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Expand your commercial real estate portfolio with passive real estate investments and embrace the benefits of ownership without the active obligations. Learn how to find a reliable syndicator and the factors to consider that will help you choose the right deal.

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Record Job Growth, Surging Demand, Strong Fundamentals: Why You Should Invest in Texas Multifamily in 2024
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Texas has become a top destination for real estate investors thanks to its thriving economy and attractive multifamily fundamentals....

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Sustainable Commercial Real Estate: A Look into the Future
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8 Crucial Real Estate Investing Mistakes You Need to Avoid Now
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Real estate investing offers a myriad of opportunities for those seeking to build wealth and achieve financial independence. Whether...

Multifamily Fundamentals, Expert Negotiation, and Building Your Brand: Key Takeaways from Jake & Gino’s Multifamily Mastery 6
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The Cost of Doing Nothing: Why You Should Invest in Commercial Real Estate
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How to Evaluate a Real Estate Sponsor's Track Record: 7 Essential Questions to Ask
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Mastering Market Selection: A Growth vs. Stable Market Debate Between Cash Flow & Appreciation
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Regulation D is an exemption that allows issuers to sell securities without registering those securities. Two very common subparts of Regulation D...

Investor's Guide: The Impact of Technology on Commercial Real Estate
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7 Key Tax Advantages Every Real Estate Investor Should Know
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passive real estate investing

Important Passive Real Estate Investing Terminology

Accredited Investor

An accredited passive investor is a person that can invest in securities (i.e. invest in an apartment syndication as a limited partner) by satisfying one of the requirements regarding income or net worth. The current requirements to qualify are an annual income of $200,000 or $300,000 for joint income for the last two years with expectation of earning the same or higher or a net worth exceeding $1 million either individually or jointly with a spouse.

 

Apartment Syndication

An apartment syndication is a temporary professional financial services alliance formed for the purpose of handling a large apartment transaction that would be hard or impossible for the entities involved to handle individually, which allows companies to pool their resources and share risks and returns. In regards to apartments, a syndication is typically a partnership between general partners (i.e. the syndicator) and the limited partners (i.e. the investors) to acquire, manage and sell an apartment community while sharing in the profits.

Sophisticated Investor

A sophisticated investor is a person who is deemed to have sufficient investing experience and knowledge to weigh the risks and merits of a commercial real estate investment opportunity.

General Partner (GP)

The general partner (GP) is an owner of a partnership who has unlimited liability. A general partner is also usually a managing partner and active in the day-to-day operations of the business. In apartment syndications, the GP is also referred to as the sponsor or syndicator. The GP is responsible for managing the entire apartment project.

Limited Partner (LP)

The limited partner (LP) is a partner whose liability is limited to the extent of the partner’s share of ownership. In apartment syndications, the LP is the passive investor and funds a portion of the equity investment.

Capital Expenditures (CapEx)

Capital expenditures, typically referred to as CapEx, are the funds used by a company to acquire, upgrade and maintain an apartment community, often through a commercial property management company. An expense is considered to be a capital expenditure when it improves the useful life of an apartment and is capitalized – spreading the cost of the expenditure over the useful life of the asset.

Capital expenditures include both interior and exterior renovations.

Examples of exterior CapEx are repairing or replacing a parking lot, repairing or replacing a roof, repairing, replacing or installing balconies or patios, installing carports, large landscaping projects, rebranding the community, new paint, new siding, repairing or replacing HVAC and renovating a clubhouse.

Examples of interior CapEx are new cabinetry, new countertops, new appliances, new flooring, installing fireplaces, opening up or enclosing a kitchen, new light fixtures, interior paint, plumbing projects, new blinds and new hardware (i.e. door knobs, cabinet handles, outlet covers, faucets, etc.).

Examples of things that wouldn't be considered CapEx are  like the costs associated with turning over a unit (i.e. paint, new carpet, cleaning, etc.), ongoing maintenance and repairs, ongoing landscaping costs, payroll to employees, utility expenses, etc.

Operating Expenses

Operating expenses are the costs of running and maintaining the property and its grounds.

For example, here are operating expenses for a 216-unit apartment community:

Payroll ($239,790)
Maintenance ($65,397)
Contract Services ($82,837)
Turn/Make Ready ($43,598)
Advertising ($32,699)
Admin ($32,699)
Utilities ($190,742)
Mgmt Fees ($65,788)
Taxes ($280,825)
Reserves ($54,000)
Insurance ($49,048)
Total Expenses ($1,137,424)
Debt Service

Debt service is the annual mortgage paid to the lender, which includes principal and interest. Principal is the original sum lent and the interest is the charge for the privilege of borrowing the principal amount.

For example, a 24-month $11,505,500 loan with 5.28% interest amortized over 30 years results in a debt service of $60,977 per month.

Net Operating Income (NOI)

Net operating income (NOI) is all revenue from the property minus operating expenses, excluding capital expenditures and debt service.

For example, a 216-unit apartment community with a total income of $1,879,669 and total operating expenses of $1,137,424 has a NOI of $742,245.

Capitalization Rate (Cap Rate)

Capitalization rate, typically referred to as cap rate, is the rate of return based on the income that the property is expected to generate. The cap rate is calculated by dividing the property’s net operating income (NOI) by the current market value or acquisition cost of a property (cap rate = NOI / Current market value)

For example, a 216-unit apartment community with a NOI of $742,245 that was purchased for $12,200,000 has a cap rate of 6.1%.

Price per Unit

Price per unit is the cost of purchasing an apartment community based on the purchase price and the number of units. The price (or cost) per unit is calculated by dividing the purchase price by the number of units.

For example, a 216-unit apartment community purchased for $12,200,000 has a price per unit of $56,481.

Cash Flow

Cash flow is the revenue remaining after paying all expenses. Cash flow is calculated by subtracting the operating expense and debt service from the collected revenue

For example, here is the cash flow of a 216-unit apartment community:

Total Income $1,879,669
Total Operating Expense $1,137,424
Debt Service $581,090
Asset Mgmt Fee $40,195
Cash Flow $120,960
Closing Costs

Closing costs are the expenses, over and above the price of the property, that buyers and sellers normally incur to complete a real estate transaction.

Examples of closing costs are origination fees, application fees, recording fees, attorney fees, underwriting fees, credit search fees and due diligence fees.

Sales Proceeds

The sales proceeds are the profit collected at the sale of the apartment community.

For example, here is a how the sales proceeds is calculated for a 216-unit apartment community purchased at $12,200,000 and sold after a five year value-add business plan:

Exit NOI $1,134,723
Exit Cap Rate 5.9%
Exit Price $19,232,593
Closing Costs ($192,326)
Remaining Debt ($10,711,909)
Sales Proceeds $8,328,358
Internal Rate of Return (IRR)

The internal rate of return (IRR) is the rate, expressed as a percentage, needed to convert the sum of all future uneven cash flow (cash flow, sales proceeds and principal pay down) to equal the equity investment. IRR is one of the main factors the passive investor should focus on when qualifying a deal.

A very simple example is let’s say that your real estate investment is $50. The investment has cash flow of $5 in year 1, and $20 in year 2. At the end of year 2, the investment is liquidated and the $50 is returned.

The total profit is $25 ($5 year 1 + $20 year 2).

Simple division would say that the return is 50% ($25/50). But since time value of money (two years in this example) impacts return, the IRR is actually only 23.43%.

If we had received the $25 cash flow and $50 investment returned all in year 1, then yes, the IRR would be 50%. But because we had to "spread" the cash flow over two years, the return percentage is negatively impacted.

The timing of when cash flow is received has a significant and direct impact on the calculated return. In other words, the sooner you receive the cash, the higher the IRR will be.

Cash-on-Cash (CoC) return

The cash-on-cash (CoC) return is the rate of return, expressed as a percentage, based on the cash flow and the equity investment. CoC return is calculated by dividing the cash flow by the initial investment.

For example, a 216-unit apartment community with a cash flow of $330,383 and an initial passive real estate investment of $3,843,270 results in a CoC return of 8.6%

Equity Multiplier (EM)

Equity Multiplier (EM) is the rate of return based on the total net profit (cash flow plus sales proceeds) and the equity investment. EM is calculated by dividing the sum of the total net profit and the equity investment by the equity investment.

For example, if the limited partners invested $3,843,270 into a 216-unit apartment community with a 5-year gross cash flow of $2,030,172 and total proceeds at sale of $6,002,116, the EM is ($2,030,172 +$ 6,002,116) / $3842,270 = 2.09.

Market Rent

The market rent is the rent amount a willing landlord might reasonably expect to receive, and a willing tenant might reasonably expect to pay for a tenancy, which is based on the rent charged at similar apartment communities in the area. Market rent is typical calculated by performing a rent comparable analysis.

Gross Potential Rent (GPR)

The gross potential rent (GPR) is the hypothetical amount of revenue if the apartment community was 100% leased year-round at market rental rates.

For example, here is how the GPR is calculated for a 216-unit apartment building:

Unit Type # of Units Bed/Bath Market Rent
A1 48 1x1 $737
A2 96 1x1 $796
B1 72 2x1 $990
    GPR $183,072
Gross Potential Income

The gross potential income is the hypothetical amount of revenue if the apartment community was 100% leased year-round at market rates plus all other income.

For example, a 216-unit apartment community with a GPR of $183,072 and monthly other income of $14,153 from late fees, pet fees and a RUBS program has a gross potential income of $197,225 per month.

Loss to Lease (LtL)

Loss to lease (LtL) is the revenue lost based on the market rent and the actual rent. LtL is calculated by dividing the gross potential rent minus the actual rent collected by the gross potential rent.

For example, a 216-unit apartment community with a GPR of $183,072 and with an actual rent of $157,270 has a LtL of 14%.

Bad Debt

Bad debt is the amount of uncollected money a former tenant owes after move-out.

Concessions

Concessions are the credits (dollars) given to offset rent, application fees, move-in fees and any other revenue line time, which are generally given to tenants at move-in.

Model Unit

model unit is a representative apartment unit used as a sales tool to show prospective tenants how the actual unit will appear once occupied.

Employee Unit

An employee unit is a unit rented to an employee at a discount or for free.

Financing Fees

Financing fees are the one-time, upfront fees charged by the lender for providing the debt service. Also referred to as a finance charge. Typically, the financing fees are 1.75% of the purchase price.

For example, a 216-unit apartment community purchased for $12,200,000 will have an estimated $213,500 in financing fees.

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