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A single-family home, duplex, triplex and quadraplex are considered residential properties. Anything more than 4 units is considered commercial multifamily.

Here are the key differences –

Valuation:

Residential properties are typically valued using a comparative sales approach with respect to recent sales of similar residential properties in the area.

Commercial Multifamily Properties are often valued using an income approach, specifically the capitalization rate (cap rate) method. The value is determined by the property’s ability to generate rental income. This approach considers the property’s net operating income (NOI), expenses, and prevailing cap rates in the market. Valuation for multifamily properties also considers comparable sales, but it places greater emphasis on the property’s potential rental income and its income-generating capabilities.

Lease Terms and Tenant Quality:

Residential property valuation doesn’t typically consider lease terms and tenant quality to the same extent as commercial properties.

Commercial Multifamily Valuation considers lease terms, tenant quality, and the potential for rent increases in commercial multifamily properties.

Income Potential: Multifamily properties often have higher income potential compared to residential properties because they can generate multiple rental incomes from different units. This can provide a more stable cash flow stream, especially in areas with a high demand for rental housing.

Economies of Scale: Multifamily properties may benefit from economies of scale. This can lead to reduced costs for maintenance, repairs, and other operational expenses, as certain costs can be distributed across multiple units.

Appreciation and Resale Value: While residential properties can appreciate in value, multifamily properties can have higher appreciation potential if they are located in areas with high population growth and strong rental demand. The potential for increased cash flow and property appreciation can make multifamily properties a lucrative investment in the long run.

Market Dynamics:

The residential market can be influenced by factors like school districts, neighborhoods, and individual home features.

Multifamily properties are often influenced by location, local rental market conditions, and the overall economic environment.

Cash on Cash Return (CoC)

Cash income earned relative to the original cash investment e.g. a property generating $10,000 in annual cash flow after debt service and initial cash investment of $100,000, has a 10% cash on cash return. A typical minimum CoC target for syndicated investments is 8-10%. It is not uncommon for the cash-on-cash return to be lower in Yr1-2, while the property is being updated.

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Average Annual Return (AAR)

Return on investment averaged over the hold period of the asset, measured as total distribution to members divided by the initial cost of the investment or cash investment. A typical minimum AAR target for syndicated investments is approx. 15%+. It is not uncommon for the average return to be lower in Yr1-2, while the property is being updated and value-add work is ongoing.

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Internal Rate of Return (IRR)

This metric captures the full return of the investment including distribution to members (referenced above) coupled with the gain on sale after accounting for time value of money, the timing of when cash flow is returned impacts the IRR. Therefore, the sooner you receive the cash back, e.g. the shorter the hold period, the higher the IRR. A typical minimum IRR target for syndicated investments is 15+ to 20+%.

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Equity Multiple (EM)

Measured as total dollars received divided by total dollars invested. Total dollars received includes the cash flow earned throughout the hold period of the asset coupled with the sale proceeds. For example, if you invested $100,000 and you received a total of $200,000 throughout the hold period of the asset including gain on sale, that means you achieved equity multiple of 2.00x, or doubled your initial investment. A typical minimum EM target for syndicated investments is 1.50+ to 2.00+x.

Most of our deals are underwritten to a 5 year hold, but this can vary based on the business plan and market conditions.

It can vary depending on the deal, but typically $50K to $100K.

Yes.

Investors can use multiple sources to invest, such as Savings / Personal liquidity or, Self-Directed IRA, 401K, QRPs etc. or, Cash-out refinance of their primary residence or, HELOC or, 1031 Exchange or, even by taking a Loan against life insurance.

AdvantaIRA Application Fee Waived through NextGen Investment Partners referral

Madison Trust - www.madisontrust.com

IRAR Trust Company - www.iraresources.com

Equity Trust – https://www.TrustETC.com

Directed IRA - directedira.com

A short youtube video on how to use your IRA and 401K account to invest is given below- https://www.youtube.com/results?search_query=how+to+invest+from+401+K+in+syndications

Investors receive distributions from the cashflow of the property monthly or, quarterly depending on what the team for each deal decides.

Prospective investors receive an Offering Memorandum which provides all the details on the project (location, asset type, business plan) and the projected returns. If interested in the specific project, the investor completes the investment documents and contribute capital.

No. Not all deals are SEC 506(C) which are for accredited investors only. We also do 506(B) deals for non-accredited investors. You just have to initiate a discussion with us before investing in a 506B deal. Unless we have spoken before atleast once about your investment interest, you may not be able to invest in 506B.

The following self-accreditation websites give you a free assessment.

https://accredited.am/

https://parallelmarkets.com/get-accredited

506(b)’s defining feature: A GP can raise an unlimited amount of money as long as they do not publicly advertise or solicit investments for the fund. The syndicator must have a pre-existing relationship with all investors before inviting them to invest.

506(b) benefits

• Rule 506(b) offerings are not regulated by state blue-sky laws.

• Purchasers can self-verify their accreditation status; GPs aren’t responsible for verifying accreditation.

• If a GP only takes on accredited investors, they can avoid filing burdensome disclosure documents with the SEC that would need to be provided to non-accredited investors.

506(b) limitations

• GPs are prohibited from talking about the fund publicly while fundraising, and from running a crowdfunding campaign to bring in capital.

• GPs can’t take on non-accredited investors without offering the same disclosure documents typically required under Regulation A of U.S. securities laws.

506(c)’s defining feature: A GP can perform general solicitation and advertising without any limitation on how much capital they can raise. There’s no need for a pre-existing relationship, but the accreditation status of investors is verified through a strict process.

506(c) benefits:

• Rule 506(c) offerings are not subject to state blue-sky laws.

• GPs can publicly market their capital-raising offer to a larger investor base, beyond just one-on-one conversations and emails within their personal and professional networks.

506(c) limitations:

• Verifying accredited investors takes up time and money.

• Many investors are reluctant to give sensitive information to GPs they don’t have a personal relationship with.

• Given the potential liability third parties take on when they certify investor accreditation, accountants and lawyers are unlikely to make these certifications except perhaps for very large, lucrative clients.

REAL ESTATE FUNDS

A real estate fund is a pooled investment vehicle that combines the capital of multiple investors to purchase and manage a diversified portfolio of real estate assets. Investors typically purchase shares or units in the fund which acts as the middle layer with fees. The investors do not have any ownership or involvement

The fund manager is responsible for selecting and managing the properties in the portfolio.

Investors in real estate funds have a more passive role. They provide capital to the fund and rely on the expertise of the fund manager to make investment decisions and manage the properties. Their returns are fixed by the funds. There is no way to know which of the properties made what kind of profits.

REAL ESTATE SYNDICATIONS

A real estate syndication is a where a sponsor or syndicator pools money from multiple investors to acquire a single property or number of properties. Investors in a real estate syndication often have more direct ownership and involvement in the specific property or project

Investors in a syndication have direct interest and can choose whether they want to invest or not in that asset.

Investors in a syndication may or may not have a more active role, but may have decision-making influence in the specific property or project they are investing in. The syndicator typically seeks input from investors on key decisions. Investors are aware all the time and directly receive the profits with no upper limit.

Here’s how a preferred return works in the context of real estate syndications:

1.Investor Priority: The preferred return is a predetermined rate of return, expressed as a percentage of the initial investment (capital contribution) made by the limited partners. This rate is usually set when the syndication agreement is established, and it could range from, for example, 6% to 10% per annum.

2.Payment Hierarchy: When the property or project generates income or profits, the preferred return is paid to the limited partners first, and it is often paid on a cumulative basis. This means that if the project doesn’t generate sufficient profits to cover the preferred return in a given year, the unpaid amount accumulates and must be paid in future years when there are sufficient profits.

3.Sponsor Compensation: After the preferred return has been paid to the limited partners, any remaining profits are typically shared between the limited partners and the general partners or sponsors, often following a predefined profit-sharing ratio (e.g., 80% to limited partners and 20% to general partners).

4.Performance Based rewards: The preferred return is designed to align the interests of limited partners and sponsors. Limited partners receive a predictable return on their investment, which encourages them to invest, while sponsors, who are typically more actively involved in the project, receive their share of profits only after the limited partners have received their preferred returns.

The following videos and links explain this and more in detail:

The following videos and links explain this and more in detail

• 3 mins video – https://www.youtube.com/watch?v=LxtIaZUpYLg

• 2 mins read – https://apt-guy.com/understanding-preferred-returns/

Here are some key tax benefits that limited partners in real estate syndications may enjoy:

1.Passive Loss Deductions: Limited partners can often deduct passive losses, such as depreciation and mortgage interest, against their passive income from the syndication. These deductions can reduce their taxable income from the investment.

2.Depreciation Deductions: Real estate investors can benefit from depreciation, a non-cash expense that allows them to write off the cost of the property over time. This depreciation expense can be used to offset taxable income, reducing the investors’ tax liability.

3.Tax-Deferred Capital Gains: When a property within the syndication is sold, limited partners may benefit from tax-deferred capital gains through mechanisms like 1031 exchanges. This allows them to reinvest the proceeds from the sale into another investment property without immediately recognizing capital gains for tax purposes.

4.Passive Activity Loss Rules: Passive investors can use passive activity loss rules to offset income from the real estate syndication with passive losses from other real estate investments or activities. This can help reduce their overall tax liability.

5.Distributions as Return of Capital: When limited partners receive distributions from the syndication, a portion of those distributions may be considered a return of capital, which is typically not taxable. This can help investors access their earnings without triggering immediate tax liability.

6.Investment Interest Deduction: Limited partners may be able to deduct investment interest expenses, such as interest paid on loans used to finance their investment in the syndication. However, there are limitations on this deduction.

7.Qualified Business Income Deduction (QBI): Depending on the structure of the real estate investment, some limited partners may be eligible for the QBI deduction, which provides a potential deduction of up to 20% of qualified business income.

8.Tax Credits: In some cases, real estate investments, particularly those focused on affordable housing or historic preservation, may offer tax credits that can directly reduce an investor’s tax liability.

9.Estate Planning Benefits: Real estate investments can provide estate planning benefits, allowing for the transfer of wealth to heirs with potential estate tax advantages.

It’s important to note that tax laws are complex, and the specific tax benefits available to limited partners in a real estate syndication can vary based on factors such as the syndication structure, the investor’s individual tax situation, and changes in tax laws. Therefore, it’s crucial for limited partners to consult with tax professionals or accountants who are well-versed in real estate investments to understand their specific tax implications and optimize their tax strategy.

The following videos explain this in detail.

8 mins – https://www.youtube.com/watch?v=g3JVTIjDRNw

8 mins – https://www.youtube.com/watch?v=MugZ5vapwQ0

Yes, but not all syndication deals allow 1031 exchange. You will need to find out before signing up for any deal. Please reach out to us if you have a 1031 exchange. The following videos give you a good idea of what it takes.

1031 INTO a syndication – https://www.youtube.com/watch?v=OE0cYcx0pzA

1031 OUT of a syndication – https://www.youtube.com/watch?v=X3gUq4O7efU

The Capitalization Rate (Cap Rate) is a crucial financial metric used in the valuation of multifamily properties. It helps investors and appraisers determine the property’s value based on its income potential and market conditions. When calculating the cap rate for a multifamily asset, several key factors and considerations are taken into account:

1.Net Operating Income (NOI): The first and most critical factor in the cap rate calculation is the property’s Net Operating Income. NOI is calculated by subtracting all operating expenses from the total rental income. Operating expenses include property taxes, insurance, maintenance, property management fees, utilities, and other costs associated with running the multifamily property.

2.Market Cap Rate: The cap rate is a relative metric, and it’s important to consider the prevailing cap rates in the market where the multifamily property is located. The market cap rate serves as a benchmark, and it reflects the risk associated with investing in that particular market. Cap rates can vary significantly from one market to another and change over time due to market conditions.

3.Risk and Location: Cap rates also account for the perceived risk associated with the property’s location and market conditions. Properties in more stable and desirable areas may have lower cap rates, while properties in riskier or less desirable locations may have higher cap rates to compensate for the added risk.

4.Property-Specific Factors: The condition and quality of the multifamily property, as well as its age and amenities, can influence the cap rate. Well-maintained, newer properties with attractive amenities may command lower cap rates, reflecting higher investor confidence in the asset.

5.Tenant Leases: The terms and stability of tenant leases play a role in cap rate calculations. Longer-term leases with reliable tenants can result in a lower perceived risk, potentially leading to a lower cap rate.

6.Vacancy Rate: The expected or historical vacancy rate is factored into the cap rate calculation. A higher vacancy rate can lead to a higher cap rate because it suggests greater income uncertainty.

7.Growth and Rent Projections: Projections for rental income growth and potential rent increases may be considered in the cap rate calculation. The expectation of rental income growth could lead to a lower cap rate.

The formula for calculating the cap rate is as follows:

Cap Rate = NOI / Property Value

Or, rearranged:

Property Value = NOI / Cap Rate

In summary, the cap rate calculation for multifamily assets considers factors such as the property’s Net Operating Income, market cap rates, location-specific risk, property-specific characteristics, tenant leases, vacancy rates, and income growth projections. These factors are combined to determine the appropriate cap rate, which is then used to estimate the property’s value based on its income-generating potential within its market.

Yes, non-US investors can invest in real estate syndications in the United States. However, there are certain considerations and regulations they must be aware of when making such investments:

1.Regulatory Requirements: Non-US investors need to understand and comply with the regulations set by the U.S. Securities and Exchange Commission (SEC) regarding investments made by non-US individuals or entities. These regulations may include specific restrictions or requirements for non-US investors participating in syndications.

2.Tax Implications: Non-US investors should be aware of the tax implications of investing in U.S. real estate syndications. They may be subject to different tax treatments, including withholding taxes on income generated from their investments. Understanding the tax treaties between the US and the investor’s home country is essential.

3.Documentation and Legal Considerations: Non-US investors need to review and understand the legal documentation associated with the real estate syndication, including the operating agreements, subscription agreements, and other relevant legal documents. It is advisable for non-US investors to seek legal advice from professionals with expertise in cross-border investments and U.S. real estate transactions.

4.Foreign Exchange Risk: Non-US investors should consider the potential impact of foreign exchange fluctuations on their investments in U.S. real estate syndications. Any returns or income generated in U.S. dollars may be subject to changes in currency exchange rates, which can affect the overall investment return.

5.Compliance with Anti-Money Laundering (AML) Regulations: Syndication sponsors may have anti-money laundering compliance requirements that non-US investors must meet before they can invest. These requirements are in place to prevent money laundering and the financing of illegal activities.

These videos can explain in detail –

3 mins – https://www.youtube.com/watch?v=XQsLqvjxXdc

20 mins – https://www.youtube.com/watch?v=LgECtaAaLfw