CREI Partners Webinar: Diversifying Investments with Multi-Family Real Estate- January 2021

And we're going to go. We're going to go into it. So a little bit about myself. I'm based here in Austin, Texas. I am the lead investment investor relations general partner for CREI Partners. We started this back in November of 2019. And then for the past 13 years, I've been with 150 Fortune 150 commercial real estate firm, leading management services for about four and a half million square feet over my tenure with them. Over the 13 years, I've worked with dozens of professionals with real estate. We've done a lot of capital improvements, strategic plans. So the things that we're going to talk about here later today about, you know, value add and such, I mean, that's. That's been in my wheelhouse and something I've enjoyed doing again for the last 13 years. I have an MBA from University of North Carolina, master in Economics from the University of Oklahoma, and then while I was in the Marine Corps, went to National University for my undergraduate. So who are we? You know, our goal is to help people get wealthy through real estate or diversify. And we do that through syndication. So we raise money to buy assets, money that we could not, or typically others could not purchase on their own. So we raise our money, including myself. You know, we pull our money together, we acquire, we buy value add, real estate. Our markets are Austin, San Antonio and Houston. We'll execute our property business plan and we'll go into the strategic plans and such later in the presentation. But every property is like its own business, its own llc. It has its revenues, expenses, net operating income. So if you can equate a business to property, you're ahead of the game. A property is a business. Tenants are paying rents. You've got storage, you've got antenna, lease, etc. All adding revenues, expenses. The higher the net operating income, the higher the value of the property, the higher the money that we're pushing back to our investors and that goes into distributing returns to investors. So we typically do that on a quarterly basis and we'll talk more about that a little later with how those structures are set up. And then we'll implement our exit strategy and distribute profits. That is the end of my spiel on our company. I'm not. The rest of this presentation is not about CREI Partners or myself. It's really just about educating. And really, I feel like so many people are in and myself included. You know, 401ks. We've got our stocks or mutual funds are in house and we are doing a lot what our parents did they work 30, 40, 50 years and then they retire and hopefully Social Security is there and all. So this is all about diversifying. It's not about completely taking your investment and moving it into real estate. It's diversifying and doing something a little different than what the majority of people out there are doing. So we're going to go into that. So there's a lot of discussion points that we're going to cover. One, we're going to start with defining multifamily. So, you know, before we start about multifamily, we got to know what it is and we're going to talk about why invest in multifamily real estate? You know, what are the different reasons why a lot of people who are looking to diversify their wealth or grow their wealth invest in multifamily? We're going to talk about the types of investors. We talked about that a little earlier about active and passive investors. So this is where we're going to talk about the different two and then hopefully you'll know or have a better idea of where you fit in that we're going to talk about risk profiles. Everybody on this webinar is going to have a different risk profile based on where they are in life. You know, if you've, you're earlier on in your career, you're early on in, you know, your investing cycle, then you may have higher risk tolerance. You're looking to grow your wealth and okay to take more risk, whereas somebody who is already, they're looking more for cash flow, you're looking for cash preservation and such. So we're going to talk about risk profiles. A little later. We're going to talk about financial metrics, legal must knows, market cycles, and then we'll close up. So it's about a 40 minute presentation. Again, it's a lot. I'm going to send the slides and the recording likely tomorrow. So you'll have that. And then afterwards we'll do Q and A. I'm happy to answer any questions anybody has. And then you can also use the chat box or the Q and A. It obviously did work because they'll let me know that the volume wasn't working. So appreciate that. All right, so let's dive into it. So define multifamily. So Wikipedia defines this as this category including apartment complexes or high rise apartments, buildings. And this is what really is important part. Generally anything larger than a fourplex is considered commercial real estate. So anything more than a fourplex by definition, multifamily commercial real estate. So if you've got a duplex, triplex, single family. You're not in that commercial realm, you're in the residential. There's nothing wrong with that. And you know, I started out with single family. I had a rental in California and it did well. So you know that's, that's a really good way of doing investing. But investing in multifamily is anything more than four units. So why passively invest in real estate? And a lot of this presentation is going to go, it's going to focus more on the passive investors. So when you look at the real estate class versus these other investments, whether it's gold, oil, 6040 now 6040 is putting 60% in the S&P 540% in more of the Treasury's bonds. So over a 20 year period, according to this JP Morgan study, about 9.9%, close to 10% annual returns average over 20 years. Compare that to gold and oil and such. I mean those are all still pretty good returns, you know. But from a standpoint of real estate, it's a tangible asset. What we've seen over the last year is some really low lows with the stock market and some really high highs in the stock market. I was looking at my investment portfolio today and it has not done well over the last month with my stocks. But not to say, you know, that won't change over time. It's just very, you know, ups and downs. We're on the multifamily and commercial real estate. It's been pretty steady even during, you know, all the things going on with, with rents and such. So I wanted to start off this slide. I mean the biggest reason why people get into real estate investing is because it's pretty risk resilient when we go to our next slide of the property type. So there's obviously different property types. You've got apartments, industrial, office, retail. We could have added storage on here and hotels. But of, you know, these top four property types, apartments have over. I was overachieved, but it's had the highest returns over the others. You know, from a standpoint of this 10 year holding period. And why is that? At the end of the day people need a place to live and that doesn't matter if you're in a pandemic, non pandemic, if the government is, you know, subsidizing, etc. People need a place to live. You've seen in the office. This is very true with over the last year where you know, people are able to work from home due to technology. I don't think office is going away. I was on a call today for one of our office properties with a lot of our tenants and not one of them talked about downsizing or. Look, I mean people believe that we're gonna get through this pandemic and we're gonna get back to the office space just because culture and other things. So, you know, a lot of people are standing away from office, but I don't see that going away. Industrial is booming. You look at Amazon and these other warehousing, more Internet purchases and such require more storage. So that makes sense why the returns are high. And then from an apartment standpoint, again, people need a place to live and you know, rents, just because of supply and demand location, you know, rents tend to go up and it goes back to that business where, you know, the higher revenues, your moderate expenses, where, you know, you're not a slumlord or anything, you want to make sure you're maintaining the property. But all of it comes down to that bottom line. So those returns is what's meant out. So that's why I personally invest more in apartments than others. Even though I've got a lot of experience in office and retail. I just feel like from an apartment, my risk tolerance. We'll talk about that a little later. My risk tolerance is feeling like apartments for me, class B and C. We'll talk about that a little later. But that's sort of my, my personal risk tolerance. So depending on where everybody is, you know, you'll choose something different. But another reason why people go into real estate and it's not, I mean, I don't want to get into politics, but there's a reason why people like, you know, Donald J. Trump don't want to show their tax returns. You know, I dated someone in high school for most of the high school and she went to very, very expensive school, but she was able to get pretty, I mean practically go to school for free because on paper her family, even though that they were multimillionaires, they showed like they had nothing. And it's because of this depreciation and it's, it's something that, it's legal and it's a fantastic benefit on, on why to invest in real estate. So let's talk about what it is. So regular depreciation and multifamily is 27 and a half year depreciation. So if you've got a property that's three and a half million dollars, you know, got to take out the land, the land. 750,000 in this instance. Is not depreciable. So you take that out. So you got 2.75 million. That is when you divide that 2.75 million over, say 27 and a half years, you get $100,000 a year on depreciation. So if you made $125,000 for that year and you depreciated 100,000 for that year, your tax liability is only 25,000 on paper, right? So in reality, you've made 125,000. But on taxes, you don't have to pay 25,000. Now what if you were getting $75,000 for that year? Remember that revenue? Well, if your depreciation was 100,000, you're not paying any tax and you're showing a loss on paper for your taxes. And so that's how you know, the wealthy get away with what they do with the taxes. Now there's even more benefits with this. That's regular depreciation 27 and a half years. Accelerated depreciation is the straight line depreciation that really allows people to do everything over, say five, 15 years. So everything that's in an apartment can be, for the most part be depreciated. Right. Your cabinets can be depreciated, the flooring can be depreciated. The property itself, you know, land obviously can't. But anything that is an improvement on the property in theory depreciates over time. It gets old, it needs to be fixed. So what you can do is you would hire an engineering firm such as Madison Specs, and there's a lot of other engineering type firms that will come out and they will survey every aspect of your improvements on the property and they will come up with a depreciation list. So instead of doing a 27 and a half year depreciation, when the likelihood of you owning a property 27 and a half years is not very common. Right. Most is five to 10 years. So you accelerate that depreciation and say you're making, you know, the example 300,000 on the property and your accelerated depreciation is 300,000, then you're net, you know, you've netted out. You don't have a tax liability, you know, for that, for the bonus appreciation, you know, this is taking all the future depreciation into year one. So I'm not a tax consultant, I'm not a tax attorney. You would want to talk with your tax person. But this is a huge reason why people, wealthy investors, people that just continue getting more wealthy generational wealth is looking at these Tax benefits. This is not something that I'm hearing will go away. We hear, you know, 1031 exchanges and such, but Congress and, you know, they, they benefit tremendously from this depreciation of real estate. And again, if you have questions, you know, put them in the Q and A. We'll go through them at the end. But I just want you to put them in if you have questions so you don't forget. So there's more reasons why people go into multifamily. You know, there's a return on investment. So after all the expenses have been paid, you know, distributions are paid directly, you know, to the investor market demand. Depending on the market you're in, there's not a lot of, I mean, there are people investing in New York. I mean, land is land, they're not growing land. So people to say, well, I'm not investing in California, I'm not investing in New York. There are people investing, but there are a lot of people moving to the Southeast. So Florida, Tennessee's hot. North Carolina, South Carolina, where I am in Texas, we're getting so much movement from the West. And that's not just California, Nevada, other states are coming here where it's driving up the demand and that's huge. And you also have this declining homeownership, so you have low interest rates right now, which is great. But there's just a lot of people that don't want to own a home, which is driving up multifamily. You got this leverage and it goes back to why I like syndication. You know, many of you that have bought a house, you know, you might have used a VA home loan where you didn't have to put money down. But they're, you know, a lot of you that had to put money down and that money came out of your pocket that you saved over time. It's the same thing with larger multifamily. You're pulling your money to buy larger properties that you couldn't before. So in this example, a $10 million asset you could get for a 2 to 3 million dollar investment and you can have equity in it, you know, for, you know, less than that because you're pulling your money with others to get to that 2 to 3 million dollar investment. The other thing that's here is appreciation and amortization. Just like your house values are going up or, you know, if you own an office building or such, you know, appreciation does happen. And amortization. Every time you're making that principal payment on your mortgage, both residential, commercial, you're Paying down the loan. So as you can tell, there's just a lot of reasons why real estate, commercial real estate, and in particular multifamily attractive. So we're going to talk about the two types of real estate investors. So the first is passive investors. And that's really where you're placing your capital into a real estate syndication that's managed for you. So if you don't like real estate or dealing with any, you know, things that can happen three in the morning, whether it's, you know, toilets, a flood leak, you know, et cetera, you know, and your passion is more on law or Construction or Dr. Or IT, software engineer. You're not wanting to get into day to day active real estate because you've got, you're busy with your day job, your, your balance with your family, you've got other passions that you're going after, but you want to still benefit from all the real estate benefits that are out there. So you take more of a passive approach and we'll talk a bit more on what, how that really looks. The flip side of that is if you are like me and I just had the sick passion of real estate. It's something that's been ingrained in me early in life, growing up and every aspect of real estate investing, you know, pretty much I enjoy. So you know, that, that is for you, if you are somebody who wants to find the deals, structure the deals, raise capital, deal with the management, deal with, you know, ongoing asset management and then the sale, you know, that is, and we have investors on the call like that, that is, that's for you. So again, this presentation is a lot more towards the passive because it's more, it's just getting as much information out there to the passive investors who may have not have been, you know, have looked into real estate investing before. So from a risk profile standpoint, there's really three risk spectrums. There's core value add and opportunistic. And I'm gonna start with core. Core is typically your class A institutional type property that's really looking to lower risk. And by that they're willing to take a lower return. So lower risk, lower return. So what does that mean? So if you're in Austin, I'll say Austin here, your class A institutional type quality, I would say a $100 million plus asset is in that core spectrum. A lot of teacher retirement funds, there's a lot of pensions and such that are tied into real estate. And they're more investing in this core. They're looking more for Consistent stabilized cash flow. And they're okay with getting a 4 or 5% return. The key here is preservation of cash, lower risk. And so depending on where you are in your life cycle. I wouldn't say life cycle, but yeah, life cycle of investment. So if you are looking to live off cash flow, which is nothing wrong with that. Say if you invested, I'm just going to put out a million dollars and you're at a 10% return, you're living that's $100,000 a year on income that you can, you know, you can live off. So you're, you're not looking at drastically growing wealth. You're just looking to live off that, you know, invest in that income. So when you get into more value add, and that's my, me personally, that's sort of where I'm at. Medium risk, medium return. This is more your class B, your Class C, 1970-early 2000 type property, where they are in a, in a good area, good, say demographics, crime area. You know, there's a way to grow value by raising rents or change in demographics. There's a story, there's a business plan to it. Just like when you take over a business, if you buy a business or you go and invest with someone else, you, you're looking at like, how do we grow value? Whether it's through lowering operating expenses or finding ways to increase revenue, whether it's through rents or parking, et cetera. So there's usually a clear path to growing value. And you do that by looking at nearby properties and finding like, hey, this property over here was able to get a $75 rent bump by doing ABC. And that type of value add can be done at this property. So sort of the middle of the line, medium risk, medium return. You're gonna be getting preferred returns, say 7 to 9%, and I shouldn't even say preferred returns. I'll say 79% returns with 12 to 15% or more IRR. And we're gonna talk about those financial metrics shortly. Then you get an opportunistic, and this is truly a higher risk, higher return. These are your, your stocks that you may invest with, whether that's globally or domestically, that there's just a higher risk tolerance. But that's okay because where you are in your investing path, you've got time to recover, if it goes south, etc. So what's an opportunistic land that's buying, maybe raw land, going through the full development permitting cycle. And what makes that opportunistic is when Times are good today does not mean it's going to be good in three or four years when that property is developed. And so you're taking a risk unless you pre lease on that. So that's an opportunistic. Or you find a property that is just complete disrepair, maybe a 50% occupancy or less. And you know, you're going in with the, with the mindset of, you know, finding ways to lease up the property, whether it's office, multifamily, whatever it is. But in the work that you're putting into, you will be getting a higher risk. So you know, if you look at lower risk, lower return, think of, you know, and I won't say it's less work, but I mean you're not. When it's a class A property, in essence, it's a newer property. So you're going to have and it's a different demographic in a lot of ways. So you're going to have different risks than some than opportunistic type. So wherever you fit, it's not, there's not a right or wrong. Everybody will have their own place. And I'm spending a lot of time on this slide because it's really important whenever you start talking to deal sponsors is where do you fit in this? So if you're more in the middle of value add, you're good with, you know, you want to return every year, but you're five to seven year, you're good with a 1.8 or 2x multiple or over the five to seven year hold, then value add, that's your place. If you're okay with 4 to 5% and you're looking more cash flow and low risk, then core is you. If you're just completely opportunistic, you don't care about cash flow today, but you care about the future opportunity that will be you. So wherever you are, this is just a good slide to figure that out before you start investing. So some of these financial metrics here that you will hear a lot in, passively investing in multifamily is cash on cash. And so simply this is the money that you have put into the property divided by the amount of money that you get from the property. Okay, so it's a rate of return calculated by dividing the cash flow being produced by a property by the initial cash investment. So if you've invested $100,000 and you had a 10% return, then your cash on cash, or you made 10,000, your cash on cash is 10%, which is really, really Good in today's investing, right, the internal rate of return. And this can get confusing and at the end of the day, when you're comparing different investments, it's hard to know which one has the better return overall anticipated cash flows. So if you're looking at a 5 to 7 year deal compared to an 8 year deal, or compared to some stocks, etc. Your IRR is a way to really discount all future cash flows to get a net present value of zero. And really what that means is what is your, you know, what is your overall return? When you look at all the quarterly or monthly cash flow amounts and then you look at the sale of the property, where say you're getting a $30,000 check at the end, plus all the other periodic investments, you calculate all that into your irr. So it's really important in a value add. It's typically in today's environments, 12 to 15%. If someone's saying they can do a value add, get 20% or more, you know, that's really, look at the market, look at what's going on. And the reason I say that is because rents right now for a lot of us deal sponsors, you know, we're not putting in year one rent growth, right, because we don't know what is going to be happening in the market. We're going to be looking to retain tenants, we're going to be looking to attract residents. And so, you know, we're a little bit more conservative. So depending on the rate of return, typically again, it's 12 to 15%. There's a lot of people on the call that have had 18, 20, 25% IRR and that's fantastic. We just, you know, I don't say sadly, but the times are changing where, you know, the, the wins that were helping us get to that point is sort of going in the opposite direction just because of the economy. But still, you know, 12 to 15%, even a 17% return is fantastic. When you're looking at all the investments that you can invest in, plus the tax benefits and the other things we talked about earlier. The other financial metric that is heavily talked about, when you'll see, when you'll get listings or opportunities, is this equity multiple. So for me personally, if it's not a 1.8x to 2x over 5, 5 to 7 years, it's not really exciting to me. And so, you know, this is a way for you to quickly see, you know, what is, what is the rate of return that I should be expecting over all the cash flows. So that's the periodic cash flows and the cash flow at exit. So if you're putting in 100,000 and you have a 1.8 equity multiple, then over the five, seven year, whatever the whole period is, you're looking at $180,000. So these three metrics are talked about and so, and there's so many different blogs out there. So cash on cash, internal rate of return and equity multiple. Those are three things that you'll want to look more into. So some target returns to investors, everybody. So depending on the deal sponsor, they're going to set it up differently. There's different ways. There's a preferred return. And a preferred return is one that the investors that are investing their money from a passive side, they're going to get that return first before the general partners. So if the property had a 7% return, then that entire 7% would go to those investors because they had the preferred return. Now if it was an 8%, 7% would go to all the passives and then the 1% could go to the active or they could split it. So there's also the equity split. Okay, so if you've got the preferred, that's one way, or you look at it equity, where if you and I investing in a deal and we say, hey, we're doing a 60, 40 split, you can get 60%, I can get 40%. You know, that is straight up equity. If we make those returns, it's great. If we don't, you know, then we've shared the risk in that. So I like in our deals we do preferred returns. I feel like those that are trusting and investing their capital, you know, should have the preferred returns and it allows us to work harder to get the cash flows we need. But every deal is going to be different and we're going to talk about the private placement memorandum later. But it's important to read and know how your deal is structured. So in this case, let's say it's a preferred return. You put a $50,000 investment. And year one, we're at a 7% return. So year one, you had 3,500, year two, you had 3,750, year three, 4,000, 4,250. So the returns go up every year really because there's more revenues, you've got the property more stabilized. But year five, we sell. And over that five year period you've, you've captured, you know, from your investment of 50,000, you're at 87,500. So you've had 175% return or an IR rate of 17%. Your total equity multiple, when you add this 3,500, 3,750, 4,000, 4,250, 87,500, all combined is about 103,000. So you've had an equity multiple of 2.06. Those are fantastic returns that. Oh, by the way, because of also that tax depreciation, all this money that you were making, you know, on paper, you know, again, everybody's gonna be different. Talk to your tax consultant. But you know, for the most of us, you know, we're not paying taxes on those cash flows now at close at sale. Yes, there are capitalization taxes, there are tax considerations then, but then there's those 1031 exchanges. There's other ways that continue taking that money, shielding it from taxes, moving into a new investment and go from there. I do have a webinar on my website, creipartners.com that goes into the taxes as well. So hopefully that explained a little bit on the preferred returns versus equity split. Again, preferred returns is the passive investor is getting the priority return before the other investors. So if it's a 7% or an 8% preferred return, you're getting those returns first before anybody else splits the cash flow. One thing to note on the slide too I put in here is refinancing is a huge benefit. Just like you would refinance your house. Similar thing in multifamily, where say you buy it at a property that had lower occupancy or lower cash flow because the rents weren't at market and, and you're able to grow that over say two to three years. In essence, if you were able to grow the value, say by a couple million dollars over that term, you could refinance it depending on how your original loans all set up and such. But in there, say you can refinance it, pay out those investors, that capital that goes back to investors is tax free, and then your continuing, depending on the situation with the deal sponsor, you're able to continue benefit from those passives because you didn't sell the property, but you got your initial investment back and then you're able to still benefit from the returns. A huge caveat. Every deal is going to be different. This is just an example. Look at your private placement memorandum and we'll talk about that a little later. That will have all the deal information. Get to know your deal sponsor, have those discussions with them so that you know exactly how things are set up. So that way there's no surprises. So we're going to talk about some accredited investor versus sophisticated investors. So this is a lot about the legal must knows and this is all extremely important because as we will discuss it will determine what deals that you can and cannot invest in. Okay then we're going to go into the securities offering table. We're going to really dive into 506B, 506C and what really all that is by the Security Exchange Commission. We'll go into the private placement offering memorandum. We'll discuss the general versus limited partners and operating subscription agreement. As I said earlier, this is a lot of information and this is why holding the questions to the end just because it's a lot but hopefully it's good information at least get you thinking or asking other questions as you have have them. So what is an accredited versus sophisticated investor? So an accredited investor are people that have certain wealth that's been determined by the Security Exchange Commission. And in this case if you're single and you're making 200,000 or more and you've shown that you've done that last two, three years, then you're accredited based on your annual income of 200,000. If you're married or have joint income 300,000 is the security Exchange Commission threshold for you to be accredited or a net worth of at least $1 million not including a primary residence. So if you've got a million with stocks and I know a lot of my investors the same they've made a lot of their wealth through tech stocks. So they're over a million on paper with that. And so they're based on the Security Exchange Commission. They are accredited investors. Recently in the last few months the Security Exchange Commission has loosened this and it's a huge benefit and I hope everybody listening on this call really looks into this because deals that are going to the accredited investor are deals that the average person that one who's not looking or two can't because of the financial limitation are are not able to access. So they've come out and there's several I wrote a blog on this so check it out on my on the website. But what one bullet point that I really wanted to point out here is that professional designation certifications or credentials can't qualify you as accredited. This is, this is a huge game changer for so many people because they didn't hit that 300,000 or that 200,000 minimum income or the million dollar, you know, net worth. So really recommend everybody if you're not an accredited look into that series 765 at 82 license these licenses, you know, two of them, I believe it's the 7 and 82. You have to be with a broker sponsor, and I believe series 65, you don't may have those mixed around. But either way, there's one of the three here that you do not have to be with a securities broker. Meaning you take, you study for the exam, you take the exam, you pass the exam and you're an accredited investor. And we're going to talk about why that is a benefit in the next slide to be an accredited investor. Now, from a sophisticated investor, everybody on this call, at the end of this call will be a more sophisticated investor ready to invest. And it's because you are knowledgeable and have, are getting sufficient experience and knowledge to make a decision if it's worth investing or worth the risk to invest. Because real estate investing with any type of investing is a risk. Okay, So a sophisticated investor does not meet the annual income or the net worth or don't have these professional designations. Right. But you can still invest while not having that, you know, the net worth and income. Right. You just have to show that you've been, you're sophisticated enough to look at a deal, analyze it and determine for yourself if it's worth investing in. And really all this is good because a lot of people lost a lot of money to Ponzi schemes and other bad actors who just, you know, did horrible things with their investors capital. Right? And so the Security Exchange Commission, their goal is to protect the investors as much as they can. And so with a sophisticated investor, you can invest in certain deals. And we're going to talk about that right now. The two most common syndication offerings are typically 506B and A506C. The 506B and the 506C can have unlimited raise amounts. So as I talked about earlier, you can get a $10 million for a 2 to $3 million, you know, down payment, just like you would if you're buying a, you know, $200,000 house, you know, 10, 15%, 20%, you're able to put enough down to buy that house. Same obviously with multifamily, as we've talked about, there's no limit for investment size per investor. So if you wanted to invest $2 million, 50,000, 10,000, it doesn't matter to secure exchange on what you can invest in both 506B and a 506C. Where it changes here, excuse me, is the 506B. If I have a 506B offering, I'm not able to post on Facebook. I'm not able to go out there and do a general solicitation for advertising. Okay. Whereas a 506C you are able to do that and we're going to talk about that shortly on why you can. Going back to the accredited investors, unlimited amount of accredited can invest in both 506B and A506C. There is a difference. On the 506B somebody can self certify. So you don't need a third party to say that you aren't lying about your financials. Whereas on a 506C you do need a third party to validate your financials that you are accredited. So this is where it changes. So are non accredited investors allowed? So for 506B deals, yes, sophisticated investors are allowed in those deals. However, for every deal and it's deal specific, when I say deal, it's property specific, 35 sophisticated investors can invest in that deal. I can have an unlimited amount of accredited investors, but 35 sophisticated investors. Now as we talked on the last slide, sophisticated are those that can look at a deal and make a decision for him or herself to know if it's a deal that they want or interested in investing in. There's Another caveat to 506B. You and the deal sponsor have to have a pre existing relationship prior. So one of the things I've been doing on the blogs and such is like let's get to know each other because if we don't know each other, I do a 506B you're not able to invest because we don't have a pre existing relationship. Even though you're sophisticated and such. If we don't have a pre existing relationship, you can't Invest on a 506B. It's also another reason why recommend passive investors. You know, we'll talk about our meetup later but get out there and meet other deal sponsors, other people that are sourcing and finding deals. So that way you have an opportunity to invest because they can't publicly announce to you that they are. They found a deal if you're not an accredited person. Right. Or a 506B. Now if I slipped over to a 506C I can do whatever I want. From an advertising standpoint. If you see some ads, I'm sure now that you've typed in multifamily investing, you'll start seeing some ads on Facebook. All Those things are 506C and you can get major the deal sponsor get a major trouble, legal trouble by if they were doing a 506B and doing general solicitation. So the 506C that you may be seeing, you know, are only limited to those accredited investors if you met that net worth or you had those professional certifications designations. So that's where does, you know, change. So 506B is, you know a lot what we do. It's more I like the relationships. I know who's investing in the deals. I can do sophisticated, I can do accredited, but I can only do 35 if I'm doing a huge capital raise. And it's a, it's a, you know, multi, you know, say it's a $15 million property and I've got a 5, 6 million dollar raise, you know, likely, you know, depending on the partners that are involved, you know, we're going to be doing a 506C. So look at those destinations, professional certifications. So it doesn't limit you on what deals you can and cannot invest in. Okay, this 506B though, if you, if you don't have the accredited designation or certification, meeting the net worth and such, that's okay. There's a lot of great 506bs. The biggest thing is you've got to get in front of deal sponsors and you've got to say hey, I'm such and such and I'm wanting to partner with you and you know, build that relationship going to be good for you because you get to know what they're doing and how they structure their deals and how they are able to deliver and do day to day management of that property on your behalf and such. So hopefully that explained a little bit more about 506B, 506C. I'm not going to go into Regulation A, Tier 1 and Tier 2, but that is here and you'll have the slide when I send out the recording. So this is probably the most important document that you will read if you're going into these type of investments. And this is called a private placement offering memorandum. I would hope that every deal sponsor out there is providing a PPM to their investors. If they're not, this is something now you need to be asking for and all rep most I would say the reputable ones are right. And this private placement offering memorandum provides you that transparency of what is involved in this deal. You know, what are the splits, who are the partners, how are the distributions going, what are the risk factors? It gives you the all the details and it's written by, you know, it's through a law firm that they'll put it together and they'll have all the considerations for you as a passive investor. Now this can be a 30 page, it can be 100, I mean depending on the asset and the complexity could be a pretty daunting task to read. But it's an important thing to read and it's something that the PPM typically, unless you are a huge contributor in that deal, cannot be changed. So it either works for you or doesn't work for you. Okay? But this PPM is a very important document that you will cover again, it will cover the conflicts of interest, discuss legal representation, it'll go through all the terms of the offering. If you're not knowing initially that it's a preferred return versus an equity split or there's waterfall splits, et cetera, you know, that is all going to be put into this private placement memorandum. This is your homework on the side of, you know, doing due diligence on that property and making sure the numbers, you know, make sense. So now we're going to talk a little bit about a general partnership and an lp. So we talked about what an active investor is and a passive investor. So the active investors are the general partners. Let me back up. General partners and the limited partners together are the legal entity are the owners of the property. If you go invest into a real estate investment trust, you're buying sort of a stock into an investment, right? Similar to buying a Google stock or you know, any publicly traded stock. Similar thing on the reit, you're not buying equity into the property, you're buying a share in the company who owns and manages those apartments or that real estate. The benefit of pass away investing in a syndication is you own equity, you are an owner of that property. You can go to that property and say I'm a limited partner and say this I own, you know, I have ownership into this property. And it's the truth because the general partnership and the limited partnership combined will hat will equal that corporate entity that owns that property. So they're that LLC or the limited partnership. Now the GP on the active, so everything in blue is active. So the general partner, you know, they found the property, they've capital raise, they've, you know, signed the loan, etc. Their job is to manage the entire deal from start to finish. And what I tell my investors and my tell others is you should know the strategy of the property that you're investing in before you invest anything. That deal sponsor needs to share their business plan and go from A to Z on how they're Going to improve the property, you know, for your money. Okay. So the general partner is responsible for doing that. Now the limited partner contributes the majority of the funds to finance the deal and then their job really is passive. They have other interests, they have other jobs, they're not actively on the day to day. Now does that mean they completely stay away and they don't ask questions or they don't read anything? No. You can be as active or not, you know, whether it's getting a monthly report from the GP of you know, what's going on, what were some of the market changes, etc. Asking questions going to the property. Those are things that a limited partner can do. Right. But they are passive. So at the end of the day the general partners is the decision maker on the property. So the expectations are the gp. They showed you a strategic plan. Now things can change depending on the market conditions, but for the most part the business plan is what it is, right? And you implement it and that's the general partners responsibility to implement it. There's got to be ongoing communication to the limited partners and they've got to provide the distributions on time. You're investing your money and you're being told that at month six returns are going to start and you'll be getting a 7% return. Well, that 7% return needs to come and if it doesn't come, you need to have open communication from the general partner on why that isn't and how they're going to do to fix it and how to get, you know, if it's preferred return. If they don't meet their returns, then future returns are accrued. So you get, you know, caught up. But as expectations of the unlimited partner you completely passive. Right? Capital's locked in for a whole period. Profits aren't guaranteed, you know, they're at risk, some financial considerations. So the general partner, they're responsible for the deal's debt. So there is risk. You know, for me signing on a multimillion dollar loan, there are risk. A lot of the loans on the multifamily side are non recourse. But that doesn't mean that the lenders can't come out for you if you were doing something they shouldn't have, et cetera. So there are liabilities from a general partner side about the debt and then from a limited partner, the money that was put in the deal is the money that's the max money that that person can lose. Right. And we're talking about a lot of loss and stuff here and the nature of the Historical returns as we talked about before. Historically, properties, you know, grow in revenue and such and grow in value. But there is, there is risk, just like with anything. Go to the next slide. Got a few more slides here on the operating and subscription agreements. So on an operating agreement we talked about the private placement memorandum, important document. Now the operating agreement is going to go in and it's going to talk about how our decisions made, you know, about the rules, regulations, because remember it's a legal entity that owns that property. So that legal entity, because there's a general partnership and a limited partnership, there needs to be rules to govern the internal, you know, operations of the business. And so you will get an operating agreement. It's a document you should read and if you have questions, talk with your attorney. But it will be signed by all those that are in that limited liability company. So the gps and the limited partners that make that limited liability company will sign this document. The other document that you'll see is a subscription agreement. So the subscription agreement is really that two way guarantee that deal sponsor is going to provide a certain amount of shares to the investment and return you're buying at a certain price. So there's those three legal documents, the private placement memorandum, the operating and the subscription agreements that are really the three documents that you, as a passive investment will review aside from the business plan that, you know, the deal sponsors putting together. So just a couple more slides here and then we'll open up some questions. So on real estate market cycles, this is, if you haven't heard, Glenn Mueller, he is a professor at the University of Denver. Every quarter he puts out a report and I believe this has happened, you know, since 1996. But he goes in and labels certain markets based on these four phases. So in real estate, we are not tied to the stock market. It's one of the reasons why we invest in real estate. You know, it's not one day it's hot, one day it's cold. You know, it's supply and demand and it's, you know, it's going through this like for example, phase one recovery. You know, there's, you know, during a downturn, you know, rents start going down below inflation, rental growth. So you're starting in this recovery. Then you start getting into an expansion mode where rents start rising. It's usually the time where development starts occurring again and as you get higher and higher, you start getting into phase three, the hyper supply. Then you have this downward cycle of too much apartments or too much office and rents are having to decline because You've got to stay competitive. You got to attract, you know, new tenants, new residents. And then you start getting into, you know, the last phase four recession. So it's important because wherever you invest and there's people, you know, all over the country on this call right now, but it's good to know where your city is and all that. And it's important because when you talk to your deal sponsor and your deal sponsor saying that they can get 3, 4% annual rents, but you know, because you're a sophisticated investor, that, hey, my city is in hyper supply or this particular sub market, there's new construction all around it or et cetera. Those are type of things that you can look and ask the deal sponsor to clarify and understand that they're being conservative. Maybe, you know, not have to be like super conservative, but the other day being conservative with the mindset of are the returns from a rental standpoint achievable? So looking at my three markets, so San Antonio is in expansion mode. You know, San Antonio is a city that continues to grow. It benefits from the Central Texas location being close to Austin, but it also has a lot of its own economic drivers that are there. And the apartments in particular are, you know, they're still in that development. You know, rents are growing, and when rents are growing, money's there. So there's expansion going, but it's not in that hyper supply. So, you know, a 3, 4% rent increase is definitely doable in the expansion cycle. But if you're in Houston or Austin, there is so much development going on in these, in these cities and in good reason, because there's a lot of companies and a lot of growth, you know, in the, in these markets. So they got to keep up with the demand. But all these cities that are in hyper supply, again, may not have the rental growth that your deal sponsor is projecting. And so you just want to look, you know, from a rental side, it's like, hey, I understand this market's in a hyper supply. You're going to be competing, you know, talk to me about your, you know, your projections on rental growth. Now when, like when we're underwriting a property in Houston, you know, instead of like a 3%, you know, maybe we're doing a two or, you know, even a one and a half. Some markets, you know, that affects the purchase price. So if the deal sponsor can talk through it and it can make sense to an investor of, okay, well, this person has thought about it and they've worked to reduce risk and it makes sense to Me, then, you know, you can understand where, you know, it's like, okay, I feel comfortable investing. And then when you go into recession, you know, these are opportunities, you know, for me, it's like blood in the water, you know, and we're sort of getting there with multifamily now where, you know, a lot of owners overpaid and they have debt service that they're not able to pay right now. So they're working with the banks and going through, you know, modifications, in some cases, forbearance, etc. Those are opportunities for some great, you know, great opportunities to buy. So, again, long story, but it's very cyclical. Ups and downs, supply. It's all driven on supply and demand. And that's a huge benefit of real estate investing compared to the stock market, which, you know, one tweet can really destroy or boost stocks. Right. So with that said, I do want to share on a couple slides on how to learn more. One is we had a meetup on Monday. It was our best turnout yet. We had about 30. Over 30 people that joined. 30 investors joined. But we meet every fourth of the month at 7pm It's a different format than this. It's a meeting set up so we'll have breakout groups in the beginning and in the end, or we have conversations at the end so you're able to see each other and ask questions and such. So go to the meetup.com Texas multifamilyinvestormeetup and join us. Next month we're gonna go through how to underwrite. From a passive investor standpoint, there's not a lot talked about. If you get a deal, how do you do your own underwriting at a high level to make sure it makes sense. So one of our investors that have just joined previous meetups is going to take the lead on that. I feel like it's important from a passive investor side for them to share what they look for to benefit others as they learn. So it'll be a great one again the fourth Monday of each month. There's another book here that I recommend. I don't get any money from it, but I think it's so, so good. I recommend all my investors to read it because it gives you the information to ask questions and make you that sophisticated person so you can question, even question me or question another deal sponsor. I think that's a good thing, right? It makes everybody. It elevates everybody's game. And so I highly recommend passive investing in commercial real estate. Insider secrets to achieving financial independence. James Kanasami is my mentor and he's a GP on all our deals. And he really goes a lot into multifamily and deal structures and what to ask and you know, when you're dealing with a deal sponsor. So again, recommend that book. The other things to learn more is, you know, I've got a podcast that we do every other week you can get@creipartners.com podcast or Apple iTunes. Go on there, but subscribe. We've been very fortunate. I've had conversations with, you know, obviously multifamily, but we've had storage, we've had student housing. I'm about to interview a good friend of mine that's in office acquisitions. So, you know, that's a really good podcast. There's a lot of, lot of others. But, you know, hopefully I'm adding value to those that are listening or if you haven't, you know, please do so. And hopefully it helps everybody on the journey. Real estate investing. And then I've got my ebook@crapePartners.com ebook so I'm all about again, just providing knowledge, education, trying to get people aware that you can diversify, that it's not just the wealthy that can invest in these type of deals. You know, those that are looking for that financial freedom. Or I had one guest who 100% lives off passive income from multifamily deals. You know, he doesn't have a job, he doesn't work from, you know, he invests his money or invested his money into deals and lives offset passive income. So it can happen and it does happen. And if there's anything I can do for y', all, and I'll go into questions in a second, but, you know, let's connect. Whether you invest with me or not, no big deal. It's at the end of the day building the relationship and, you know, seeing, you know, how I can provide value to y' all and you know, how we can work together in the future. So please reach out. I'm going to send everybody an email after this, but you can reach me@waynerei partners.com or you can call me at 512-710-2500. So with that, I'm going to try to answer some of these questions that have come in. All right? So, Nathan, thank you for Confirming the Series 65 exam is the one that doesn't require sponsorship by a broker dealer. So, yeah, so you don't have to work for an investment firm to get it. So thanks for clarifying that. You should be able to see my contact info on the slide here. And again I'm going to follow up afterwards. One of the questions came in is is it typical to see either preferred return or a cash flow split for LPs or is it also common to see the pref and a cash flow split? So it really depends on the, on the deal sponsor. Depends on the deal. And I say that because there's got to be enough meat for both parties to be excited about it. Okay. So at the end of the day, if the deal sponsor is able to grow their wealth as well, then it aligns with those passive investors that are investing. So why do I say that? So if it's a higher opportunistic type property, they may not can't guarantee a 7, 8% because there's more opportunist, it's more opportunistic, there's more risk. So for that you know, they're going to be doing more of an equity split. Now what I do see typically on a preferred is typically a 7, 8% what we saw before 8, 9% preferred, that was norm 7%. If I'm only looking at 8, 9, 10% cash flow, I'm not gonna make any deals because today's market, again if you're underwriting conservatively, and we're gonna talk about that in our meetup next month, you're gonna underwrite conservatively. I rather make sure we have consistent achievable returns to our investors then over promise 8, 9, 10% and then only can deliver 7. So what I am starting to see more so with deal sponsors is 7 to 8% cash on cash. And then year, you know, it was year five sell, now it's more year six, seven. Some deals can sell at year five, it just depends on the market and location. But then you would have this split typically an 8020 split or a 7525 or 70 30. And those are, you know, one thing I didn't really hit on. But if your splits, if you're bringing in all the cash, right, and the split is pretty 50, 50 with returns and such, then you know, talk to another deal sponsor. Just make sure you, you've got the right fit. I think if you're at 75, 25 meaning 75% of the total equity profits are going to passive 25, going to active the GP or even a 70, 30 or 80, 20, I mean a 64. I mean those go to deal sponsors that have had, you know, a lot, a lot of say experience potentially and you're okay. With paying them more, because again, it goes back to that risk profile. So. Good. So one question is, you also hear term cash yield, is that the same cash on cash? So yeah, it's the rate, it's the same cash on cash, the yield. So it's the return on that. But remember, the cash on cash is the money that you put in divided by the money you've received. So again, if you put in 100,000 and you've got 10,000, then that cash on cash for that year is 10,000. So depending on the deal, you may not get the full 10% year one. Right? It may be a 5% year one, but if you had a preferred, and I say only 5% because year one, you're re tenanting, you're renovating, you're implementing the strategy of the property, but that 5% that you didn't earn that year one is accrued into year two until you're caught up. Right. So that's, that's something to consider. Going through some of these other. One of the questions was how does cost segregation affect taxes? So cost segregation goes back to that accelerated depreciation. Okay, so that's what that is. And I've got a blog on that as well that really dives into it. But if we talked about before, normal depreciation is over that 27 and a half year period. When you hire an engineer, it gets into that cost segregation. They're doing a cost segregation. They're looking at all the different aspects of the improvements on the property and they're determining, okay, this, this, say cabinets have a 10 year life, or, or flooring has a five year life, et cetera, you know, they're breaking that down. So that cost segregation affects taxes because you can in essence grow, I mean, maximize your depreciation to offset your income. And it's on paper. So just because you've made say $10,000 on investment cash on paper, you're showing a negative, showing a loss because you had that cost segregation. So all of our properties have a cost segregation, typically 5 to 6,000 a year from the property, that's done, but it's worth it for the investors. So is a PPM required or recommended for a jv? So it depends. Like if you're bringing in all the capital, like say you have two partners and it's a, say it's a million dollar deal, or say a $500,000 deal and you're able to bring in your own money, then no, because there's two investors, you know, there should be Some have a legal document, so an operating agreement, you know, something that if things go south there should always be something in writing. Even on smaller deals if you're dealing with someone else. So there should always be something in writing. PPMs typically come into play where if you are asking a passive, if you're asking others to be passive on it, then yeah, you would want a private placement memorandum or do any type of syndication. I should say if you're doing any type of syndication, you know, you should have. I mean at the end of the day what we want to do is be transparent to our investors. I mean, depending on the number of investors you have, you know, that's a personal decision. Is a PPM required? No, it's not required, but it is something that I think is good and typical. One of the questions was the higher interest rate environment in three to five years. So I from. On our deals we adjust. On our cap rates, we do adjust it going up instead of thinking that cap rates and such are going to go down. And we do that because of we don't know where interest rates are going to be. We do know that the Fed has said that they're not going to increase the rate. So you know, from that standpoint, I think it has helped because it's stable. You know, it's helped lenders and businesses to be more thoughtful over their five, seven year plans from investments and such. So I don't know, I don't know about three to five years. At some point, you know, inflation's going to happen and. Right. And interest rates are going to have to start going up. There's got to be a correction. Okay, so I do think there will be a correction. But in the next three to five years. I don't think it's going to happen the next three years, maybe longer. There's just so much unknown politics and such. But it's a good question. And we didn't really go much into the cap rate and so that's something I'll write a blog about and maybe we can talk about one of our meetups. But it's important because if say your cap rate, the cap rate for those, it's a multiple. So you got net operating income and when you buy a business there's a multiple that you can multiply times the income to get the value of say the business. Some are in commercial real estate. It's not like your house where it's price per square foot. You know, this house sold at 183, mine would sell at 183 square foot, et cetera. It's not like that. It's all about net operating income and the cap rate, the multiple for that particular sub market. So if you buy a property at say a 5.5 cap rate and your exit cap rate is at 5, then you're being really, really aggressive in my opinion. And so, and how this all ties together so is the interest rates. You got to assume that there's going to be some movement going up. So you want to see that cap rate be at least a core basis point or some more to help offset that risk. Good question. Let me make sure I've got another. All right, I'm give any other questions? Again, this was a lot of information. As you can tell my voice is going out, but it's a lot of high level stuff. And so let's, you know, take it as, you know, a little bit of everything. Reach out, join our meetups, you know, learn. I don't, you know, I'd love for you all to invest and such but then it's not about that. It's finding, you know, good deals for everybody to grow their wealth. And to do that you've got to have some type of knowledge and be sophisticated and look at deals. So y' all don't, you know, get into an investment that you wish you didn't do. All right, again, My number is 512-710-2500. Website creipartners.com you can reach me through there. So reach out. I'm going to send out an email and hopefully this was helpful and then join our meetups. The meetups are different setup, you know, it's definitely more engaging and such. I know this is a lot one way so I appreciate the understanding. But we are recording this and I am going to send this recording out. So hope everybody has a great rest of the day or evening and look forward to hopefully getting to know you know, you better. Thank you.