ready to get rolled in. So, pros and cons of multifamily syndication. Before we go ahead, just a little bit disclaimer from my side. This information is provided for education and entertainment purpose only. I am very passionate about education. So please know that this is not any kind of offering. It's not any kind of investment. This is just for your education and information purpose. If you have any tax advisor, legal advisor, please feel free to seek their help. We are not tax advisors. We are not legal advisors. We do encourage to seek that advice if you need to. Also note that there are some examples and today we have a lot of examples. There are examples which are point in time. So you know, they of course course depend on lot of factors like market conditions etc. So keep that in mind. It's example only. You know, if you go ahead and participate in the investment, every particular investment is little different. So their, their numbers could look a little bit different. All right, so let's get into my introduction. My name is again Madhvi Nade Chand. I am the president and wealth strategist at Think Outside the Stocks. I focus in a twofold approach and we will talk about it in a bit, just very briefly. Live in Austin, Texas with my husband and two kids. One kid is ready to go to the college. So just within a month, getting ready to start her journey. Say goodbye to her. In my past life, in my past experience, I spent about 17 years plus in IT industry, mostly with Big 5, consulting in Project management. And I'm really grateful for that because that's experience. Experience that, you know, if you think outside the stocks, it's really, really essentially helpful for me to just help my investors and just, you know, expand, think outside the stock's reach. So I'm very grateful for that experience. In my real estate journey, I do have, you know, the rental Portfolio I have the, you know, passive, active, multifamily syndication, Airbnb, you know, few other stuff. So that's, that's what my portfolio is. And, but I'm truly, truly passionate about, like I said, the education and that's really keep me going and I love sharing the education, the information I have received free of cost with you guys so that you can feel more confident moving towards that passive investment journey yourself. So there I am with Think Outside the Stocks. My focus is to grow and preserve your wealth outside of the stock. The Wall Street Roller Coaster. Now many of you are really pros in Wall street roller coaster, so I'm not against that. Think Outside the Stocks is not against Wall Street. If you are thinking about diversification, that's what I would like to bring in these alternate strategies. So with Think Outside the Stocks, it's a twofold approach. The first is the better saving system because our money, which is the savings money, we keep it in the bank account. It's really rotting. It's just so lazy and stagnant. So one of the first strategy I bring in for my investors is the infinity banking where you can become your own banker and, and you can utilize kind of compounded growth which can snowball over the period of time in this infinity banking system. And the second fold is that investment approach which is the risk managed syndicated real estate investment which is kind of a group investment. We'll talk briefly about it. If you haven't been with me in the past, webinar, just briefly touch base about that before we go ahead today. And above all just live free educational events that we conduct. That's you know, that's what Think Outside the stocks how we help you as passive investors. So you know, feel free to reach out to me. I do can have like a free strategy session for you where we can talk about your course and what exactly you want to do in terms of investments or the savings and we can just get you your roadmap towards that particular goal. So Outside the Stocks. Today's topic is the syndicated real estate investments. When you think about outside the stocks investments, you know, one thing that comes prominently to your mind is real estate investment. So yes, the focus is on real estate invest investment right there. If you are, you have attended my previous session a couple of weeks back, little bit repeat for you. But I just wanted to touch with that topic a little so our listeners today will have some background into it. Multiple ways to invest into real estate. If you Google real estate investment, you'll get millions of results right A traditional way to invest is single family. There are multiple ways that you know, we already know and there are a lot of real estate investor gurus that you know, teach this single family way of investing. When it comes to commercial side of real estate, there are again multiple ways you can invest to multifamily apartments, self storage, you know, hotels, et cetera. We are going to focus on multifamily, that's apartment complexes today. We will talk about why in a minute. So the problem number one, when you decide that, okay, I want to invest outside of the stock market, I want to go into real estate, the number one problem is the strategies that we looked at previous slide narrowing down to that one strategy that is right for you as a busy professional. If you want to be passive in real estate investment, you know, finding that real estate investment that is truly completely passive and you don't have to get actively involved or you know, receive those midnight calls about hey, the toilet is broken or you know, the roof is leaking or something like that. So narrowing down the problem is really the key here. The too many options to choose from. When it comes to real estate investments, there's a risk associated with high risk, high rewards. You typically when you purchase a single family home, you have your personal credit address. There could be hidden surprises. If you think about the fix and flip kind of opportunities, you are always afraid of that. What if we find something which is incredibly surprise and incredibly time consuming and of course money in this, right? So that's what the, the fear that keeps, you know, typical business, typical busy professional away from that real estate investments. If you, even if you get into it, the scalability kind of becomes very difficult. You can get into one rental, two rentals, five rentals, but can you do it like a 50 rental so that you kind of replace that active income that, you know, the cash flow that you're trying to create? The market is really highly saturated with professionals. So that's another problem that you can face. There are so many people who are wholesalers and there's so much competition. That subject matter expert kind of always pull you back and to kind of come to that level where you have the subject matter expert in that curve, that learning curve, that time curve is essentially huge. And that's typically what busy professionals like you, that's what investing into real estate can keep you away. So that's essentially what we are trying to focus on when it comes to rental real estate. Again, there are multiple problems in terms of expensive repairs, the damages, the evictions, the asset protections, vacancies where you have to pay, things like that. So this is the problem. The scalability as well as the active participation is what we are trying to solve. The solution that we are talking about is multifamily syndication. Now, what is a multifamily unit? Generally a five plus unit. So when it is a single family, one unit, that's a single family. When there's two units, duplex, fourplex, anything above five plus units is a multifamily unit. The two economies of scale where the scalability is essential, it starts at 100 plus units. When it's 100 plus units now you can have dedicated people, dedicated property manager, dedicated maintenance crew that can be there. So that becomes effective from scalability point of view for you, multifamily syndication is the solution. What is the multifamily syndication? The syndication is essentially a group investment. So two types of people, two types of groups come together. One is the intellectual resources and one is the financial resources. The intellectual resources is the syndication team like us, who have that expertise, who has that experience, who have done that over and over again and establish that kind of a business plan, that kind of acumen to, to not only find these properties, but kind of create and execute that business plan. Take it to the execution, take it to the finish line, executed it successfully, right? So that's the experience, that's the expertise that we bring in. And there's a financial resources. With investors like you, with financial resources come in picture. So the intellectual resources and the financial resources come together to invest in a property or the projects which are much bigger than they could typically afford or manage on their own. Right. So in this case, a syndication in real estate, in apartment complex, for example. And we all have stayed in apartment complex at some point in life. So the apartment complex, it will have typically some down payment. So maybe about 25 to 30% down payment plus that innovation, that's amount that's required. So that's the money that gets put together. Some money come from the syndication team, some money. I mean most of the money comes from the passive investors. That's you. Once we create that 20, 25% to 30%, that's amount required to put that as a down payment and the renovation budget, then we have the lender bringing in the rest of the money which together and we go ahead and close that particular investment, right? We purchase that together. And after the purchase, you really have as a passive investors, what you do is when you invest, when you hard commit into it, when you wire that money, that's about it then you start getting, we as authentication team are in action to purchase and start managing that property, implement that business plan, implement the renovation plan and you start getting nothing but those distributions and the newsletter which gives you updates that hey, by the way, this is what's going on with the property. So you start getting those distributions periodically. So that's the beauty of it as a passive investor, that you have the advantages of being completely completely passive. Not just theoretically passive, but completely passive. The advantages that we have at the high level with market that we have seen, if you historically look back about 10, 20 years, it has proven to give you above average growth. So completely passive, about 13 to 17% annualized returns. That's what this market has seen with multifamily investments. It is backed by a real tangible asset. So it's lower market volatility tied to the lower market volatility. It's not as fluctuating as single family or even as a stock market. Now it also gives you different opportunities to truly diversify outside of the stock market, but also in different asset classes, different classes of its multifamily investments. It also provide you multiple tax benefit which we will cover in little bit detail today in few minutes. And above all, I think the best possible advantage for this as a passive investor to you is that it's truly completely passive. You literally, you know, when you put that money in, you don't have to worry about anything. Everything that happens is happens is happening in the background. You get that active cash flow in your bank account which you by being completely passive. So that's the biggest advantages for you as a passive investor. Right? So let's look at just a sample investment opportunity right now. An apartment complex, say Arpa Lake apartment complex. It will tell you how many unit it is, what class of investment it is. It will tell you the price, what's the loan kind of we are getting into so 20 million property, 4% for 10 years, 75% loan to value ratio. It's a value add opportunity. That means there is going to be some renovations. It will have 8% cash on cash as its annual cash flow. And the total returns at the end of the period, which is the whole period, typically about three to five years, that's about 80%. So the equity multiple is 1.88. So this is again example of it, that brings it down to about 16% IRR. So essentially if you invested 100k into it, this particular investment opportunity is projected to give you about 180,000 including your principal in about three to five years. So that's how a typical investment would look like. Okay, so that's about a syndicated investment, right? But today's question is, but is this a right fit for me? Even if there are good investment opportunities available, there could be multiple, there is array of investments into real estate, right? There's that tax lien, there's foreclosure, there's single family gentle, which is again classic, always this multifamily. Most of you haven't even heard about it. So the question here is that to be or not to be that passive investor, is it really truly a right fit for me? So let's look into those pros and cons of this multifamily investment and then we will delve into that. Is it really a right fit for you? And you will have in your mind that answer as we move along in today's session. So let's talk about first of all why multifamily when it comes to commercial real estate? There are multiple ways of investing into commercial real estate. There are many other areas. So in this chart here right now, as you can see there is the office which is the blue line here there's industrial, which is the orange line and the turquoise line is kind of that multifamily. Now this talks about the vacancy in that particular class. The asset classes in commercial real estate, as you can see, the office really fluctuates up and down. But multifamily real estate, their occupancy has been really high. And this is the vacancy statistics, the lowest vacancy statistics. That's number one reason why I'm a very numbers person. I am a math major and I'm a very numbers person. So statistically the pointers goes that the multifamily investment hold up really nicely. And I love the statistics, I love the data behind it, the reason behind it, why we should focus on the multifamily units. In 2019, more than 320,000 multifamily units were absorbed into the market. It's a six state year where 250 plus units were absorbed into the market. So that kind of shows like the higher, higher, higher demand into multifamily market. And these days with the house prices soaring, people are first not able to afford the houses and second not able to find the houses. There's like a constant bidding war going on. So in this today's market they still need a place to live. So that's why even today the multifamily investments, multifamily occupancy is running really high right so let's look at the multifamily occupancy statistics. Right? The multifamily industry itself, about 39.7 million apartment residents, which is about 21 million apartment homes, which contribute to whooping 175 billion in local economy. Guys, that's just 58 billion in property taxes. So as we also saw that, you know, the demand and supply, the Demand is about 328,000 units, but under 300 is getting delivered every year. So that's kind of in despair that we have. And that's why the multifamily is kind of a prime demand area. Right? So that's why the occupancy is kind of staying really, really high. So 95.8% occupancy rate, that's the current, that's really high in terms of the multifamily apartment complexes. Right. Reason number three, America has been changing, you know, its focus. America is becoming more renters nation. On right hand side, that chart again indicates, you know, what the, the renters population, how it's changing and how is the owner population changing, right? So as you can see, there is a surge, absolute surge into the renters population and there is a drop in people owning the homes. Why is it, why is it happening? First of all, affordability is the reason the prices, home prices are soaring. There's so much of economic uncertainty going on with COVID There's just so much of shaky ground that we stand on that we don't even know how the economy is going to be, how the inflation is going to be. So that economist uncertainty, the job uncertainties kind of adds to that also. You know, the dream used to be, the American dream used to be, you know, owning the house in the suburbs, probably having a family, you know, having a van. But now the American dream is changing. They're moving more towards financial freedom. And not just the financial freedom, but you know, they're also, the baby are also downsizing it because most of, I mean most of them unfortunately lost a lot of their retirement money in 2008 crash. And now they cannot afford. Right? They had to sell their houses. They had, they cannot afford or they cannot manage their houses, their backyards and stuff like that. And they had to move into the apartment units, right? So that's another reason not just the millennials are moving, but even the baby boomers are moving now. Millennials, very interestingly, they are focused on what's called nomadic life. So they're changing job, they're changing cities. They don't want to tie it up to a city, to a home, they want to travel, they want to travel. And Covid has kind of proven that we can literally work from anywhere, working from home. So most of us have experienced that now and they don't want to go back to it. Right. So that's another reason that America is becoming more and more renters nation now. Reason number four, the renting trains analysis, right? What we have also observed that, you know, there used to be typical scale where people in certain high earning kind of household will go and purchase the houses. But today we are watching and we are seeing that even in household earning 150k plus, people are still preferring to just rent. People who are actually high earners, they're staying in the urban areas like downtowns and they want to be in a posh area, posh apartment complex, they will pay more for the apartment unit itself, but they do not want to purchase a house and get tied to the suburbs, etc. Another statistics is 60 plus age group. The renting statistics went up by about 32% in last decade. That telltale too that not only the millennials, but the 60 plus age group is also moving to the apartment complexes. In terms of other statistics, the apartment deliveries, as we can see that over 300k units are getting pushed into this economy, into this market and they're getting, without any effort, they're just getting absorbed into the economy. So that's kind of the statistic that I like to look at that this is what tells us that multifamily is such a strong asset class. Right. When I focus into the investments, my focus is capital preservation. Right above anything. All when you're playing that risk, you're playing that risk managed returns, you're providing that risk, managed returns. And multifamily is a great candidate for that because of all these things, all these reasons that we have seen. Another reason understanding the real estate market cycles. Real estate market kind of goes through the recovery, expansion, hyper supply and then kind of hits that recession. We also have what happened in 2008. The 2008 market crashed and single family home prices literally went down by 50% or more. But what happened to multifamily people who could not afford to be in single family now they had to sell their houses, foreclose or short sell their houses and they were the one who moved to apartment units. So actually the occupancy went up for the multifamily unit. So even through 2008, the occupancy as well as the market value of the multifamily apartment complexes stayed pretty steady. And another statistics around that time, which shows how the stock market and the real estate has been performing. You can see that. And this kind of the blue line shows the real estate, which includes the single family, by the way, it shows that if you look at the CAGR index for the stock market for last about 20 some years, it's about 5.5% on an average. But with the real estate, and this is just REITs, by the way, it's not even the multifamily. Multifamily is doing much better than this, but it's about 8.7%. So compared to the stock market, it has much higher statistics. I see a chart here. Jay says that investors are also beginning to rent as they make more from the homes they own by renting them out. That's absolutely true. Or selling and vetting for the better deals elsewhere. Right? Absolutely right. And sometimes they want to kind of, you know, exit out of their property. Sometimes what happens is when you are in your primary home, a lot of equity is stuck in that home. So you kind of cash out from that and invest into the passive investments, such as syndication, what we are talking about, and start getting that cash flow. So instead of keeping that, you know, all that equity, 200k, 500k equity, all that equity stuck into your primary home, they are selling their houses, taking the equity and start getting that, you know, 8 to 10% cash flow so that they can start creating that passive stacking, that passive cash flow on top of each other. Great point. Thank you so much for contributing to that. So again, another indicator, right? When you looked at the single family homes, what happened during 2008? So we are looking at the delinquency, the serious delinquency in single family. During the 2008 cycle, the single family had about 12%. At its highest, about 12% delinquency, people could not pay their mortgages. Right. So that's the delinquent delinquency that we are talking about. And as you can see that it's just, you know, staying higher around this area. Right. During the recession. But in multifamily, this chart, the maximum value here is 1%. So during even the 2008, 2009, the delinquency was less than a percent, less than, you know, 0.1% even. So that's what tells that people are able to afford consistently to pay for these mortgages, this huge mortgages. So the delinquency is kind of a telltale that, hey, these investments are performing these investments are going better and better. So that's essentially why as a multifamily investor I like to focus, because it is backed by this strong statistic, strong data analytics, right. That this is how multifamily market works. And I think in the audience today we have few folks who are actually into the marketing market research when it comes to the multifamily, sorry, single family. So this aspect of multifamily is really why I like to focus into it. Now let's delve deeper into the multifamily syndication. The advantages of it, right? These are the few advantages that we will talk about today. We talked about fully diversification, completely passive risk adjusted high returns for returns of this in particular investments. We will also talk about the tax benefits in detail. We will talk about the forced appreciation economies of scale. In digging a little bit deeper into that, we'll also talk about leverage, how leverage works and how leverage is helpful. I will talk about the non recourse loan guys. I just cannot insist enough on how having a non recourse loan in multifamily is so helpful not just for the syndicators, but also for passive investors like you. Again, it's backed by a tangible, a real tangible asset. The asset is not going anywhere. It stands there. You know, even if something happens to you, there's insurance or other aspect of it which takes of care scale of it. So that is a real tangible assets which is standing there, which is relatively recession resistance compared to the stock market or compared to the single family homes. Right. It also provides that automatic asset protection and it has a multiple other advantage when it comes to the professional teams that we can have to manage these properties. So let's get a little bit deeper into this. The high level, it does provide that above average growth risk adjusted returns backed by that real asset. In terms of leverage, there's two type of leverages, one you can leverage from the bank. In the discussion sometime back we talked about that example where we get that 20 to 25% to 30% down payment and the rest of it comes from the lender, from the bank. When you're investing into the stock market and you have that 100k invested, for example, the 20% growth for you, if it goes to 120k, that's just a 20% growth for you, right? But here in real estate, if you have 100k investment and you have invested just about 20,000 into it and the investment goes from 100k to 120k, that's doubling your money. That's the power of leverage. And that's why real estate again and again yields a higher returns for whatever principle that you have invested into it. So that's one kind of leverage. Another is the sponsor experience. Now, when it comes to stock market and the education in the stock market, right, when you start learning about stock market, and many of you have tried that, when you kind of go deeper into one direction, there is something else that pops up the net, there's something else that pops up. It feels never enough that you know about the stock market. In real estate investment point of view, you kind of have again, the same aspect of it that there's so many people who are pros at real estate. I am not. That's the feeling typically busy professionals will get. But hey, that's the point where you can leverage the expertise, the experience from the sponsor team, from the syndication team who has been in the business years after years. They have worked on several properties for years. A few of them have also completed the complete cycle. So they can bring in that expertise and you can literally use that expertise, leverage their experience. So you don't have to be the expert. You don't have to have that experience. You don't have to actually manage that personally, right? Automatic asset protection cannot insist enough on you, enough on that. When you have a rental real estate and say if somebody trips and falls in your driveway, you are exposed to somebody come and create a, come and sue you for that damage or whatever happens, right? In that you put your equity at stake, you put your other assets, you know, if it's not sufficient, the equity in the house is not sufficient, your other assets also get. Gets kind of, you know, trouble. The creditors can go and claim on that, right? But when it comes to syndicated real estate, right, the syndicated real estate investment, each investment in is in its own llc. So you as a passive investor, when you are investing into that llc, it completely is separate. So none of this assets, not just for the syndication team, but even as a passive investor, your other assets are not exposed. So it's just content kind of a box environment. And that's why it's kind of an automatic asset protection for your investment, right? Again, cannot insist enough on being completely, completely passive. Now let's talk about, and let's take a look at how diversification works, right? Jay has another comment here. The American dream of owning a home has taken a new definition, really true, in how the asset is monetized. Simply owning a home and living it to its liability. That has been many homeowners, they have put it into More debt. Those who do not want to choose to educate themselves on all options. So having the education platform such as this is helpful. Thank you so much for those who make choose to pay attention. Absolutely. And hey, I mean it's still new, brand new kind of a turf for most of you people. So I completely, completely understand. So just, you know, take is take a deep breath, move in slowly, take a look at past investments that we have. Treat them as a guinea pig, you know, treat them as kind of, you know, window shopping if I say it, and just see how this investment work and slowly ease into it. Right. So pay that attention. Thanks Jay, for putting in that comment. That's really essential. So let's look at the diversification, how the truly diversification works into the syndicated investments. Right? So first of all, definitely out of the stock market. It's not a reit. It's not. The REIT is still tied to the stock market, guys. I mean, you still purchase into the stock market, still kind of tied to some volatility when it comes to stock market. This is completely outside of the stock market. These are individual investments that you're investing into. Second, you can invest across different assets. So if you define like a commercial real estate, you can invest into multifamily, senior assistant living self storage, mobile home parks, there are more other beneficial asset classes that you could still safely invest into. I really like multifamily because of all the statistics that we saw. But there are other safer asset classes as well. Then within multifamily, you can invest in different markets. It's just not a city around you. But based on statistics, you can invest into emerging market. I look at the statistic, the data which backs that city, the growth in the state, growth in the particular city. When we have that statistics laid out, we can see that, okay, I live in Austin, Texas. Austin is growing like crazy. But I don't have to be limiting myself in Austin. I can go in Texas. I can invest into the Dallas market, right. For example, I can go outside of Texas. There could be Florida market. That's really strong market too. I can invest in there. I could go in Utah. Right? So there's just different markets which are truly emerging markets, which are statistically so strong that you don't have to be tied to to your own city or around your city. Right. Another aspect of is that you can invest into different asset classes based on the condition and the age of the property. There are different classes. Don't get overwhelmed by class A, class B class. Hey, Madhvi, I don't even know what this means. Don't worry about that. What it simply means that, you know, from new to older, there are different classes of the investment when it comes to apartment units, depending on the area as well, right? So you could, you know, diversify investing maybe in class A, class C, class B, any combination that you want. So it's just not fully diversified outside of the stock market, but within the asset class also it provides you that true diversification. Right? Let's talk about the economies of scale now, right? What is economies of scale? How can you scale, how can you kind of expand the business model that you have, right? So that if you are investing in a particular way, suppose you are buying a rental, right? You are a landlord, you purchase one property, you're maintaining that, it's working for you, it's giving you good cash flow, good equity. Okay, I want to multiply that. How much can you multiply? Right? 5, 6, 10, 15. How many of single family rentals can you purchase and can you manage? But what happens in multifamily units is it's really, you know, the economies of scale is it's a truly friend here. So let's take a, you know, one by one roof. For example, in single family we just have one roof, but in multifamily we have about one roof in about six to 12 units, right? So it's a little bit less roofs to maintain, a little bit less roofs to kind of replace, right. In terms of maintenance and management, we all have lived into apartment complex. We have seen that there is an office. We walk into the office and there is a property management manager to greet you if you have a leak in your toilet. There is a maintenance crew, the same person comes back and fixes those leaks. Or multiple people maybe are assigned to that property. That can happen. If you have that hundred plus units. You can have a dedicated person who sits there, that dedicated property manager, the dedicated maintenance crew turns out to be cheaper than you. Paying every visit somebody $80 just to come and check where is that leak and why is that leak happening? So that's an advantage in terms of, you know, renovation. Now think about it. If you have one single family home and you want to put in the renovation, right? You're going in purchasing in like a retail market, right? So if you want to say purchase cabinets or appliances, you're just buying one unit at a time. You're those, the material is expensive, the labor is expensive. But when we are trying to renovate the apartment complexes, we are renovating like 100150 units at a time. Now we are kind of in a wholesale market when it comes to the cabinets or the, you know, the countertops or the appliances, we're just buying everything in bulk. So the cost per apartment to renew it per apartment is really, really low. Even the labor costs. Sometimes we are even using our own maintenance crew who sometimes don't have work. We are using kind of repurposing that same stuff to renovate that or we are getting the contractors which are giving the kind of bulk order. So it's really cost effective to get that done. That brings down that cost really, really, really low. Another advantage of it that you can have professional teams which are for passive investors is essentially no cost at all, at no additional cost. Whatever numbers are projected includes the cost of this legal teams. Now in terms of asset protection or creating the legal documents, we hire the lawyers, we pay the lawyers. That's part of that business plan. We hire the CPAs, we provide that. We have the tax professionals who are backing us up. They provide that tax form at the end of the year and you are not paying them. It's part of that business expense taken care of. So your returns are not impacted by that. You are also, you know, in terms of vacancy, right when you have vacancy, say for example in single family home, it's either 0% occupied or 100% occupied. When 0% occupied, you're paying a lot of money out of your pocket. But in single, in multiple family, even if at the 90% occupancy, 10% vacancy, this property can still cash flow. It can still provide you that cash on cash annualized returns to the investors. And depending on where the breakeven occupancy as and typically it's about 80%, 80, 85% is like the breakeven occupancy. Based on that breakeven occupancy, even if that occupancy falls below that 90%, it can still cash flow, it can still provide you those returns. And once you start renovating it, pushing the rent rent up, that's when you can really start seeing that equity is getting built up in those in these properties. Right. In terms of consolidation, right. When you are going for a single family home rental, for example, if you have one mortgage on one home, on this entire unit on target portfolio, about 100 plus units, there's just one loan, there's just one mortgage. So that's really consolidated. There's just one insurance to take care of. So those are, you know, the advantages of economies of scale with multifamily investment. Let's talk about non recurse loan. And this is my favorite. I'm just going to take a second break here. Have some water. Meanwhile, if you have any questions, please post into the Q and A box and I will take it as we go or I will take it at the end, you know, depending on the question, if it is more relevant at that point. So let's talk about non recourse loan, right? Most of the multifamily investment, the loans are non recourse loan. What does it mean? Right. First of all, as a passive investors, you are not even on the loan. So A, your credit is not getting checked, your financials are not getting checked, Nobody's checking. What is your expense ratio, what is your expense and income ratio there? Nobody's checking that, you know, what is your financial look like, what is your liquidity look like? Nobody's checking that you are not on the loan, period. Their syndication part of syndication team, they're key partners who are on the loan, who are the guarantors of the loan who have that kind of liquidity. Because these are humongous loans, by the way. I mean, it's a $20 million property, so it'll have maybe about 17, 18 million in loan, right? So these are huge loans that we are talking about. So first of all, as a passive investor, you are not on the loan. Your personal credit history and financial is not verified. And in case of default, if something happens, you know, something terribly goes wrong, your credit is not getting impacted. What happened in 2008, really sadly, people who purchased the homes, not just the renters, not just the rental properties, but even their personal homes and they did not purchase sustain the payment that dinged their credit history. Their credit history really dropped drastically, right? The credit score dropped drastically. But as a passive investor, since you're not on the loan, your credit history is not impacted in case of default. Even for the syndicated team, it's an advantage because in case of default, what happens is that real estate as a property that's as a collateral that's collected. So lenders are not allowed to go anything beyond that particular asset. So no, the lenders cannot go and kind of, you know, take the personal assets of the syndication team or the personal assets of the passive investors. So I cannot tell enough about why this is important as a passive investor for you if you know, something happens. I mean, we have also seen that multifamily sustains really well than single family. But even something happens, your credit is not on the line, your credit history is not impacted. You are as good as new when it comes to the credit history. And you know, your assets, they are not, you know, they're not support, they're not supporting this loan. They're not, you know, in case of default, they're getting kind of stuck in, in this by the lenders. So that's, that's the biggest advantage, one of the biggest advantages as the passive investors. Let's talk about the professional teams. So passive investors, at no extra cost, you are getting to use this really high SEC level attorneys, right? So those are the attorneys that we use, the legal team, very strong legal team. We get, you know, the tax team to just manage, not just to manage the financials but also the tax filings, creating those CA1 forms which we send it to you at the end of the year. And it's very simple to take that cave in and kind of file your taxes if you want. If you're not used to it first year, you can maybe enroll your cpa. But you know, pretty much all this tax software can take this cape and kind of calculate that automatically. So it's not an expensive thing for you, not a complex thing for you. We talked about the professional team as in property management, who can manage and maintain when it comes to leasing and advertising and marketing and even participating and doing the project management of the renovation and much more. Property management team is providing that backbone support for this particular asset class. They are the one who are working who, they're the one who are there constantly, you know, customer satisfaction, the community satisfaction, taking care of the complaints, the, you know, the work orders that the tenants have and making sure that everything works well in that property. Right. In terms of brokers also we have professional teams. So you know, there's, you know, for the mortgage we involve the mortgage brokers, real estate brokers. So, so that's the advantages when we are talking about single family rental. When you are looking at finding a property versus what happens like the amount of, massive amount of things that happen because of the support from the professional team for the multifamily investments. So let's move on. Let's talk about the value increase, how the value, the appreciation in the multifamily is not tied to the market. In fact, the syndication team kind of pushes this value and it's called forced appreciation. The terminology wise, don't get overwhelmed by it. I'm just going to explain it quite simply in a few minutes. So the forced appreciation, it's basically the investors control the increase in the value of the property by Managing the income and expenses. Let's talk about how we can do that, right? So when we increase the money that's coming in, that's the income generated by that property. And when we have the expenses, we reduce the expenses of it. By optimizing the expenses, the net operating income of that particular property goes up. So essentially the net operating income goes up. The cap rate of the market. That's kind of the driver of the value. And when you increase that income, the value of the property automatically goes up. Those who love the numbers, let's look at the number wise that what happens here in this first value appreciation. Let's take a look at the property value, which is 10 million. The equity raised, say about 2 million. Just for this, you know, calculation purposes, simplicity purposes, we took the 8 million loan from the bank and suppose we have the income minus expense is about 1.4 million, minus 400k. About 1 million is the net operating income. And say there is. So now 1 million is the income. So the cap rate is defined by net operating income divided by the current value. So 1 million divided by 10 million. 10% is the cap rate for this particular property. Now let's implement our strategies that we were talking about, right? Increasing income, decrease expenses, maybe increase the income just by 100k and decrease the expense, reduce the expense just by 100k. Now what happens? I mean it could simply be done, right? It's not too much to do it. 100 units multiplied by 84 units per month multiplied by 12k, that's about 100k. So that's what, you know, increasing the rents by $85 and reducing the expenses by $85. You can place it right there where we can have the 100k bump in the income and 100k reduction in the expenses, right? So if we achieve in this particular property, what happens, 1.5 million becomes the new income, 300k becomes the new expense. So now the 1.2 million is the net operating income, right? Let's talk about in reverse order what the value becomes now. Right? We had 10% cap for this particular property. So in here the new value becomes now net operating income divided by cap rate. So 1.2 million divided by 10%. 12 million is the new value, right? So you will say, Madhavi, that's just a 20% increase. We had 10 million, we now have 12 million. So at the end of, end of five years, 20% increase. How that doesn't make sense. That's not too much of gain, but that's 20% increase. In value. But we invested just 2 million in it, right? So 2 million is what we bought. 8 million is what bank gave us. The 2 million now became, you know, if that 8 million is the loan 12 -8, that's the 4 million, that's the returns. So we invested 2 million and that became 4 million. That's almost 2x. Again, these are numbers, example, purpose only and simplicity purposes. I took like very basic numbers so that 2x in five years is about 200% returns, right? So 100% returns on your investment. So that's how the power of leverage and the power of forced value appreciation works. When it comes to single family rental or your property value is defined by what is the neighboring house got sold for. So if they start going up, the value goes up. If they start coming down, your value goes down. But that's not how it happens in multifamily. In multifamily, by increasing the income and reducing the expenses, which is typical strategy by us as a syndication team. That's how we bring up the value of that particular asset. And that's why it is more important to look at multifamily because by standalone their value can be managed by the syndication team by the business plan that we are implementing. Let's talk about the tax benefit. Now. Many of you may already be already involved into the single family rentals and know how the depreciation works, right? So there is the first level of depreciation is the building itself. So tax benefit in multifamily actually has three folds to it. The single family gets the depreciation of the building itself. That's include that also works in the multifamily. But there is also something called a cost segregation study that we perform specifically for the asset. It breaks down the assets into two different classes. Five year kind of depreciation and 15 year depreciation. Things like appliances, fans, the cabinets that can be depreciated in five years so that actually depreciate faster. There are other, say for example the roads, the pool, Those depreciate in 15 years. So when we do this cost segregation study and we depreciate this 5 year and 15 year asset as a bonus depreciation, we can actually take all the depreciation in the first year. So typically when you say invest 100k into the real estate investment in multifamily, you can see anything between 50 to 70% of passive losses. This is not actual losses meant that it's passive losses. So this is just a paper loss. So this is how Your Cayman typically will look like if you have this particular asset is giving you 8% annualized returns. So you will have 100k invested, 8,000 annual return for that particular year. And first year, you get about 50 to 70% paper losses. So 50,000 in losses. So you know, plus 8,000, minus 50,000. Whatever is left over gets carried over to the next year. So your cash flow even next year becomes kind of tax free. That's the advantage of it. When you are looking at that return, 8,000, you're keeping more money in your pocket. So this is very, very strong. The tax benefits of this particular investment type of investments are really, really high. You as a busy professional, you are in the high earning category and you start investing into something and anything that you are making, you know, above your active income, above your W2, if you start putting more money in Uncle Sam's pocket, your growth is getting limited by that. But in terms of syndicated real estate investment, especially in multifamily, after we do all these studies, when it comes to the taxes, that's the advantages, you're keeping more money, most of this money in your pocket. So that's the advantages of the taxes when it comes to the multifamily syndication. So we are almost at the end of the advantages of it. Let's talk about the downsides or the risk of this particular type of investment, right? So first and foremost, you have to remember that this is a real estate investment, not just this particular syndication type of investment is, but you know, even like any other real estate investment, they're typically illiquid, right? So even if you own your home as a rent, you know, your rental property, you cannot just exit immediately. If you want to exist within year, it's advisable that, you know, you hold that property about three to five years. Typically in this particular asset class, in this type of investment, the syndication team will have that period already explained to you. So three to five years, it could be three to seven years. Five years is kind of on an average. You have to remember, it's not like a stock market. It's not like you can liquidate that and immediately have that money back. Typically it's locked for that period and it gives you that high growth. It's locked for that period. So you have to remember that. So the illiquidity is one of the biggest aspect of it. In terms of volatility, again, it's not tied to as much tied to the stock market volatility or the recycles of the real estate. In terms of the recession, etc. It's not that highly tied to that volatility. It's backed by the real estate asset. But hey, it's, it's just volatility anywhere around it, around us, the economy, we just don't know where it's going. So you have to keep that in mind. I mean, if this is going down, probably your stock market is going down, probably a single family market is going down too. But you still have to remember that yes, there is a volatility, there is some risk that associated with it. The biggest thing some of the investors find is that lack of control that the passive investors. You're not taking that decision that, hey, I want to exit from this property now, or let's just sell this property after two years. You cannot, you know, you don't have that voting rights to participate in investment, but it's rightfully so, right? Because the syndication team, they're the one bringing in the expertise. They're the one have that experience. They are the one who know that. What is that right time to exit? What is the right time to take that decision? Right? So those are kind of, you know, the downsides for that, for as a passive investor. So really the question, we are almost the end of our webinar. Here. Do you want to be a passive investor? That's the question to you, right? So you are, you know, we talked about all the advantages and we talked about little disadvantages too, right? So if you are looking into, you know, you are measuring it out, you are kind of contemplating and thinking about, how do I make that decision, right? Ask yourself a question. Do you like that active involvement into the real estate? Do you like to, you know, get your tenant in place, you know, run that, you know, kind of vacancy, pay that mortgage when there's, you know, the Occupancy is not 100%? Do you like to keep on maintaining kind of fixing AC broke, this happened, that happened. Do you like that active participation and some people do like that. Or do you like to be passive, Right? Do you like to be in control or do you like to leverage the experience, the expertise and just kind of take the back seat and kind of enjoy that chauffeured ride around, Right. Do you like that? Do you like that, you know, having the liquidity so that you can, you know, kind of do in and out anytime you want, just like stock market. Now, again with stock market, it's tricky, right? Even if you know that you can do that exit anytime, sometimes when the stock has lost its value significantly, you cannot come out of it because you're wanting it to bounce back when it's growing up and up and up, then you think that hey, what if I exit now and it keeps on going up, Am I going to regret it? Right? So even if you technically have that flexibility that you can exit that stock market anytime you want, do you really get to do that? So think about that. Do you like that liquidity option whenever you want or you're okay with having the high growth, having the complete passive involvement into it and have that three to five years of hold? So at a high level, that's what I would say. If you have any questions, please, please put it into Q and A. And if you are, if you want to talk, just raise your hand and I'll allow you to talk. But with that, we have reached to the end of our discussion today. And please, if you, you know I have a free gift for you. Anybody who participated today, attended. Today we have that 45 minute strategy session completely free of cost for you. We can talk about your plan. What do you want to do what what your intention is? What is making you comfortable about this type of investments? What's making you uncomfortable for this type of investments? So let me know if one on one you want me to answer any of your questions. Just go to Bit Lyre Madhvi M A D H A V I or just point your phone to that QR code there and schedule a session with me. So with that we are at the end of this session. Please post your questions. Jean says thank you. Thank you so much for joining Jean. Looks like I either did really good job or really bad job. People do not have any questions. So if you are to reach us www.thinkoutsidethestockswiths.com that's our website. We recently launched launched a six day course of video course just five minutes a day which is why and how to think outside the stocks. 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