Top 5 questions I get about Real Estate Investing: #3

#3 “Can you break down the investment process for me?”

In a typical apartment syndication (becoming a partial owner of an apartment community) the property will be bought, repositioned, and then sold for a profit over a period of 3-7 years.  But what does that look like from the investor’s perspective?

“You are now officially an investor in a property and can enjoy your financial returns while the General Partners do all the hard work for the duration of the hold.”

This week’s article is a bit lengthy, as I’m going to do my best to give you a step-by-step breakdown of the investment process with one giant PREFACE: Every deal is uniquely its own, so these will be generalities for education purposes.

  1. Your investment process will begin by educating yourself.  This can be done through books, classes, friends, podcasts, or educational articles like these.
  2. You will receive an “Investment Summary” for a specific property.  This is not like a REIT where you are investing ‘in real estate in general’ but rather, you are sharing ownership with other investors for that one property.
  3. If you have questions, you will speak with one or more of the general partners on the deal, who will explain the plan for the property, as well as your expected returns.
  4. Once you are comfortable with that property and lock in an amount you are willing to invest, you will sign a PPM (Private Placement Memorandum).  This is a legal document specific to that deal, covering the financial structure for the investors and the General Partners, as well as the standard disclaimer: ‘Investments are not guaranteed, be advised that you are investing at your own risk, etc.’
  5. Once the general partnership is ready, they will open up an escrow account, where you will wire your funds.  The money will be used specifically for the property and will live in the LLC that owns the property – safe from tampering.  (This is not going to any partner’s personal bank account for instance).
  6. Roughly 15-45 days after your money is wired, the property will officially close/be purchased.  The reason the money gets sent so early is to be certain the funds transfer and that all capital is raised.  The more investors, the sooner money will need to be transferred – simply to wrangle everyone’s money.
  7. Congratulations! You just literally completed all the ‘work’ you will have to do.  You are now officially an investor in a property and can enjoy your financial returns while the General Partners do all the hard work for the duration of the hold.

Speaking of the returns, there are typically two ways you will get paid; monthly or quarterly distributions, then, when the property sells, you will receive your share of the proceeds. 

In order to make this clear using specifics, I will assume a $100,000 investment, with an 8% preferred return.  I will assume a purchase/closing date of Jan 1, 2018, and a sale date of January 1, 2023 (5-year hold).

Year 1:

Jan 1, 2018 – property closes.  You now have $100k invested in the deal.

April 1, 2018 – 1st quarterly distribution – You receive a check for $2,000.

July 1, 2018 – 2nd quarterly distribution – You receive a check for $2,000.

October 1, 2018 – 3rd quarterly distribution – You receive a check for $2,000.

Dec 31, 2018 – 4th quarterly distribution – You receive a check for $2,000.

(K-1s are distributed for tax purposes, reporting your $8,000 income for the year, as well as your percentage of the property’s tax depreciation – which can be used to offset your income.)

Year 2-5: 
Returns are paid on the same quarterly schedule, with the same dollar amounts.

But now, at the end of year 5, the property is sold.  Assuming the property went according to plan, it is sold for more than you bought it for.  Congratulations, you’re about to make more money…

January 1, 2023 – Property sells for the projected sales price

January 15, 2023 – You receive your original $100k investment back, plus a check for $60,000 – your share of the profits.

At the end of year 5, you have received a total of $40,000 ($8,000 x 5 years) in quarterly distributions. This comes out to an 8% return on your investment annually.

$40,000 in quarterly distributions + $60,000 from the sale of the property + $100,000 (your initial investment back) for a grand total of $200,000, thus doubling your money in 5 years.

At this point, your investment commitment is over, and you have a couple of options.  Your first is to simply declare your capital gains and pay your taxes.  But the second, is to roll that money into another property through what is called a 1031 exchange, deferring your tax and doubling your investment in the next property if you choose.  Feel free to read more on 1031 exchanges, but the cliffs notes go like this: ‘You may continue to defer your taxes until you die, and never pay taxes on the capital gains.’

I know this was a lengthy read, but good job investing time into your education.  Keep in mind, all deals are unique.  Some may fall short and some may overdeliver.  If you are eager to get involved right awaycontact me.  I have a deal that is open right now for a limited number of investors.

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