The Importance of Time, Family, and Peace of Mind: How Ashcroft Capital Supports Investor Well-Being
June 8, 2023
By: Evan Polaski, Investor Relations Managing Director
In today’s fast-paced world, the importance of striking a balance among our professional, personal, and financial lives cannot be overstated.
Investing in multifamily real estate can be a challenging, yet rewarding pursuit. It allows investors more time to focus on what matters most: pursuing passions, spending time with loved ones, and maintaining their overall health and well-being. In addition to the potential for financial growth, multifamily real estate investing can provide investors with peace of mind and the opportunity to live a more balanced, fulfilling life.
The Value of Time in the Life of an Investor
Time is one of the most valuable commodities we have. It is a finite resource, and how we choose to allocate time significantly impacts our overall happiness and quality of life. People who get outside, eat healthy, practice mindfulness, and engage in creative activities (i.e. painting or writing) experience increased positive emotions and decreased negative emotions.1 When we are passionate about the activities we engage in, we feel happier, more fulfilled, and more purposeful.
But to find time and prioritize passions, investors need to feel secure in their investment strategy. When investing with Ashcroft Capital, you can be assured that your investments are managed by a team of seasoned professionals. Together with our dedicated property management company, Birchstone Residential, we draw upon the experiences of our over 300 employees. Our team knows how to maximize the returns on our properties, while creating superior living spaces for our tenants, allowing our investors to realize their financial goals. The time you would otherwise spend actively managing assets can be spent pursuing passions and engaging in activities that bring joy and fulfillment.
Alleviating Investment Fears for Overall Well-Being
The investing world can be complex and intimidating, often causing investors to experience fear and anxiety. This is especially true when markets are volatile or unpredictable. Investing, by nature, comes with a certain degree of risk and uncertainty. Many investors no longerwant to rely solely on the stockmarket, precious metals, and cryptocurrency, yet 49 percent of investors do not feel confident making investment decisions, and 78 percent do not feel they are on the right savings path.2
However, Ashcroft Capital aims to alleviate these fears by utilizing our expertise and experience in the multifamily real estate market. By carefully analyzing each potential investment and focusing on properties with strong fundamentals, Ashcroft Capital minimizes risk and provides investors with peace of mind. Furthermore, our diversification strategy ensures that investors’ portfolios are not overly concentrated on a single property or market.
You can invest confidently, knowing that experts in the field have meticulously crafted our investment strategies. Our commitment to transparency, open communication, and education helps ease these fears by ensuring that you are always informed about the performance of your investments and the strategies being employed.
Strengthening Family Bonds Through Smart Investing
Family is the cornerstone of our lives, and spending quality time with family is essential for our well-being. Research also indicates that healthy relationships, regular exercise, and an active, passionate lifestyle can help you maintain a healthy brain as you age.3
Investing in multifamily real estate with Ashcroft Capital provides the potential for financial growth and creates opportunities for investors to spend more quality time with their families. This peace of mind allows you to be fully present with your family and enjoy life’s priceless moments on family vacations, shared experiences, and moments that strengthen family bonds.
So, take that trip! After all, studies show that men and women who travel twice a year significantly lower their risk of having a heart attack. Men who don’t take an annual vacation have a 20 percent higher risk of death and 30 percent greater risk of heart disease. Traveling relieves stress, enhances creativity, and boosts happiness and satisfaction.4
Enhancing Work-Life Balance Through Passive Income Generation
One of the most significant advantages of investing in multifamily real estate is the potential for passive income generation. This income stream allows investors to maintain their desired lifestyle without the need to work additional hours or seek supplementary employment. As a result, they can enjoy a better work-life balance, which has been linked to improved mental and emotional well-being.
Ashcroft Capital’s multifamily investment offerings are designed to provide investors with opportunities for passive income, allowing them to focus on other aspects of their lives, such as personal interests, hobbies, and spending quality time with friends and family. Take that extra time and get out in Mother Nature! Spending 120 minutes in nature per week boosts your mental and physical health, promotes better breathing, improved sleep, boosted immune function, and reduced depression symptoms.5
The Connection Between Financial Health and Overall Wellness
Financial health is a crucial component of overall wellness. When investors feel secure in their financial future, they are more likely to experience reduced stress, increased happiness, and improved physical health. By providing opportunities for passive income and long-term wealth creation, multifamily real estate investment can contribute significantly to an investor’s financial health and overall wellness.
Ashcroft Capital understands this connection and is dedicated to helping investors achieve financial success by carefully analyzing each investment opportunity. We do this by focusing on properties with strong fundamentals and potential for appreciation, ensuring that investors enjoy the benefits of a well-performing portfolio.
The Ashcroft Capital Advantage: A Partner in Health and Wellness
Through careful investment selection, diversification, and passive income generation, Ashcroft Capital helps investors create a well-rounded portfolio that supports their well-being in various areas of life. The Ashcroft Value-Add Fund III (AVAF3) is structured so that investments are allocated across multiple properties, creating diversified sources of return.
AVAF3 is for accredited investors interested in diversifying their retirement and wealth portfolios into multifamily real estate. Investors can invest in Class A and/or Class B Limited Partnership Interests. The AVAF3 is targeting 3-6 multifamily properties throughout the Sunbelt region with an anticipated lifespan of 5-7 years.
Investing in multifamily real estate with Ashcroft Capital can be a powerful way to enhance one’s health and wellness. By providing opportunities for financial growth, stress reduction, and improved work-life balance, Ashcroft Capital demonstrates its commitment to supporting the overall well-being of its investors. As a partner in this journey, Ashcroft Capital is dedicated to helping investors thrive both financially and personally, ensuring a better quality of life for years to come.
Investor Feature: Single Mom and Biotech Executive Sets Herself Up for Early Retirement and Worldwide Adventure
June 6, 2023
“I’m trying to get to the level of Job-Optional.”
Jennifer Skeen knows a lot about hard work. She worked multiple jobs for most of her life, paid her own college tuition, and even saved enough to buy her first townhouse after graduation.
A molecular genetics and biochemistry expert by training, Jen is now an executive leader in biotechnology and a single mother of two daughters.
If the job description sounds exhausting, that’s because it is. For Jen, the demands of her role and the unpredictability of her industry led her down the path to real estate investment in hope of designing a less stressful future. “It’s always nice to have a second stream of income. Biotech is pretty volatile. Even the bigger companies restructure frequently, so jobs are never secure. Being in a higher-paid category, it’s a huge hit when you lose your income. Knowing if that happens I have a little bit coming in to bridge the gap gives me a safety blanket.”
The Science of Building Passive Income
Jen started investing seven years ago after her divorce, which she calls a difficult financial lesson. But she quickly dove in with scientific rigor, learning about FIRE (financial independence and retiring early) and the investment types that could help her reach her goals.
At an Ashcroft event in San Diego, where Jen lives and works, she met investors who had been through a full turn and noticed, “They were all really happy.” And that’s not all that gave her comfort: “Being new to this investment space, it can be a little nerve-wracking that you’re making the wrong call. But the Ashcroft name is really well respected, the people are public––talking at conferences; they have their own podcast. They’re not going to disappear and take your money. There’s a level of security and comfort that they have your best interest in mind. We’re all in it together to make a little money if we can, in an ethical way.”
Jen had joined a publicly traded company at that time, and the compensation package inspired her to find ways to not just save but invest her money. Like many new investors, Jen started out with single family rental homes, purchasing four new-construction properties in Ft. Worth, and an additional two in Florida. However, she soon discovered the stresses of remote property management and decided to sell the homes in Texas.
“Passive! I want to be passive. I’m 46 and I want to retire in about four years with a comfortable living.”
Jen made the decision to roll the proceeds into a deal with Ashcroft. “It was a hassle for an out-of-state investor, and the market was popping, so I decided I would just cash in. Instead of flipping them into a 1031 exchange so I would reduce my taxes, I decided to put the money toward a passive investment with Ashcroft, where I could take advantage of accelerated depreciation to help with taxes. Ashcroft is a really reputable company and well-known in the investment community, so I felt really comfortable.”
Detailing her thinking, Jen explains, “I split apart two bonuses, and I wanted to put it somewhere I wouldn’t touch it for a while so I could grow it. I put $25k into Eagle Crest and $25k in the Vista properties.” Jen also recently added to her previous investments in the Value Add Funds II and III. “It’s not just one property, so I like the diversification of multiple properties there. And they also have this new waterfall based on how much you put in, plus a new 10% kicker on monthly distributions.”
“It’s nice to see that they’re actively working to maintain and create additional value for investors. I have a ton of trust in the group.”
Hard work pays
All of Jen’s efforts are building toward a carefully engineered plan for a well-deserved early retirement. Regarding her recent investments, Jen says she’s, “using them in preparation for cashflow. When my kids are out of high school and I hit 51 or 52, I’m going to sell everything and travel the world! And I use the current funds I receive to pay down mortgages on my rental properties. That way, that additional cash flow will hit in about five years.”
Investing isn’t the only thing Jen has down to a science. She has developed a useful ‘life hack’ that brings her financial, work, social, and personal life together in one view. “I have a ‘Master Control’ spreadsheet with dozens of tabs that I review monthly with net worth, account balances, spending by category, travel rewards points, upcoming vacation planning, rental property performance, retirement planning, doctor contacts for the family, and a bucket travel list of over a 100 places and activities that I want to accomplish. A guiding principle in my personal [sic] and professional life is to have one central source of truth and where I can find critical information.”
It’s no surprise that Jen has found herself setting strategy and guiding teams, but she’s ready for a change of pace. “I’ve always been in a leadership role, so I have corporate responsibility and team responsibility. I’m always high-level analytical, and it doesn’t shut down when you go on vacation, so I’m really looking forward to being able to switch off that level of responsibility and do things I want to do. My goal is to take a two-year travel sabbatical and figure out what the next chapter is. I’ll have the time to figure out what I want to do next instead of what I have to do next.”
Ever the methodical scientist, Jen has created a chart of over 200 travel destinations she hopes to explore. In retirement, Jen would also like to help other single women explore the world of investment. “None of us got the education––we don’t even know where to start. We don’t know the language because the lexicon is so specific: what is compound interest, arbitrage, tax deferrals.”
With Jennifer Skeen on the case, we have no doubt the next generation of female investors are in good hands.
Photographed below, Jennifer Skeen and daughters Kendall and Autumn Skeen
Navigating Turbulent Times to Protect Your Investment
May 30, 2023
By: Joe Fairless, Co-Founder and Partner & Frank Roessler, Co-Founder and CEO
Since its inception, one of the founding principles of Ashcroft Capital LLC. has been to preserve investor’s capital. With the Fed’s mandate to bring inflation under control, the ensuing interest rate hikes over the last 12 months have pushed the financial markets to the brink, adding significant uncertainty to the overall market. But with this uncertainty comes opportunity.
Banking Relationships
Ashcroft holds its accounts with First Republic Bank. Immediately following the collapse of Silicon Valley Bank and Signature Bank, we had implemented an Insured Cash Sweep on all accounts, meaning if any account exceeds the FDIC insurance limit of $250,000, the excess is automatically swept into a new account. This keeps all balances fully insured.
Lender Relationships
Historically, Ashcroft has utilized a combination of agency loans through Fannie Mae and Freddie Mac, and private loans through strong relationship lenders. We continue to grow these relationships and expand our network of lenders.
It is through our strong relationships and track record that we are able to create additional flexibility in our lending terms.
Interest Rate Exposure
Ashcroft has historically utilized both floating rate and fixed rate financing, based on the overall business plan of each asset. Our floating rate loans have been impacted by the interest rate rises over the last year. We have hit our caps across our portfolio. Depending on the assumptions going into each deal, this has had varying impacts on the asset.
In addition to the impact on current interest expense, the increase in interest rates has caused our interest rate caps to cost much more at expiration. Across our portfolio, we have interest rate caps expiring anywhere from this summer through early 2025. We are constantly monitoring the various factors that affect the rate cap pricing, primarily the forward curve. We are updating the capital needs in our budgets and reforecasts on a monthly basis in an effort to maintain adequate liquidity within each offering as these caps expire.
Going forward, we are going to continue matching our loan products with the business plan for each asset. This means we will continue to seek both agency loans and private loans. We are in regular communication with our relationship lenders in order to continue to find the best available lending product to minimize risk while maximizing our returns for investors.
Refinancing and Dispositions
A silver lining in all the volatility in the market is: demand for quality multifamily assets remains high, keeping strong upward pressure on valuations. While cap rates have increased with the increase in interest rates, the overall demand remains high. Well-located, strong performing assets within in-demand metro areas are continuing to see interest.
At Ashcroft, we are seeing deals continue to trade at cap rates below 5% due to the strong overall fundamentals of multifamily in these markets. This has expanded from deals trading in the 2% range 18 months ago, and still falls in line with our projected exit cap rates that we initially modeled across our portfolio.
We are exploring strategic refinances and possible sales, where we can generate strong returns. Both of these options rely on our continued focus to drive Net Operating Income (NOI) at the asset level, as higher NOI will create higher refinance proceeds and sale proceeds.
Acquisitions
As we continue to raise for the Ashcroft Value-Add Fund III (“AVAF3”), we believe we are in a strong position to acquire assets at relative discounts compared to 12 months ago. That being said, the acquisition market is still relatively quiet. This is due to a large bid-ask spread, where sellers are still wanting early-2022 prices, while buyers are continually looking to hedge the uncertainty in the capital markets.
Through conversations with both brokers and other operators, there is continued strong demand, but many buyers, like Ashcroft, are being patient and prudent. Once we see interest rates level off, and likely some levels of distress entering the market for those owners that did not hedge their interest rate exposure, we anticipate more transaction volume to come back to market. With both sellers putting assets to market with reasonable pricing, and buyers having better understanding of where interest rates will be to more confidently underwrite their purchases.
Operations
A large reason for the continued strong demand of multifamily assets is the strong underlying fundamentals that continue to aid our operations. This is not to discount the work that Birchstone Residential and our Asset Management team are doing to further drive these results. Birchstone executes the value-add business plan for each Ashcroft property, optimizing financial returns while obtaining high resident satisfaction.
Our NOI is budgeted to stay ahead of projections, even with sizeable increases in several of our expense items. Specifically, payroll and insurance are ahead of proforma. COVID created a strong upward pressure on payroll and the strong job market has continued to drive salaries faster than projected for quality candidates. On the insurance side, providers are reassessing their risk profiles and, across the industry, pushing large premium increases. However, on the remaining operating line items, our team has done a great job holding those expenses close to, if not below budget. We continue to strive for further operational efficiencies, such as outfitting our maintenance teams with paint sprayers to allow for easier paint touch-ups at turn over, versus a full repaint, minimizing turnover costs.
Overall, we continue to remain conservative in our current budgets for all of our assets. The Fed has raised rates at a faster pace than any previous round of rate hikes in the past 30 years. We are coming off a global pandemic which had created first its own challenges, followed by a robust expansion. At the end of the day, we remain confident in our business plan and long-term outlook for both our existing portfolio and future acquisitions. We continue to make strides to further hedge our risks across the portfolio. This started with bringing our management in-house in 2021 and continues through diversifying our geographic concentration, lender and banking relationships, and ultimately exit strategies for our portfolio. We are starting to see signs of light, with the slowing of rate hikes, but we are still planning that at least one, if not two more hikes are coming in the upcoming Fed meetings. We will continue to monitor our capital position for each of our assets and make decisions in line with one of our primary principles: capital preservation for our investors.
Investment Criteria and Current Markets We Are Researching
May 25, 2023
By: Ryan Wynkoop, Investor Relations Manager
INVESTMENT CRITERIA
A real estate investment sponsor’s success is contingent on having both a strong business plan and strategy to market. This will serve as a guide throughout acquisitions and the approach to the real estate asset thereafter. It will also dictate how a sponsor generates their value and investor returns.
Ashcroft Capital’s business plan is to acquire multifamily assets that present the opportunity to drive returns through improvement—known as the value-add method. With this in mind, we target underperforming or distressed Class B properties that are well maintained and occupied, with an average life span of 20 years. Applying selective upgrades to these property types quickly brings the asset back to the market standard. This improvement process typically takes us around three to five years to execute. The process is complete when we begin to see returns in the property income that are equal to or exceed our projections.
In addition, we target properties with over 200 units, knowing that our target takeout buyer after improvements are completed is an institutional level buyer who targets this size and scale of properties for acquisition. We also focus on strong suburban submarkets outside top-tier cities where the most demand and focused growth has been, especially since the COVID-19 pandemic.
Additional investment criteria include the following:
– Strong developing suburban submarkets outside of top-tier cities, particularly in the southeast
– “Garden style” construction—typically two to four stories, with surface parking lots and robust amenity offerings—in high demand by renters
– Properties capable of producing $20 million to $150 million in total capitalization per property
CURRENT MARKETS WE ARE RESEARCHING
Ashcroft Capital’s overall portfolio has a strong presence in a number of submarkets throughout the Sunbelt such as Texas, Georgia, Florida, and North Carolina. Our latest acquisition for the Ashcroft Value-Add Fund III (AVAF3) is located in Chapel Hill, North Carolina. We have also identified the second and third properties for the AVAF3 in Florida’s strongest markets—Sarasota Springs and Coconut Creek.
We are currently researching several new markets throughout the southeast that we flagged as potential expansion markets for acquisitions.
Those markets include, but are not limited to, the following:
– San Antonio and Austin, Texas
– Charlotte and Raleigh–Durham, North Carolina
– Charleston and Greenville, South Carolina
– Nashville, Tennessee
Ashcroft uses a thorough due diligence process when reviewing potential markets. We assess a multitude of regional factors to determine the level of opportunity for investment in these markets. There are a number of factors driving demand for the foreseeable future. We have found that there is inward migration and positive population growth in these markets, with a lack of housing supply. Research findings also established that economic conditions for growth are robust in these markets. Specifically, there has been onshoring of many industrial, manufacturing, and logistics jobs. In addition, baby boomers are increasingly choosing these markets for relocation and retirement. The likely cause of this migration is the discernibly cheaper cost of living found in the southeast in the face of nationwide inflationary pressures.
By: Ben Nelson, Investor Relations Regional Manager
In the first weekend of May, Warren Buffett and Charlie Munger hosted Berkshire Hathaway’s highly anticipated Annual Shareholders Festival in Omaha, Nebraska. I always pay attention to this meeting because, in addition to its unprecedented history of success, I’m impressed by Berkshire’s consistent adherence to its fundamental principles of investing. I’ve read several of Buffett’s books, and the wisdom from the “Oracle of Omaha” always helps to eliminate the outside noise and recenter my focus. It would be hard to not classify our current environment as “noisy” with bank failures, rising interest rates, possible de-dollarization, debt ceiling pressure, and the prospect of a global economic downturn. Needless to say, I decided to read his words again and found that they are just as insightful and useful as I remember years ago. I’m sharing three quotes that I think are especially relevant to multifamily investors and Ashcroft Capital.
“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.”
First recorded in Forbes magazine in 1986, this is quite possibly Buffett’s most famous quote, and for good reason (1). However, “winning by not losing” is easier said than done. History has a nagging way of repeating itself and inflicting pain on those who do not learn their lessons the first time. During bull markets, investors tend to become less cautious, and even downright reckless, with capital while chasing high returns. At Ashcroft Capital, our first and foremost goal is capital preservation, and we created our due diligence and underwriting standards to align with that goal. We purchase, operate, and renovate Class B properties in markets with strong fundamentals, which we believe gives us the best chance to ride out unfavorable economic cycles. Statistics from CBRE revealed that during the Great Financial Crisis of 2008–2009, Class B properties experienced a delayed drop in revenue and less revenue loss than Class A and Class C properties did. Class B properties also rebounded to their pre-recession peak faster than the other classes did (2). In today’s housing market, affordable Class B apartment properties in areas of inward migration are experiencing high occupancy and steady demand. We are encouraged by the positioning of our portfolio with respect to Buffett’s first two rules.
“Risk comes from not knowing what you are doing” (4).
It’s no secret the multifamily space has been under more pressure in 2023 than originally predicted. You may have seen the news that a Dallas-based investment firm was recently forced to foreclose on 3,200 multifamily units in the Houston, Texas, area. Rising borrowing costs and the inability to meet those costs with cash flow ultimately cost its investors $230 million (3). Ashcroft even has some investors who also participated in that syndication, leaving them blindsided and shell shocked. I am not implying this firm did not know what they were doing, but it is clear the fundamentals of the properties and the measures put in place did not adequately shield their investors’ capital. Yes, hindsight is 20/20, but there are basic principles Ashcroft underwrites in each and every deal to protect against these types of scenarios. We underwrite deals conservatively, perform 144-point due diligence on every property, conduct extensive research on our target markets, and buy interest rate caps to protect against a rising interest rate environment. We also force cash flow growth and asset appreciation by adding value to our properties through Birchstone Residential. There are many great capital raisers in this space and some excellent property managers, but few can do both at a high level. This is where Ashcroft sets itself apart. As Buffett also says, “Time is the friend of the wonderful company, the enemy of the mediocre” (4).
“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it” (4).
It is being widely reported that we may be entering a tough period in our economic history. Full recovery from COVID-19 seems to be taking longer than expected, and every industry in every sector is under some sort of pressure. Multifamily syndications are no exception. For example, the impact of higher interest rates makes pricing of multifamily homes harder to predict. However, times like this have historically borne fantastic opportunities for investors. Famed investor Shelby Cullom Davis once said, “You make most of your money in a bear market, you just don’t realize it at the time” (5). As of mid-May, Ashcroft has been awarded two property deals via a broker with whom we have transacted before. We weren’t the highest bidder, but our strong relationships and ability to execute put us in an advantageous position to place these assets in the Ashcroft Value Add Fund III (the “AVAF3”). Ashcroft feels these properties are well priced and could be highly accretive to our investors, so we will continue to share more details on these properties in the coming weeks. Now, the hard part: getting investors to eliminate the noise, revisit fundamental principles, and take advantage of the situation. When speaking on multifamily investing in today’s environment, Alex Bhathal, executive chairman and managing partner of the investment firm Revitate, said that he “sees continued opportunities ahead to acquire assets at attractive values in a less competitive environment. ‘We believe that the opportunities in 2023 for return are greater than what we have seen in several years’” (6).
Ashcroft Capital is taking on today’s challenges with the goal of coming out stronger on the other side. We underwrite our assets to survive and then thrive through market cycles, and as the wise Mr. Buffett once said, “The best chance to deploy capital is when things are going down” (4). We think we are in a sweet spot in terms of fundamentals and will be able to capitalize on this economic pressure in the AVAF3. Our experience, skill, connections, and track record of success are all there, and we believe time is on our side.
Ashcroft Capital’s Q2 market report’s analysis of current trends makes it clear that fundamentals remain stable in the multifamily market.
Stay up to date on the latest news in the multifamily industry. We are able to draw upon the experiences of over 300 employees to anticipate and address the multifamily market, providing a comprehensive overview of current conditions and future trends. The Q2 Market Report explores inflation, rent increases, cap rates, vacancy rates, and additional challenges our industry is currently faced with.
Read our report here for a thorough analysis of the industry, our outlook, and our plan to stay ahead of market challenges:
Will the Federal Reserve continue to increase the federal funds rate?
How will the recent drop in inflation affect multifamily housing?
What do we anticipate will happen to the vacancy rate?
What are the expectations surrounding cap rates?
How will the cost of owning a home affect multifamily?
Common Emotional Investing Mistakes – And How to Avoid Them
May 16, 2023
By: Travis Watts, Director of Investor Education
Deciding how to invest your money can be difficult. We live in an era with access to limitless information at our fingertips. While more information and data help to create transparency, it doesn’t make the decision process less overwhelming or prevent analysis paralysis from occurring. Human beings are emotional by nature, and making important decisions about your wealth can be difficult if you aren’t able to properly recognize and manage your emotions during the decision-making process. The problem arises when emotions cloud your judgment; thus, leading to poor decisions.
A study by MagnifyMoney[1] identifies common emotional mistakes that many investors make:
66 percent of investors have made an impulsive or emotionally-charged decision they later regretted.
47 percent report difficulty keeping emotions out of investing decisions.
37 percent of investors have lost sleep worrying about the stock market.
30 percent have cried over investing.
The good news is that there are ways to avoid these mistakes!
As an investor, when it comes to making decisions about your money, you must be careful. Many investors don’t place a large emphasis on the time spent researching their investments. It’s not uncommon to get excited, busy, or want to start immediately.
The problem is that 66 percent of investors make an impulsive or emotionally driven decision that they later regret.
Separating emotions, like fear, greed, frustration, or impatience from investments can significantly help. One reason I like investing in private real estate is because it gives me time to make a well-informed decision. When you get a property under contract, you usually have 30-90 days to perform proper due diligence and make your final investment decision. As an investor looking at a private real estate placement, you could have days, weeks, months, or even the latter part of a year to make the investment decision. Having this additional flexibility allows you time to ponder, lessening the chances of falling prey to FOMO (fear of missing out).
How do you keep emotion out of investing?
It’s a question that many of us ask ourselves when we’re trying to make smart investment decisions. Additionally, 47 percent of investors report that it is difficult to keep their emotions out of investing. We want to make the right call, and we also want to feel good about our decisions.[2] The fact is, there is no way to remove emotion from investing completely, but there are some things we can do to keep them in check.
#1 We can create a plan and stick to it.
#2 We can diversify our portfolio.
#3 We can dollar cost average (investing a reoccurring fixed dollar amount).
This can be a good discipline strategy for long-term investors. It can help remove emotions by acknowledging that markets will sometimes be up, and sometimes be down. Either way, you will be investing year over year. There is peace of mind knowing that over the long run, you will have an averaged-out return, rather than trying to time the market (a difficulty for most investors).
#4 Understanding your risk tolerance and what is comfortable for YOU is perhaps the most helpful tool.
Investing involves taking calculated risks. Figuring out what types of investments make sense for you, which ones align with your risk tolerance, will provide a greater peace of mind.
If you are part of the 37 percent of investors who have lost sleep over the stock market, just know that you’re not alone.[3] That is a large percentage!
It can be easy to get caught up in the moment when it comes to the stock market. There are constant data metrics, daily news headlines flashing in front of us, and the public markets move quickly. Just remember, there is much more you can invest in aside from the stock market.
Looking at long-term historical data when considering an asset class can also be helpful. Stocks are just one asset class; real estate is another.
If we use real estate for a quick example, consider the median home price in 1990 in America. It was around $123,900. Fast forward to 2022, and it was $440,300.[4] Even though there have been ups and downs in the market along the way, the long-term trajectory has shown strong growth and stability.
Investing may be simple, but it’s not easy
It is a process like anything else, and the learning curve can be steep; therefore, it’s no surprise that 30 percent of investors have cried over investing. According to the MagnifyMoney survey, the top “reasons for tears” include losing money in the stock market (43%), feeling overwhelmed (36%), and selling too early (34%).[5]
A quick word of encouragement
The journey is worth it, and you might find that it’s not about investing at all. You’re learning to take control of your finances, which can be incredibly empowering. To me, this is about having a life by design instead of letting life happen.
On a final note
Emotions and logic are not mutually exclusive. Emotions play a critical role in how we make investment decisions. Knowing how to compartmentalize and control your emotions can make all the difference.
To Your Success,
Travis
Ashcroft’s Real Estate Fund
Real estate funds like the Ashcroft Value-Add Fund III (AVAF3) differ from single-asset syndications by investing in multiple properties, which creates a diversified return to investors.
AVAF3 is a real estate private placement currently open to accredited investors who are interested in diversifying into multifamily real estate. AVAF3 is targeting 6-10 multifamily properties throughout the Sunbelt region with an anticipated hold period of 5-7 years. Investors can invest in Class A and/or Class B Limited Partnership Interests.
Class A shares offer a 9 percent annualized coupon (preferred return), for investors seeking strong projected cash flow while reducing risk. Class A shares have limited equity upside beyond the 9% coupon in exchange for higher cash flow. Class B shares offer a 7 percent annualized coupon and offers a greater overall potential return with participation in the potential equity upside when properties sell or refinance.
To learn more about investing in multifamily apartments or to review projections, track record and FAQs, please visit AVAF3.com or schedule a call with our Investor Relations Team at investorrelations@ashcroftcapital.com.
66% of Investors Regret Impulsive or Emotional Investing Decisions, While 32% Admit Trading While Drunk, magnifymoney.com™. (n.d.). Retrieved February 7, 2023, from https://www.magnifymoney.com/news/emotional-investing/
Ibid.
Ibid.
2022 Investor Benchmark Survey, Crowdstreet, 2022. 2021 Global Wealth Report by Credit Suisse. 2017 Millionaires Survey, Fidelity Investments.
66% of Investors Regret Impulsive or Emotional Investing Decisions, While 32% Admit Trading While Drunk, magnifymoney.com™. (n.d.). Retrieved February 7, 2023, from https://www.magnifymoney.com/news/emotional-investing/
Conversations | Multifamily Q1 Performance and 2023 Strategies with Scott Lebenhart
May 12, 2023
By: Evan Polaski, Investor Relations Managing Director
Evan Polaski:
Hi, I’m Evan Polaski with Ashcroft Capital. Today for our acquisition update, revisiting quarter one and our outlook for quarter two and beyond, I’ve got Scott Lebenhart, Ashcroft Capital’s chief investment officer. Hi, Scott.
Scott Lebenhart:
Hey, how’s it going? I’m sure you all know me by now, Scott Lebenhart. I’m the CIO here at Ashcroft. I joined up with Ashcroft in 2018, and it’s been a fantastic ride. I love working here. We’ve bought a lot and done a lot of great things. I’m excited to share with you guys what I’m seeing out in the markets right now.
Evan Polaski:
I appreciate it. As we’re recounting, this is our fourth or fifth quarter now doing our interviews. I’m looking forward to continuing these. You can find his full bio on our website if anybody’s looking for a little more detail on Scott’s background.
Looking back at Q1, it was a pretty disruptive quarter on a macro level, not for Ashcroft, but globally. Why don’t you give us a high level of what we’re seeing and what steps we took to try to get through that quarter.
Scott Lebenhart:
On the acquisitions–transaction side, deal flow was extremely slow to start the new year. Every January, toward the end of January is multifamily’s largest conference, called NMHC (National Multifamily Housing Council), which was held in Vegas this year.
The timing couldn’t have been more perfect to put thought leaders in the same room—buyers, sellers, lenders, brokers, and everyone else. We had a big conversation about the current market, and it was almost like a therapy session. What are you feeling? What are you going through right now? What are you seeing with your portfolio? What are your hopes, visions, and plans for 2023?
I think that helped calm some of those in attendance. To understand, “Hey, there’s a lot of money out there. There’s a lot of equity that is looking to invest in multifamily.” Whether it be domestic money, but also a ton of international money looking to invest in multifamily in the United States, everyone feels strongly about the fundamentals of multifamily. We’re dealing with capital market challenges right now.
The overall concerns that everyone shared with each other were about the capital markets and interest rates: “What are interest rates going to do? If and when there is a recession, what’s the impact; how long is that going to be?” Those were the main themes of the conversation.
From the lender side, lenders are as eager as the equity groups are to put money to work and have loans in multifamily. Because again, it performs very well, it stays occupied, and it cash flows as opposed to [sic]. If you lose a tenant, you can’t necessarily find someone else to move in the next day. It doesn’t work like that—same with retail and industrial. Therefore, lenders are still eager to put money out there; it’s tough to buy deals right now.
Refinancing on the lender’s side is extremely difficult as well because of high interest rates. If you’re looking to refinance now, you’re likely going to be refinancing with a higher interest rate than the loan you currently have. As a result, people are waiting.
A good theme that we got from that conference was that lenders are working on getting creative and coming up with new debt products. To meet this higher interest rate environment, they’re offering fixed-rate loans with the ability to buy down the interest rates, providing flexibility to get out of those fixed-rate loans at a certain time. Where we used to love floating-rate loans because they are super flexible, now lenders are starting to figure out how to be flexible with their fixed-rate product as well.
After NMHC, having those conversations helped calm concerns that industry leaders had, and more deals came to the market for sale. These are typically more core-plus in profile deals, most of them built after 2000, and even the majority of deals we saw were probably 2015 and newer. Loan assumption deals became very popular in Q1, where the existing loan was able to be assumed by the next buyer.
This got a lot of interest because it takes the volatility of the debt market out of the equation.
Overall in Q1, some of these deals will actually trade and sell. Some of them didn’t hit their projected pricing and were pulled from the market. And there are a handful of deals put under contract and getting awarded, but they’re not closing, which is rare for the past 24 to 36 months. Ultimately the buyer is dropping out because of interest rate volatility, the capital markets change slightly, or the inability to find equity.
So overall, Q1 was a quarter that was filled with continued uncertainty, but there is some optimism as data points start to come out on where deals are ultimately priced. I know we’ll get into Q2 later, but we do see things opening more from here.
Evan Polaski:
I appreciate that. I was reading yesterday a Wall Street Journal article stating that commercial multifamily transactions were down 74% in Q1 relative to Q1 2022. So obviously everybody is seeing it. I’m sure there are a lot of the same impacts affecting the single-family home market. People who have long-term fixed-rate loans don’t want to sell. Why (assuming that there’s no other distress in the property or other issues coming up)?
I’m talking with investors and saying, “Yeah, we would love to see that great core-plus with value-add upside type potential in a loan assumption, but unfortunately so does everybody else.” Every other buyer wants that; you’re not getting any type of discount in today’s market because of that financing.
Jumping kind of from the macro level to Ashcroft specifically, we didn’t close on any deals in Q1. How many deals were we realistically underwriting? How many offers did we have out there throughout Q1?
Scott Lebenhart:
We’ve looked at probably a hundred deals or so in Q1, which is a good amount. It’s not a light amount; it’s not the highest quarter we’ve had looking at deals, but a lot of those deals have not traded or won’t trade.
Realistically, about a third of the deals that we looked at went through the full process and were awarded to somebody, whether or not they actually closed. We looked at a lot of deals, and the common theme that we saw was a large bid–ask spread, where the sellers think the property is worth X. And we’re coming back and saying, “That’s great that you think it’s worth that, but it’s worth Y.” Then the seller ultimately says, “Well, I’m not a seller at that price; I’m going to hold it.” We’ve had a lot of conversations, and a lot of those hundred deals were deals where we had these types of conversations. People were testing the water to determine, “What does the market think it’s worth? What do I need to do to get the price that I want on it?”
That led to the limited number of transactions out there. Property holders do want to sell their deals, and they don’t want to sell them at prices that don’t make sense. But of a hundred or so deals that we looked at and had conversations about, we submit LOIs on 10. As you mentioned, we did not get awarded any. Although we’re upset, we’re here to transact; that’s what we like to do. We’re comfortable with this result because we submitted prices that made sense for us.
Ultimately, the deals that we didn’t win, that we heavily pursued, we got outbid. Whether or not that was relationship-wise or pure pricing-wise, we did see that there were some more aggressive sources of equity out there in Q1.
We saw 1,031 buyers being extremely aggressive. Because, again, for them there’s not a lot of deals right now, and they need to put their money to work within a certain time. Therefore, they got aggressive in Q1. We also saw certain buyers coming up near the end of their funds, and it’s either use-it-or-lose-it money. You either spend the money and invest it, or you’ve got to give it back to your investors. We saw some groups that had a time clock on their equity.
Conversely, a lot of buyers were more private family-office-type buyers that were buying deals purely for cash-on-cash returns, not looking at IRR, and planning on holding the deals 10 plus years or more. When you’re dealing with someone who’s pricing a deal that way, where we are both cash-on-cash-return focused and IRR focused, it’s tough to get to that same price point that someone who’s purely cashflow-focused is concerned with.
Evan Polaski:
That’s good to hear. And it’s always particularly good to hear deal results from your perspective, as the acquisition guy and the acquisition group, as to why we were not able to acquire anything. One thing I appreciate about Ashcroft and the broader view that Frank and Joe have set out, which is obviously coming through within the organization, is that it is better to do no deals than bad deals. And if it works out, it works out.
As an investor myself, that is definitely something that is good to hear. There’s almost value in knowing that we’re not buying anything.
Let’s jump into Q2 and what we’re starting to see coming forward. Some of these questions obviously go Q2 and beyond, but what are you starting to see? You had mentioned lenders getting into some creative structures. Why don’t you dive into a little more detail on that?
Scott Lebenhart:
We are continuing to talk to our relationship lenders, as well as new potential relationship lenders and our peers, asking, “Hey, what are you doing with this type of loan? What are you doing with that on that deal? How did you finance that?”
Right now, the real issue with lenders and the entire capital market perspective is that interest rates are so high, meaning debt service coverage ratios on deals are low, debt yields are low, and there is uncertainty on where devaluation is going to end up for these properties. This is leading to lenders lending at less proceeds, meaning lower LTVs. Typically, right now, it’s more in the 55 to 65% loan-to-value range. Where we weren’t taking it up to 80% LTV two years ago or so, you could have gotten loans in the 75, 80% range back then.
That’s pulled back, which is creating issues for people who need to refinance or people who want to buy but don’t necessarily have that larger equity piece that you need, call it 35%, 35 to 45% of the capital stack with equity as opposed to 20, 25% of equities.
One of the unattractive parts about a fixed-rate loan is the lack of flexibility to sell out of it early. Typically, there are larger prepays on that and the fees, costs, and yield maintenance to unwind the securities that are backing that loan. Because it’s more debt-fund focused, we’re seeing more balance-sheet lenders. This means that these lenders are using their own money, lending it out, and waiting for it to come back, as opposed to lending it out and then selling off that loan to a different holder, where they’re buying that loan for the cash flow expected of it. That is where the issue is being created. A lot of these groups that have debt funds are lending their own money, which means that they can do what they want because it’s their own money.
We’ve also spoken with certain lender relationships on the insurance side that have preferred equity groups within their shops. They give you a typical bank loan up to 60% or so, and then they go from 60% to maybe 70, 75% with their preferred equity product. But to the borrower, it looks like one loan of up to 70% or so. It’s just the higher interest rate, but you’re able to get proceeds that way.
Again, we’re continuing to see the lenders try to react to the environment that we’re in today. All this happened very quickly. People didn’t have money raised to accommodate the summer of last year when interest rates started to hike. Now they’re taking a step back. They’re able to go to their investors and their investment committees and say, “Hey, this is what we need to do to fill the gap in the hole.”
There are still a lot of products that are not out yet that are launching in Q2 or Q3 based on the timing of setting up the fund documents, etc. I am optimistic that there are better solutions on the horizon for us on the lending side.
Evan Polaski:
From that standpoint, it sounds a bit like the lenders are running the show and causing some pause in the acquisition market. Clearly, if people could still borrow at 2%, a lot more deals would be transacted at the prices that sellers still want.
Is that accurate? I know this is a bit of a crystal ball comment, but what are you seeing start to thaw that market to get more transactions so that those bid prices can start coming down?
Scott Lebenhart:
I hate to say that one person controls the fate of our industry. But in reality, until Jerome Powell and the Feds start to signal an end to the interest rate hikes, that is going to start the thawing process. We’ve started to see that with his March statements talking about the peak interest rates. Since then, we’ve seen treasuries come down significantly. The yield curve flattened and has started to decrease a lot sooner than originally anticipated.
If he starts to signal that, I think that will be more promising. If he signals when rates may start to decrease and what rates may look like in 2024, that’s going to help even more. Ultimately, once people can start to get a better understanding of what their cost of capital is going to be, people are going to be excited and willing to be more aggressive on deals.
Evan Polaski:
To overly simplify modeling a multifamily deal, it is a simple math equation. As you noted, if you don’t know what you’re subtracting, what the number that you’re taking out of the bigger number is, you don’t know whether that’s going to be a positive or negative spread. I completely understand where you’re coming from there.
Using that, and particularly with the forward curve end of Q4, going into early Q1, there was a lot of talk about the wave of distressed loans that are coming due in the second half of this year, particularly people who took out bridge loans that maybe got aggressive on assumptions on the front end and bought in 2020, 2021, 2022 on short-term types of loans. Are we still seeing that? Is there still an expectation that there is going to be some of that coming later this year?
Scott Lebenhart:
Yes, I believe that truly distressed deals will be here by the end of next year. Like you said, the floating rate environment started post-COVID in early 2021. That’s when all the debt funds came back to the table and got aggressive with their floating-rate product. Those are the loans that are starting to come up for their two-year anniversary, where people need to buy rate caps.
You start getting tested at that level. Certain deals were only two years, with one-year extensions. We typically did three-year initial terms with two one-year extensions. So thankfully, we’re not running into that issue.
I personally don’t think the distress in the market is going to be as robust as other people do. The distressed sellers on deals are going to be those owners of properties that have been poorly operated and poorly capitalized and basically have their lender forcing them to repay that loan.
At that point, they’ll have two options. They could either sell at perhaps a loss, which would create that distressed environment, or refinance into a new loan, which, as we talked about, is very difficult in this environment. If you didn’t complete your business plan and grow NOI substantially, you’re likely not going to be able to refinance out your proceeds. As a result, you’re taking a loan for less than what your original loan balance was, meaning you must come up with equity or some type of preferred equity to come into the deal. That is not always the best solution for a deal. This has been an extremely heavy focus of Ashcroft and NARS (National Association of Realtors). When we’re not buying deals, this is what we’re working on. We’re in constant communication with our lenders, working to ensure that we’ll have no pressure to sell or refinance.
Ultimately, based on conversations, I don’t think lenders want to foreclose on properties in mass quantities. They don’t want to become landlords. They don’t want to have what happened in 2008 and 2009, forcing them to figure out what to do with all the properties that they’re now owners of. Therefore, they’re willing to work with the borrowers with whom they have relationships and are executing business plans properly.
I do think between working with known borrowers and the creativity that we’re starting to see in the loan space, some potential distress will be alleviated that we were originally expecting and kick the can down the road so to speak. This will also give owners and borrowers time to let the capital markets settle and then work through the payoff of the loan. They will wait for the capital markets to improve to sell the property or refinance. I think that the distressed deals are going to be more truly distressed deals that you’re buying from poor operators that haven’t executed the business plan.
Evan Polaski:
Taking all that you’ve shared with us and diving into Ashcroft, how are we evolving our discussion last quarter to take a more calculated approach, setting ourselves up to take advantage of the opportunities that will arise and will continue to come to market?
Scott Lebenhart:
We’re being extremely selective on the properties that we’re pursuing. To the point I mentioned before, we are focusing on the more core-plus profile deals that are coming out. Those are what we’re looking at. In times of uncertainty, you look at the markets. People flood toward gold, commodities, and other safe plays. Those core-plus type deals are more of those “safe plays.”
High-quality deals, extremely strong locations, and good demographics are all things that we’re focused on. Given the lending environment that we talked about, we’re looking at deals with big straight loans. We’re trying to work within the flexibility of them, but we’re buying these deals with the mentality of, “Hey, we are going to hold it for at least five years or so.”
In terms of the calculated approach, on the distressed side, we are taking a very targeted approach and doing a ton of research to find deals in submarkets that we like. As you suggested, we think that more of this distress will be on the outskirts and the B-locations. We’re trying to find that diamond in the rough, where there may be a distressed deal coming up with an ideal product type in an area that we like.
We’re targeting and researching properties that were purchased in the last two to three years, looking at who the owners are and what their type of capitalization may be. We want to be in position on those deals when it is time for a seller to say, “All right, now I’m a market seller; I’ll take my loss, and I’m ready to go.” We are hoping to be that first call.
Evan Polaski:
At Ashcroft, as things have slowed down, our leasing agents are upping that salesmanship, where they didn’t necessarily have time to do so the last two years because tenants were flooding in, and they were getting five qualified tenants for every vacancy.
Now we need to find these tenants. We need to follow up and make sure we’re getting them into units—to that end, on the IR side, being continually in front of our investors and making sure that we’re having those conversations. I appreciate all of this input. Any final comments that you might have that you’d like to share?
Scott Lebenhart:
I hope that in the next call, we’ll be talking about a deal that we actually got under contract. As an acquisition person, a deal junkie, it’s frustrating to not have any deals. But to your point, we are remaining hyper-focused on great deals and staying firm on our prices. We’re not looking to make a bad investment on the front end. We’re looking to find a safe investment in a market that we feel strongly about, with a business plan that we feel confident in—also building in, as we’ve always done, a conservative underwriting.
At the end of the day, our expectation is to under-promise and overachieve. We want to make sure that we stay true to that. It’s frustrating, but we know that in the long run we’ll be just fine.
Investor Feature: Turning the Dream of Generational Wealth Into Reality
May 4, 2023
“I never have to work again–neither does my wife. If my kids never choose to work, they don’t have to. I don’t want them to live a life based on money like I did. I want them to focus on making the world a better place. I want them to do something they believe in. That’s what I’ve gained through my investments.”
Thirty-four-year-old Samuel Wilkinson followed in his father’s footsteps and became a veterinarian. As he speaks, his gratitude for his father is palpable, but Samuel clearly wanted to make some changes to the model. “What fuels me is setting up generational wealth for my family,” he says. “I have two kids, a wife, five sisters, and two living parents. When I think about everything I do, it’s with them in mind.”
Honoring the family legacy
“I don’t have some childhood sob story, but my dad worked hard…and a lot. He provided for us and gave us vacations, but his work took away from time with us. I respect him for his sacrifice. I know he wanted to be there, but at the time, it was hard not being able to spend time with him. He grew up poor, turned his situation around, and gave his children a leg up by paying for our education–so we all have successful careers. I saw him and decided I don’t want to give everything and all my time to my active source of income.”
For a while, Samuel worried this meant giving up being a vet. At his first practice, he found himself caring for animals all day long and then focusing on business operations after hours. It amounted to 12-hour days with no chance for leisure. That’s when Samuel began exploring investing as a way to get his time back, while still earning money.
“My strategy has been to develop a number of sources of passive income–I personally own two businesses, participate in 8 syndications, invest in nonprofits, and have traditional retirement accounts.” Now, Samuel can balance his veterinary work with the family time he cherishes.
Building wealth with real estate
Samuel is a big believer in real estate investment–and with good reason. “More millionaires have been created with real estate than any other industry in existence. It’s a stable asset, though it does experience ups and downs. But the bottom line is if you want a solid investment over the course of your life, there’s nothing that will perform as consistently as real estate. It’s one of the few things you can completely ignore, treat it poorly, even let it get down to the raw land, and it will still maintain value.”
He also appreciates the tangibility of real estate, noting that his familiarity with the asset class gives him added peace of mind. “I like being able to literally hold my investment. I have a key; I can cut the grass. I needed to be involved in something I understood. If worse came to worst, I know how to manage real estate and the ship would not go down with me at the helm.”
When it came to investing with Ashcroft, Samuel says it wasn’t just his market research that supported his decision, but the warm rapport he developed with the leadership team. “I liked their vision, history, track record, and assets they invested in. I had a great experience with them. They treated me respectfully at a time when they didn’t really have to. I wasn’t quite ready to invest when I first met Travis and Joe.”
“Eventually I wanted to see if I could find anything bad about the company. When I looked, there was nothing. Nothing. And that doesn’t happen.”
Slow and steady wins the race
At 34 and ready to retire his entire family, Samuel is the perfect picture of an investor that has it all figured out–but he’s quick to remind everyone that smart investing doesn’t mean overnight success.
It is his long-term strategy of conserving income and building a diverse portfolio that has led Samuel and his family to a new level of security and financial freedom. “We have not splurged because we have been focusing on reinvesting and growing our wealth.” In fact, Samuel has been living in the same modest ranch home rental since finishing his doctorate in 2017, when he shared a combined $120,000 of student loan debt with his wife.
“Now we’re completely school and consumer debt-free, and I have set up retirements for my mom and dad so they never have to work again.”
Samuel credits his passive income with making these life-changing milestones possible. And he has no plans of stopping, sharing that he invested in multiple syndications in 2022 and will do the same in 2023. “Only now are we really changing our lifestyle, because our past investments are starting to snowball. Our passive income will now help us buy our first home. It’s all about patience. I hope that inspires people.”
With the dream of laying the foundation for generational wealth achieved, Samuel is also starting to relish a few of the finer things in life, thanks to his investments. “We don’t eat crappy cheese anymore! I really enjoy high quality cheese and bread…and I bought a plane.”
Photographed below, Sam Wilkinson, wife Becca Wilkinson and kids
Those described as ultra-high-net-worth individuals (UHNWI) have amassed net worths of $30 million or more. These ultra-wealthy investors have plans for investing during good economic times and downturns. Rather than sit on the sidelines during times of uncertainty, the ultra-wealthy believe economic downturns present some of the best opportunities to buy long-term assets at discounted prices.
Let’s look at the five investing mistakes the ultra-wealthy don’t make[1]:
1. Investing only in intangible assets
Although intangible assets like stocks and bonds are a part of their portfolio, the ultra-wealthy also allocate their money to physical assets like real estate, land, gold, and artwork. Real estate is a popular asset class for UHNWIs because it has lower volatility and a low correlation to the stock market.
2. Allocating 100% of investments to the public markets
UHNWIs look to private markets to generate substantial wealth. According to Knight Frank’s 2023 Wealth Report, here’s what makes up the portfolios of the world’s wealthiest people[2]:
34% in commercial real estate
26% in equities
17% in bonds
9% in private equity/venture capital
5% in investments of passion
3. Keeping up with the Joneses
Building wealth is not only about what you make but also about what you spend. Although UHNWIs will make savvy investments in assets that grow in value over the long term, they resist the urge to overspend. They remain focused on growing their own portfolios rather than competing with, or keeping up with, others. Take famously frugal billionaire Warren Buffet for example; he still lives in the same house he bought for $31,500 more than 60 years ago.[3]
4. Failing to rebalance a personal portfolio
The ultra-wealthy maintain specific allocation goals in their portfolios and rebalance them regularly to ensure they have the right mix of assets based on their age and risk tolerance.
5. Omitting a savings strategy from a financial plan
Building and preserving wealth is achieved by both investing and saving. By living below their means and maintaining an emergency savings fund, UHNWIs can achieve their desired level of wealth faster.
Identifying the right investments to preserve capital requires due diligence, but UHNWIs don’t get stuck in analysis-paralysis. They understand how to evaluate investment opportunities and complete due diligence, and they take the necessary steps to preserve and build their wealth. Rather than sitting on the sidelines, they maintain an active investment strategy and seek opportunities in times of uncertainty.
If you’re looking to diversify your portfolio with real estate and invest like the ultra-wealthy, you might want to consider real estate syndication. Syndications offer the opportunity for individuals to invest in commercial assets like large apartment buildings alongside a sponsor, such as Ashcroft Capital, who has the expertise needed and manages the day-to-day responsibilities.
Multifamily Real Estate: Perceptive Reasons for Caution and Confidence
April 20, 2023
By: Ben Nelson, Investor Relations Regional Manager
In recent conversations with accredited investors, I’ve found that few asset classes feel like comfortable landing places for capital in today’s environment. It seems that every list of pros can be outweighed by a longer list of cons that stall investor decision-making. For many, the choice is simple: move to cash and stay on the sidelines until the climate improves.
However, because cash appears to be a prudent choice, if you’re looking for the stability and protection of a major bank, you may be forced to forego yield entirely. For example, most large institutional banks currently offer 0.02%–0.05% on savings accounts.[1][2] I’ll refrain from any further cash-bashing rant to focus on a topic we love at Ashcroft: multifamily real estate. Like any other asset class in the past 12 months, multifamily has had its share of ups and downs. Here are three factors that make us cautious in this environment and three that keep us confident.
Reasons for Caution
Inflation and rising costs: From the data released on April 12, 2023, the current consumer price index (CPI) measures 5.00% over the past 12 months.[3] These monthly CPI data represent a wide range of consumer goods and services and are primary indicators of the inflationary or deflationary forces at work in the broader economy. This is the ninth consecutive month that the CPI has fallen, which is a good sign for consumers feeling the pinch. Unfortunately, inflation is still at uncomfortably elevated levels, and sovereign measures to fight inflation can take months, if not years, before they are fully realized. Ashcroft’s proven value-add strategy requires a substantial commitment to construction materials and labor. Although Ashcroft is able to reduce costs and maximize efficiency through Birchstone Residential, our vertically integrated property management and construction company, construction costs are separate from and can be up to double the CPI inflation rate.[4] We are being extremely cautious when deploying capital to our construction projects in this environment to maximize investor return.
Tighter lending requirements: If recent history is any guide, when banks start failing and governments rush to backstop depositors, stricter lending regulations are sure to follow.Sometimes it can take years for these policies to go into effect, but you can bet that they are coming. Real estate markets operate on credit, and tighter requirements usually restrict deal flow, weaken property economics, and slow the movement of capital required for growth. This can come in the form of larger down payments for new acquisitions, increased insurance requirements, and forcing buyers to hold higher levels of cash reserves. Often these policies will force sellers to market assets at attractive valuations for buyers, which can be advantageous for a syndicator like Ashcroft Capital.
Market timing: One of my favorite quotes has always been “No plan survives first contact with the enemy.” The ability to adapt and find opportunities ultimately leads to long-term success. In 2022 and 2023 the timing of market forces beyond our control has been concerning. As the US Federal Reserve led the fight against inflation by raising interest rates at its most aggressive levels in the past 40 years, every syndicator was notified that their original plan had made contact with the enemy of progress. Franklin D. Roosevelt said, “A smooth sea never made a skilled sailor,” and I believe this statement will apply to the multifamily space in the coming years. A skilled syndicator will be able to capitalize on opportunities brought on by market conditions and use every tool at their disposal to navigate the turbulence for their investors.
Reasons for Confidence
Supply/demand imbalance: There is a housing shortage in the US. Anna Bahney of CNN recently stated that, from 2012 to 2022, the gap between new households formed and new homes constructed, including multifamily units, is a shortage of 2 million.[5] When consumer demand is up, and supply is down, economics 101 tells us prices will increase until that supply is met or demand falls. Even more revealing is that 95% of new housing construction in the first three quarters of 2022 was intended for rentals, not purchases.[6] New multifamily construction is often the most expensive rental option, so your average renter will typically look toward more affordable housing in renovated but slightly older properties. This plays into Ashcroft’s core strategy and why value-add properties will continue to maintain high occupancy rates and drive net operating income growth.
A nationwide shift to renting: If we look in the rearview mirror going back 24 months, we see a dramatic shift in US home affordability. According to data from the Federal Reserve of St. Louis, in March 2021 the average 30-year fixed-rate mortgage was 3.18%, and the average home sales price was $418,600. As of April 6 the average 30-year fixed-rate mortgage is 6.24%, and at the end of the last quarter of 2022 the average US home sales price was $535,800. [7][8] To summarize, mortgage rates rose 96%, and home prices rose 28% in roughly a two-year period. Moreover, homeowners with existing low-rate mortgages are largely unwilling to sell their homes and add to the already low housing inventory. This combination has priced out thousands of would-be home buyers and has propelled the necessity of affordable multifamily housing. Rents have risen along with rising interest rates, but the affordability gap between homeownership and renting has widened dramatically.
The great migration: Inflation-adjusted wages were reported down again for March of 2023, marking the 24th consecutive monthly decrease.
But financial pressure isn’t the only factor causing people to move and later rent in more affordable cities. Rising crime, growing homeless populations, heavy taxes, subpar education, and stubborn home prices are also factors. Perhaps the greatest is the growth of the remote workforce in the US, making tens of thousands reevaluate where they can afford the highest quality of life for their families. Derek Thompson of The Atlantic wrote, “But for millions of white-collar workers, something important has changed: They don’t work ‘in’ cities anymore. They work on the internet. The city is just where they go for fun.”[9] Ashcroft’s core strategy is to acquire multifamily properties in healthy and growing submarkets, and this continued nationwide migration makes us even more confident in our long-term strategy.
Why Ashcroft and AVAF3?
This may not be the most favorable time for a multifamily syndicator, but it’s not all negative. The sector’s fundamentals remain strong, and there will be opportunities for the skilled and prepared. Our value-add process has repeatedly been proven to work, and although construction materials can be cost-prohibitive, we hedged against potential rising prices by prepurchasing our materials and safely storing them in our centralized Dallas warehouse.
Ashcroft Capital will always be conservative in its projections, and we’ve gone to great lengths to incorporate market softening and rising cap rates into our AVAF3 model. In fact, we’re assuming year-over-year rent growth of 5% in year one and only 3% each year thereafter, which is much less than the commonly used 10 bps per year an asset is held. We have also lowered the loan-to-value percentage from our historical average of roughly 75% to 65% on Midtown 501, our first asset in AVAF3, to reduce interest expenses. Our all-in interest rate on Midtown 501 is 5.75%, with three-year rate caps in place. We also can refinance this property without any prepayment penalties should rates begin to fall.
Most important, we feel great about our target markets and the assets we buy. Areas like Raleigh, Jacksonville, Tampa, Orlando, Atlanta, and Dallas–Fort Worth are buzzing with strong economies and growing populations. People need an affordable place to live and are choosing to rent in safer areas where they can maximize their income and quality of life. We believe this will play into our hands and drive returns for years to come.
“Average Sales Price of Houses Sold for the United States.” FRED, ECONOMIC DATA | ST. LOUIS FED, 26 January 2023, https://fred.stlouisfed.org/series/ASPUS. Accessed 11 April 2023.
Why Not All Real Estate Sponsors Are Created Equal
April 18, 2023
By: Ryan Wynkoop, Investor Relations Manager
A common theme in the questions we hear from new and existing investors alike concerns the key elements of real estate syndications that differentiate the large field of sponsors that exist in the marketplace. We have heard horror stories from a number of our investors over the years about deals they invested in that went sideways (at best)—and while we do not track the industry as a whole, we know there are attributes of real estate investors and sponsors of deals we feel are critical to success. We wanted to share those with you here.
Track Record
Every company needs to start somewhere, some sponsors are more established than others—but it is critical to know a real estate syndication sponsor’s track record to see how they have performed in deals over time. This should demonstrate consistency in performance, and for the deals that are low performers, you can dig in and identify lessons learned from that specific real estate syndication. At Ashcroft, we have a consistent track record that we are proud of. We started in 2015 and have exited 26 deals to date with an average return of 25.6% to the investor. We currently have 37 other deals going through our value-add process.
Business Plan/Strategy to Market
Most real estate sponsors have many different asset classes they are invested in, and within those asset classes they also may have different strategies to market. An investor would want to understand the business plan and broader strategy for a specific asset to know it was a deal they were comfortable investing in. At Ashcroft we have an extremely detailed market strategy, specifically, we only pursue multifamily apartment deals over 200 units in top-tier Sunbelt submarkets. Once acquired, we execute a value-add strategy on those assets, making strategic capital improvements over a three-to-five-year hold period.
Vertical Integration There are large and small real estate sponsors in the open market, and it’s imperative to understand how they execute their business plan and overall strategy. Some real estate syndications rely on outside sponsors or partners to maintain the day-to-day operations of their deals. Larger and more established real estate sponsors tend to have in-house operational capabilities in the way of property and construction management personnel. When vetting groups, investors should seek to understand how they are structured and what level of risk you are comfortable with as an investor. At Ashcroft we have in-house property and construction management through our subsidiary Birchstone Residential, which is headquartered in Dallas, Texas, and has personnel in the field at every one of our properties. This vertical integration is imperative to our ability to execute our business plan and overall strategy in a timely and seamless manner.
Communication
A common theme I hear among some of our investors is that they have invested with groups in the past and received little to no communication on performance and operations throughout the course of the deal. It’s easy to imagine this does not instill confidence and transparency in the investor and is obviously not a desirable situation to have with someone holding your invested capital. At Ashcroft we believe in maintaining ongoing and consistent communication with our investors. This comes in the way of monthly reports when distributions are issued, and we also have a full Investor Relations and Investor Services team that is always accessible.
Retention Rate/Repeat Investment
A great metric to understand how satisfied clients are with a real estate sponsor is their retention rate or repeat investment rate. If a real estate investor tracks this and is willing to disclose it, this data point can indicate how pleased investors have been to continue to invest their capital in deal after deal with a real estate investor. For example, 65% of the AVAF2 investors were repeat Ashcroft investors. We feel this is one of our strongest statistics of the confidence our investors have in us and our overall performance.
Financial Projections/Disclosure of Fees
Last, investors should consider what type of projections are being presented: Gross or Net Projections. Unlike gross projections that do not disclose all fees to the investor, net projections consider these fees. We highly recommend that anyone vetting real estate investment opportunities make sure to look out for anything that is not net projections and inclusive of all fees. At Ashcroft we believe in transparency and present investors with an accurate picture of what they can expect in the way of returns, and our fees are included in those projections.
Due diligence is a crucial part of the investment process. When investors conduct research and ask questions, it makes it easier to make an informed decision. Your interactions with the syndicator and team should make you feel comfortable and confident about investing your money. Although this is not an all-inclusive list of the required elements for a real estate sponsor that an investor should consider, it is a good starting point to better navigate the market.
Being a real estate investor doesn’t come without challenges. There’s psychology and self-discipline required and an endless amount of information to sift through when it comes to investing. In this article I’ll provide several tips that can help you beat the odds during your investing journey.
A strong conviction based on your own beliefs can be your downfall.
Allow me to unpack this . . .
Although many people know me as an apartment investor, when I first started investing, it was in the stock market. Leading up to 2008, I had some college money saved up, and 100% of my capital was tucked away in mutual funds with the help of a financial advisor.
My parents, my advisor, and I were all taught similar convictions about investing. Buy low and sell high, invest in the stock market, diversify into mutual funds and index funds, hold for the long term, and so on. It was during this time that I started educating myself on investing, which began to change my perspective.
I have always been fascinated by the idea of multiplying money without having to work a job. For me work was a grind growing up, watching my parents struggle with small businesses and try to work up the ladder in the corporate world. I discovered that I rarely enjoyed work because I was only doing it for the money. From age 15 with paper routes to digging trenches, painting houses, washing cars, and working in oil and gas, it was 100% for a paycheck and 0% for fulfillment or purpose.
If I had kept a strong conviction for betting on the stock market and working harder for money, what would my results have looked like today? If I had to guess, I would probably be burned out with little to no interest in investing. What ended up happening instead is investing became my fulfillment and purpose, and “work” became optional.
Questioning convictions made all the difference.
Now that we’ve discussed the importance of questioning your convictions, let’s talk about the importance of odds. Go with the odds because the numbers don’t lie.
I made a tough decision to pull out of the stock market in 2007 during college after reading Rich Dad’s Prophecy, a book written by Robert Kiyosaki about “Why the Biggest Stock Market Crash in History Is Still Coming!”
I doubt the author really knew that 2008 was the chosen year for the Great Recession meltdown, but I did learn that the odds were stacked against the market at that time due to having a long bull trend in the years prior. I wasn’t trying to time the market; I was looking for something more predictable and steady to put my money into, ideally, something that produced passive income.
It was during this time that I truly began my study of investing and finances. This is when I started considering the odds for the first time. For example, if you pull up the Forbes 400 list, which is a list of the 400 wealthiest Americans ranked by net worth, you can see which industry they made their fortune in, and most fall into the category of finance and investments.
I also remember reading from various sources that 90% of millionaires invest in some type of real estate.
Source: CNBC. “Real Estate Is Still the Best Investment You Can Make Today, Millionaires Say—Here’s Why,” October 2, 2019, https://www.cnbc.com/2019/10/01/real-estate-is-still-the-best-investment-you-can-make-today-millionaires-say.html
I started working at one of the largest brokerage firms in the US several years later and learned about how economic cycles work and why assets move in cycles. This was fundamentally important to stacking the odds in my favor. It is common among investors to wait until the market has been doing well for years, and then dive in. It is also common for investors to wait until a crash occurs before exiting the market, just as the pain gets too hard to handle. Then what happens? The market begins moving up again . . .
The reason I ended up leaving the Wall Street world is that real estate just made sense to me. I had a hard time talking about mutual funds all day when the reality was that I was investing in real estate. I found that it was pretty easy to understand and appealing to base my investment decisions on real estate fundamentals as well as. In additional to all the other aspects such as forcing appreciation into a property, receiving tax benefits, using leverage (having a mortgage), and my personal favorite – collecting monthly passive income.
In contrast, I found speculating to be much riskier and similar to playing blackjack in a casino, where there is an element of skill and an element of luck. In fact, the odds are about 42% for a win, so the house wins in the long run – statistically speaking.
So consider the odds when investing—go with the numbers.
Avoid the Mirage
It’s human nature to chase the mirage or to want to get rich quick:
The California Gold Rush
Buying penny stocks
Playing the lottery
Gambling in casinos
Moving to Los Angeles hoping to get famous
Multilevel marketing schemes
In most cases, these are high-risk, high-reward options, but they rarely pay off for most people.
Of course, some people become wealthy from chasing these ideas, but are the odds in their favor?
I want to end with something interesting I was reading. This comes from The Journal of Roman Studies, and the chapter is about Rome nearly two thousand years ago(volume 67, published in 1977).
Take a look at the first two sentences:
Multifamily apartments have been around for thousands of years. Rental real estate is not a mirage, it’s not the latest trend, and it’s not a get-rich-quick scheme: it’s a simple human necessity.
It’s something to think about this month. I hope you found some value in this short article. If I can be a resource along your journey, feel free to reach out to me anytime at travis@ashcroftcapital.com.
At 41, Mukul Patil has just four years left on the clock. This Bay Area software engineer and father of two cracked the code for his early retirement by starting small in the stock market 15 years ago, then cultivating multiple sources of income and asset classes.
Mukul’s engineering mind is evident in his investment strategy and the way he thinks about his journey to finding Ashcroft. First, he starts simply with, “Why invest at all?”
“My goal is to not rely on a single source of income,” says Mukul. “Knowing if you lose your primary job that you would still have some income gives you confidence.” Although his skills are in high demand today, Mukul acknowledges that his comfortable, flexible job might not last forever. He finds a sense of safety in investing.
Searching for security in real estate
Tracking the next logical step, Mukul explains his investment path: “Now, why real estate? I started with the simplest investment class, and that’s stocks. And that’s the only class I invested in for 10 years or so,” he says. “When my portfolio grew, that’s when I started investing in other classes. If you have a smaller portfolio, it’s okay to take on the amount of risks that stocks have. A 50% drop is okay if you’re starting out and have $50,000, but if you have a million dollars and you lose 50% of that, it’s a much bigger setback. That’s what led me into real estate.”
Why syndications? Mukul started with a single family investment home but soon wanted to take advantage of the passivity and scale that syndications bring. “The goal is to not work for money! So if you’re still working on properties and have to be involved frequently, that defeats the purpose.”
Mukul brings his story to the present day. “Why Ashcroft? There are many things I like about Ashcroft compared to others.” Mukul encountered Ashcroft Capital when he sought recommendations for a reliable investment firm, and he was quickly impressed with our communications and client courtesies, like covering the costs of obtaining accreditation verification and handling 1031 filings. “With others, I hardly get emails every three months, and the content isn’t substantial—especially when things aren’t going well. That’s when you want to have more frequent updates and know what’s going on and happening next.”
“Whatever Ashcroft has promised or projected, they’ve done it. Compared with others that have not delivered on their promises, Ashcroft is good.”
Weighing the risks and riding the waves
Ashcroft’s personal touch and strategic approach align well with Mukul’s own view on investment, which is both personal and highly calculated. It’s clear he’s thought a lot about risk management and his tolerance for the ups and downs of the market.
“As far as risk appetite, that’s for each person to decide. With stocks, if you are willing to take on higher risk and stay invested for a long time, there’s a good chance you’ve mitigated the risk. Let’s say you’re invested in stocks, and they go down, but you know from historical data that it’s going to recover in 10 years. The next question is, can you sleep well for those 10 years when you are down? If you can, okay; otherwise, just go for asset classes with lower risk.”
“So it’s not really a dollar amount you get at the end. It’s how you feel throughout the journey. Are you worried; are you happy; are you excited?”
On this part of the journey, Mukul is actually quite happy despite a slowdown in the real estate market. “Last year things had grown so much that it made me think these asset classes are no longer fundamentally sound; they are just speculative. It made me think that I was investing in things that were just a bubble. I would say it’s a return to sanity, even though my portfolio has lost some of its gains. I’m happier now because I think we are on stronger fundamentals.”
Living mindfully on multiple income sources
Mukul’s patience and diligence have helped him engineer not just a more secure life today but an impressive early retirement at just 45. “I look at retirement in two stages: before 62 and after 62, when I can withdraw from my 401(k) and Roth IRA as well as social security. Before 62, I won’t have access to these, so I would live on savings, dividends, capital gains, selling stocks, and income from syndications.”
As far as how he’ll spend his retirement, there’s less engineering involved. “What I would do in retirement is the same thing I do today, just more slowly and mindfully. I’m lucky in that most of the things that make me happy don’t take up much money: reading books, going on hikes, camping. Rather than looking at my investments to fuel expensive hobbies, I would say they feed my regular expenses. I would rather cut a year off my retirement age than buy something.”
One expense Mukul does make room for is traveling. He wants to spend three months a year with his parents in India. “You only have 4,000 weeks in your lifetime, and you’re probably already out of 2,000. You might only meet your parents another 150 times,” says Mukul, illustrating his urgency to make his time count.
Thanks to well-engineered investing, the next 2,000 weeks of Mukul’s life should turn out exactly as he’s planned: “Everyday life would look like what you read about in one of those self-help guru books. I can do more things, but I’d really like to do the things I already do at a more leisurely pace. Being mindful of what you’re doing. Even if you’re just cooking—taking 10 more minutes. I think that’s a good way to enjoy life and be happy.”
Photographed below, Mukul Patil, wife Shweta Birwadkar and kids
It takes money to make money! We’ve all heard this saying, and while true, it’s not 100 percent accurate. Making money takes time, effort, knowledge, and capital that is converted into income. But the wealthy don’t just expect their wealth to grow; they plan for the next generation to maintain and build it.
Generational wealth is a method of securing financial wellness to help safeguard the financial wellness of our children, perhaps our grandchildren, and so on.The goal is to grow assets and income over time, putting each generation in a better financial position than the previous one. However, 70 percent of affluent families lose their wealth by the next generation and 90 percent lose it the following generation, making investors unable to create a lasting legacy.[1]
Don’t let that data scare you – there are ways to create generational wealth that lasts well beyond your children and grandchildren.
Start Investing and Diversify Your Assets
Generational wealth needs to be cultivated in a way that creates generous upside potential but with a capital preservation first mindset. There are many different ways to approach that challenge. When investing in the financial markets, one of the most common ways that investors may accomplish this goal is by building a diversified investment portfolio. Too much exposure to any single stock, investment type, or sector can create unnecessary risk. While many investors know that in financial markets, diversification is critical, they may not apply that same principle to the overall mix of assets within their entire portfolio.
Due to 2022’s inflation, geopolitical tensions, supply chain issues, etc., Wall Street saw the largest annual percentage drop for all three indices since 2008.[2] Investors seeking strategies to hedge against inflation and offset risk in their investment portfolio can look to real estate. Real estate is a reliable, tangible asset with consistent cash flow that is not directly subject to short-term market volatility. Additionally, historical real estate values have outpaced inflation; making real estate an attractive option for building long-term generational wealth.
By investing in different types of assets, you can minimize your overall exposure to any one type of risk. The goal is to create a balanced portfolio, with growth and income-producing assets, to maximize returns while reducing risk.
Invest in Financial Education for Your Family
Financial literacy is the skills, knowledge, and tools that allow people to make sound financial decisions. It extends beyond just knowing your finances and includes being an active participant in financial planning, while maintaining the ability to manage emotional and psychological factors that could influence your decision-making. Many people who inherit wealth may not be educated on the importance of financial knowledge. As a result, they may delay acting in their investment portfolio out of fear of the unknown.
Why is it important? When it comes to building generational wealth, financial literacy is key. Only 22 percent of U.S. high school students have access to personal finance courses. Additionally, a recent annual survey found that only 52 percent of U.S. adults are “financially literate,” and less than 37 percent understood “comprehending risk” (i.e., understanding uncertain financial outcomes).[3,4]
We all have unique values, goals, and dreams that motivate us. Accessing and understanding the financial information needed to make those dreams happen can be extremely empowering. The good news is that you can start investing in your children’s and grandchildren’s financial education now. Ensure they know the basics of budgeting, savings, retirement, and investing, and give them the tools they need to protect their long-term wealth.
Having open conversations about money and investing, including both your methodical decisions and not-so-logical decisions, can help your family learn and make better choices in the future. As an investor, it is inevitable that you will experience a loss. Rather than dismissing those losses, view them as an opportunity to educate your family to help them avoid making those same mistakes down the road. Teaching your family how to save, spend, and give will help develop financial responsibility. Involving your children in the financial planning process is critical to helping them understand the importance of small actions and their potential major impacts on future financial outcomes.
Ashcroft Capital and Multifamily Investments
Ashcroft Capital is headquartered in New York and has a team of real estate professionals that focus on capital preservation and wealth generation. Due to our focus and expertise, over 3,000 investors have trusted us with their capital.
Drawing upon the experiences of our over 300 employees, our team knows how to maximize the returns on our properties, create superior living spaces for our tenants, and allow our investors to realize their financial goals. We acquire Class B apartment communities in high-growth markets across the sun belt states. All the properties we acquire have value-add characteristics that include the ability to reposition the asset through capital improvements and upgrades, renovating the interior units (one unit at a time), improving operations, decreasing expenses, and creating other revenue-generating projects. This strategy provides our investors with risk-adjusted returns with distributions that offer greater liquidity from one investment vehicle.
Ashcroft Capital’s Real Estate Fund
Real estate funds like the Ashcroft Value-Add Fund III (AVAF3) differ from other syndications by investing in multiple properties rather than a single deal. The fund is structured so that investments are allocated across multiple properties, to mitigate downside risk and deliver diversified sources of return.
AVAF3 is a closed-end private placement fund for accredited investors interested in diversifying their retirement and wealth portfolios into multifamily real estate. Investors can invest in Class A and/or Class B Limited Partnership Interests. The AVAF3 is targeting 6-10 multifamily properties throughout the Sunbelt region with an anticipated hold period of 5-7 years.
AVAF3 offers both Class A and Class B share types. An investment in Class A shares earns a 9 percent coupon, generating strong projected cash flows, while reducing risk. Upon disposition of a property in the fund portfolio, Class A shares offer limited distributions in exchange for the higher coupon rate. Class B shares earn a 7 percent coupon; however, Class B shareholders have greater overall return potential through their participation in the disposition of fund properties.
To learn more about investing in multifamily apartments or for IRR and cash-on-cash projections, visit AVAF3.com or schedule a call with our Investor Relations Team at investorrelations@ashcroftcapital.com.
Speed and Strength: How the Dallas–Fort Worth Metroplex Is Built to Handle Market Volatility
March 23, 2023
By: Ben Nelson, Investor Relations Regional Manager
“A potential recession” is an uncomfortable phrase that continues to pop up no matter where we turn. The thought of a recession makes us reassess everything. Is a recession coming? Is it already here? How long could it last? Are our investments well positioned to weather the storm?
A recent survey of 2,200 Americans by Morning Consult revealed that 31% are financially preparing for a recession in the 2023, while another 50% cannot prepare but wish they could. An even more sobering statistic from the same survey is this: greater than 70% of respondents think we’re already in a recession or will be in a recession by year-end.[1] As inflation remains high and market volatility makes us all uneasy, it can be challenging to know where to invest in the current environment.
In periods when the economic landscape appears suboptimal, we turn to the past to revisit lessons learned from prior decades and generations. Most published outlooks, forecasts, and data-packed projections will focus on the US economy as a whole. This information is useful to investors but doesn’t always tell the whole story. Not all US markets are created equal. For a company like Ashcroft Capital, which specifically targets acquisitions in markets with economic strength and a positive outlook, a granular look is even more revealing.
Focusing on Dallas–Fort Worth (DFW), Ashcroft Capital has had a strong relationship with the booming Texas metroplex since the company’s founding. With many DFW multifamily properties in the portfolio, our property management company, Birchstone Residential, decided it was the best place to place its headquarters in 2021. In total, Ashcroft owned 32properties in DFW and still has 18in our portfolio, making it our most frequented market to drive investor returns. The growth of the DFW economy has been making headlines for the past decade, but is this metropolitan area more recession resistant than others? How does DFW’s strength translate to strong multifamily economics? To answer those questions, there are four factors we need to look at:
Job growth: According to the US Bureau of Labor Statistics, Texas gained more than 650,000 new jobs in 2022, more than any other state in the nation.[2] DFW is responsible for creating 234,700 new jobs during that time, increasing 5.9% year-over-year, a pace well above the national average.[3] In a show of resiliency, the region recovered 99.9% of pre-pandemic jobs by September 2021 and continues to march on.[4] Texas’s business-friendly policies, lower costs, and centralized US location are causing more companies to transition their operations and job opportunities to the Lone Star State.
Population growth: It should come as little surprise that the hottest jobs market in the US will be welcomed by substantial population growth. The Metroplex is currently home to over 7.6 million people and is projected to pass the 10 million mark by the 2030s.[4] However, job growth hasn’t been the only driving factor behind this influx of people. The majority of newly minted Texas residents hail from Los Angeles, Chicago, and New York City, largely attracted to DFW by the affordable cost of living and absence of burdensome state income tax. At the height of the COVID-19 pandemic, when working remotely was the only option for most, DFW saw an unprecedented spike in new residents looking for a more cost-efficient home base.
Diversified economy: History has shown that a diverse economy, such as that of DFW, is well-equipped to handle recessionary periods. During the dot-com bust of 2000 and The Great Recession of 2008–2009, the DFW economy suffered less and recovered faster than the national average.[5] DFW is currently home to 22 Fortune 500 companies, ranking them third in the US, and the Dallas Regional Chamber reported that 21 companies moved their corporate headquarters to Dallas in 2021 alone [6]. Notable additions to other DFW areas include Toyota, State Farm, and Caterpillar. No single sector dominates the 19-county area, with technology, business management, energy, financial services, health care, aviation, and defense all playing vital roles.[7]
Rental demand: Now that we have ascertained that DFW has a healthy economy and a rapidly expanding population, let’s look at what this strength and growth means for the present and future of multifamily real estate. In 2021 and 2022, DFW led the nation in new apartment sales. Still, the steady stream of new residents was able to absorb those new units easily. Further, fourth-quarter rental data show DFW occupancy rates hovering above 94% with no signs of letting up.[8] DFW ranks well above the national average in 12-month and five-year rent growth and is projected to remain one of the nation’s most stable multifamily markets. As single-family home affordability rests at generationally low levels, prospective home buyers in DFW are opting to rent at all ends of the price spectrum.
There remains a compelling business case for investing in such a strong market. Although no market is immune from the effects of a nationwide or global recession, some markets are built to weather the storm better than others. Ashcroft made its first DFW acquisition in 2016 and will continue to make the Metroplex a high-priority market in its future business plan.
Conversations | Q4 2022 Review and Q1 2023 Outlook With Traci Wilhelm
March 17, 2023
By: Evan Polaski, Investor Relations Managing Director
Evan Polaski:
Hi. I’m Evan Polaski, managing director of investor relations at Ashcroft Capital, and today, back with me again, is Traci Wilhelm, Ashcroft’s director of asset management. Traci, how are you today?
Traci Wilhelm:
I’m great, Evan. How are you doing?
Evan Polaski:
I’m doing well. Thank you for spending your time and sharing some insights here as we’re looking back at 2022, specifically into Q4 of 2022 and starting to look forward into 2023—how we’re going to get through 2023, given all the financial-world headwinds that we’re currently seeing. But let’s just jump right into it. Why don’t you provide a little background on how Ashcroft and the portfolio as a whole really performed back in 2022?
Traci Wilhelm:
As a whole, our portfolio very much outperformed all of our competitors in our market in general. We experienced a 17.9% rent growth, year over year, from December 2021 and from December 2022, so really exceptional rent growth. That’s really a result of the market strength through the first three quarters of the year. Then, we did see some declines in the fourth quarter, as everyone in the industry did, but we were still able to achieve positive rent growth. A lot of the market indicators have said that they were starting to see some negative rent growth, so we were able to achieve positive rent growth in the fourth quarter to really finish off the year from a strong position.
Evan Polaski:
So rent growth was great. How about Net Operating Income (NOI) because, clearly, inflation affects expenses as well.
Traci Wilhelm:
That’s right, but we were still able to achieve really excellent results on the NOI growth. We achieved 13.8% improvement from December 2021 and from December 2022. The revenue obviously was a big driver of that. It was slightly offset by some increases, particularly in utilities and payroll. As we all know, their payroll has increased pretty significantly over the last year and, actually, the National Multifamily Housing Council (NMHC) has produced some statistics that have shown that multifamily has actually increased higher than the typical national average for job increases because there’s such high competition with all of the new supply and the demand that’s in the marketplace.
Evan Polaski:
What about year-end occupancy? How are we performing in occupancy?
Traci Wilhelm:
We ended the year at 94% occupied, which is great. This is down about 140 basis points from the end of the year in 2021. That’s really to be expected and in line with what we’re seeing from all of the market prognostications. All of the reporting has said that occupancy decreased, and there was negative absorption in the fourth quarter, so we experienced that as well. However, 94% is a very healthy spot, and what we’re seeing is that at the beginning of the quarter, we started out actually at about 92.8%. Since then we’ve seen it grow to 94% at the end of the year, and it has stabilized since. We had a short-term dip at the end of Q3, beginning of Q4. What we’ve seen is that really stabilized now back in that 94% range, which is exactly where we want to be.
Evan Polaski:
What were the highlights of last year? What would you and your team say really performed the strongest?
Traci Wilhelm:
A couple of different ways. I’d first say, from a geography standpoint, we saw that Georgia outperformed the market, including the other markets that we are in. Now, that’s softened significantly. They’re expecting about 40,000 units of new supply over the next couple of years, so it’s a huge market; keep that in mind. It’s not the same as Austin, expecting 30-something thousand units in a much smaller Metropolitan Statistical Area (MSA) and is delivering over a few years, but we were able to see tremendous growth there this year. What’s interesting is that what we saw were wild swings in Georgia. The first quarter was good, second quarter was exceptional, and then third quarter started coming down but was still great. Then, the fourth quarter was pretty slow in terms of growth but still growing, so that’s important.
Dallas was kind of steady as she goes. We didn’t increase significantly, but we didn’t drop down as much in the fourth quarter. While Dallas is also going to see some supply, it’s not, from a percentage standpoint, as significant as what we’re seeing in Georgia. I think that it’s interesting to watch because we’ve had quarters of amazing rent growth in some of the markets. But then, you’ve got Dallas, which is just behind Georgia in terms of the annual rent growth because it’s just been steady. We like to see that stability, and we know that it bodes well for the future, and we’re really positive on 2023.
It’s not going to be to the tremendous growth that we’ve seen. I think these markets are softening a bit, but we are still expecting to see positive rent growth. It’ll just be kind of back to normal. We have to remember that the 17, 18, and 20% increases that we’ve seen over the last two years are unprecedented, and we are going to be back in that 3% to 4% range, which is great. We just need to reset our expectations, again, back to normal after the last couple of years.
Evan Polaski:
Where are we looking for opportunities to continue to improve?
Traci Wilhelm:
There are a few things that have impacted NOI that aren’t necessarily what we are thinking of when we’re thinking of capital markets, the debt markets, and things like that. But insurance increases are a big one, a big topic in our industry right now. Many years of double-digit increases at most of these large REITS that we’re seeing, and we’re seeing the same. I think everyone’s seeing the same, so it’s beyond debt service. It’s the continuation of inflation—making sure that we’re really managing these expenses to the best of our ability to overcome some of these uncontrollable things like insurance and debt. One thing that we saw in the fourth quarter that we spoke with all our lenders about, and they’re seeing this across their portfolios, is an increase in delinquency. This is for several reasons. First of all, a lot of the rental assistance programs have expired.
Second, there are people who signed renewals for units that they really couldn’t afford, knowing that they couldn’t. All of the rents around have gone as well, so they knew they wouldn’t be able to qualify for a new apartment, so they stayed with the hopes that they could continue to pay rent. This has been a big challenge. We’ve seen some of these things come in. The other thing is that evictions have started to be processed more quickly in most of our markets, with the exception of Georgia. We’re seeing all of those things combined. We’re also starting to see an increase in fraudulent applications as well, so we launched a great initiative, a new technology, this year called SNAPT. It was in the fourth quarter of last year that we launched this, and we tested it out on a few properties.
What they say is that 12% of applications contain fraudulent information, and that’s for fraudulent bank statements or pay stubs. This product can detect digital alterations allowing things that aren’t obvious to our on-site teams to be caught by this software. I mean, you can literally go online right now and buy personal information that will get you qualified for a unit for like $70, so it’s really affordable to commit fraud these days. We’ve launched SNAPT to detect that. On the first property that we launched a test at, we tested it for two months and they found over eight fraudulent applications. This was in Georgia, and it takes you anywhere from four to six months to get someone out of the property. If you really look at that, that’s almost $140,000 that this program has saved us already at that one property alone.
We know that it’s doing its job because we are finding fraudulent applications at almost every single property. We’re really excited about this because what we’re hoping to do is catch it on the front end so that we don’t have the exacerbation of these delinquency issues. We’re also considering rescreening people upon renewal. We’re looking into that to see what it would take, what it would cost us on the expense side, and then maybe what the metrics are. If it’s a 1% increase (on rent), maybe we don’t need to rescreen someone, but if it’s a 15% increase maybe we do. We’re working through those parameters now and the logistics of it to see if that’s something that we’ll pursue, but, effectively, we’re trying to get it on the front end before it hits our books.
Evan Polaski:
Beyond SNAPT, were there any major, or not major, primary initiatives on the asset management team throughout Q4 that we’re really trying to improve the process on?
Traci Wilhelm:
There’s quite a few. On the revenue side, we’ve mentioned this before when we’ve talked, but we continue to roll out our portfolio on the revenue management program, which is AIRM. It’s a RealPage product that we launched for half of our portfolio in 2022. We’ve got another ten assets being rolled out in the first week of March, so we’re in the staging stage right now, and we’ll be doing the training over the next couple of weeks to launch in the first week of March. That will only leave about six properties for us to onboard, probably closer to April. We’ve done it in these tranches because when you roll it on, you might find some glitches or you might find some pricing that you need to adjust, and it’s better for us to be able to focus on a smaller group to make sure we don’t have any glaring mistakes or miss out on some revenue potential.
On the expense side or on the leasing side, we launched a really great technology called Knock. This is a leasing tool that really helps our on-site teams follow up and do lead management. It gives us, on the asset management side, a lot of transparency into each property’s performance, so if a property is struggling, and we’re not understanding why, we can dig in. We can listen to phone calls that they’re making to prospects. We can read emails that they’re sending. In the last couple of years, it’s been easy to lease, up until maybe six months ago, because the demand was so very strong. Now anybody who’s joined in the last two years doesn’t fully understand how intense this process can be, and a lot of the people who had been in the industry before that had forgotten how intense it can be.
It’s a sales job; you have to follow up, and follow up, and follow up. So it helps them do the follow-ups by queuing up the follow-ups and alerts them when they haven’t been done, but it also gives us the transparency to make sure that that’s happening and to make sure that those follow-ups are quality. Now we’re coming to the stage where you can’t just say, “ Thanks for your email; reach out to us if you have questions.” It needs to say, “I see you’re interested in a two bedroom, and here’s how expensive they are, and here’s our availability; please come into the office.” We’re able to not just track that they’re following up on the leads, which isthe only thing we were able to track before, but we’re able to track the quality of that follow-up to make sure that we’ve got our best foot forward in getting all potential residents in the door that we can.
Evan Polaski:
Where are you seeing the opportunities in 2023 to continue to improve those operations?
Traci Wilhelm:
Everything we’re hearing just on a market wide basis is that everything is expected to be a little slow, stabilized but slow, for the next three to five months. Then everyone is expecting it to really pick back up in the second half of 2023. This is not just in terms of the financial markets, if you will, but it’s also in terms of demand because a lot of what we’re seeing is that people are staying put because of uncertainty in their own lives. Really the focus this year for us is expense management and continuing the progress that we’ve been making on that front as well as retention of residents. We’ve really put an impact into, and we included in our budgets a lot of marketing money to host more resident events to create connections with those residents because it’s really important that we have relationships in order to create that retention.
Then, just working toward a higher retention goal so that we’re not spending money on turnover and if we get into a situation that we’re not really expecting. If we get into a situation where there is negative rent growth, your renewals, if we can keep them flat, that’s a positive at the end of the day, so we’re really working those renewals. Customer experience is a huge piece of that. We’re really focused on increasing and creating a better customer experience this year and then, again, on really managing those expenses to overcome some of these uncontrollable increases that we’ve seen. We’re doing things like water and electricity audits across the portfolio to make sure that we have all of the appropriate systems in place and that we’re achieving any savings that we can or if there are any small capital projects, we can do to create a savings in some of those areas.
Those are all the projects that we’re working on to try to mitigate those expenses. We’re also working on rolling out, and this has been happening over the last few months, a lot of national vendors that we’re working to get preferred pricing on. Like we do on our renovations, there’s no reason that we can’t use some of those same companies for our maintenance supplies and maintenance contracts, so we’re working on all of those things, and that’s really just to improve and mitigate that inflationary number and try to keep that as low as possible. We know there’s not going to be a lot we can do in terms of payroll on an individual level, but we’re looking at creative solutions around staffing to see if there are any savings that we can achieve that way. Then, I think that there’s other things that we can work on to try to mitigate some of the challenges we have.
For example, we’ve sent out these sprayers to all the properties. They allow you to touch up paint rather than having to paint wall-to-wall or a whole room. We were having a lot of trouble with matching colors because it was two years old, and then you had to repaint the whole unit because it looked bad. With these sprayers, we’re able to retouch, and then it becomes a $50 paint charge rather than an $800 paint charge. We’re rolling through more initiatives like that where you can spend $300 to save a lot more than that. Those things are all under underway or have already been completed, and we continue to really focus on that expense management for 2023.
Evan Polaski:
Greatly appreciate all your time and your insights for this quarter and look forward to connecting at the end of Q1 so that we can start to see how the year is panning out and how our crystal balls were reading.
When asked to assess their financial knowledge, did you know 71% of Americans give themselves high marks, yet the data shows that only 7% can answer six financial literacy questions correctly?1
Ashcroft Capital is committed to keeping investors informed and updated on the many assets of commercial multifamily real estate investments. As part of that commitment, we have created this report to provide you with insights into the real estate investment industry and syndication throughout 2023.
While we see a relatively positive outlook for multifamily this year, there are challenges to navigate.
Read our complete March market report below for full details on these challenges and our plan to overcome them:
Will the Fed Continue to Tighten Monetary Policy?
Which Regions Have the Strongest Asset Appreciation?
What Do We Expect to Happen to the Cost of Capital?
How Do Multifamily Assets Perform During Inflationary Periods?
What Do Interest Rate Hikes Mean for the Multifamily Investment Market?
How Has the Increasing Risk of Recession and Higher Interest Rates Affected Financing?
Sources:
1. The State of U.S. Financial Capability: The 2018 National Financial Capability Study, Financial Industry Regulatory Authority (FINRA) Investor Education Foundation, 2019.
Investor Feature: Investing with Intention to Shape Their Dream Retirement
March 9, 2023
“We’re nobody special–just a couple that got really focused on our investment strategy.”
The truth is, David and Sharon are anything but an ordinary couple. They’ve both found success in corporate America, struck out on their own as entrepreneurs, and have put their capable heads together to design their ideal life and future together.
Their secret is deceptively simple. It’s all about being intentional–with time, energy, and investment.
Investing Intentionally
“We’re big believers that you have to be intentional about your finances,” something David says they first picked up from budgeting and planning guru Dave Ramsey. For David and Sharon, intentional investing is about careful budgeting, planning proactively, and knowing–rather than guessing–about the future.
Illustrating the mountains they can move by being intentional together, David and Sharon recently decided to pay off a $100,000 HELOC loan on their home…in two months. “We set our minds to it, moved things around, made sacrifices, and paid it off.”
Unsurprisingly, this couple brings the same laser focus to their investment strategy.
Discovering Ashcroft
“We’ve spent a lot of time investing in our knowledge of the stock market, and unfortunately, our return on that investment has not been great,” says David. “For the amount of education, training, and events we pursued, we haven’t found a lot of success in that arena.”
However, the couple experienced different results with real estate investment, according to Sharon. “I spent a significant amount of time listening to the Bigger Pockets podcast, and that’s actually where we found Ashcroft. We deployed some of the concepts, principles, and strategies that we picked up, and that’s how we decided to invest.”
David adds that after a wide search, they narrowed their syndicate investment firms down to a final two, and invested equal amounts with both to watch the returns. “With Ashcroft, we started out with six percent returns, delivered as promised. Then there was some overage, and we were happy to learn Ashcroft planned to step it up to seven percent the next year.” From there, David and Sharon continued to expand their real estate investment portfolio as their confidence in Ashcroft grew.
“At the beginning of 2010, I wasn’t sure I’d ever retire. Now we’re able to think about when, not if, that will be.”
But it wasn’t just the consistent returns that drew this couple to Ashcroft, David and Sharon credit their relationships with the team, other investor reviews, and deep experience and expertise as key factors in their decision.
Finding Community
Looking back over their years with Ashcroft, Sharon notes that one of her favorite aspects is the opportunity to build community with fellow investors. “The regular meetups help us stay connected, and we take pleasure in attending them to have face to face conversations with our contacts at Ashcroft–as well as other investors who tell us about their experiences and what else they’re looking into.”
David describes how they debrief in the car ride home after every meetup: “You compare notes and learn from each other’s mistakes. One important thing I have learned from the investment community is, ‘Don’t try to do it alone.’”
“Learning from our community is so much easier now, and we’re able to avoid many mistakes before making them.”
Learning from the Roadblocks
David isn’t shy about sharing the lessons he’s learned from his own mistakes; he loves to help educate others on business and investing. “What you get when you don’t get what you wanted is experience. And I value that.”
Recounting a particularly poignant lesson from his early investment days, David says “I made a buy on a stock when it was taking off from 50 cents to a dollar within a week. I bought in at a dollar a stock, 4000 shares, and later ended up wallpapering my office with the certificates, because that’s all they were worth.”
That experience taught David that he isn’t a “get rich quick” kind of person, and he learned about his risk tolerance along the way. “The stock market is a rollercoaster, and you can get really hurt on a wild ride; very rarely is it obvious when you should get on and get off. The biggest thing I learned is if you’re looking for a tip to beat the market, by the time it gets to you, it’s too late.”
Now, David stresses the importance of being real about how much risk you’re willing to take on. “If you don’t know your risk tolerance, you better learn or develop what you’re comfortable with. As far as real estate risk, we’re very calculative, and our best way to deal with risk is through diversification. Sharon likes to say that we own one toilet in each of our multifamily investments. And our portfolio includes about a dozen different investments right now, including short term rentals and single-family homes.”
Looking Forward to the Future
Because of their intentional investment strategy, this couple is ready to take on the future–a future that doesn’t include clocking in and out every day. According to Sharon, “We want to get to a point where we can replace our income through the investment strategies we deploy. Eventually we will retire from our W2 jobs, but that doesn’t mean we’ll stop working.”
“As we think about our retirement and the future, I would have to say we’re more confident than we’ve ever been. We know that our money is working for us and what we’re going to get.”
David echoes Sharon’s calm confidence. “We look at each other right now and say we’re okay; we’re good; we like the path we’re on–even in the economic downturn. While everything else has taken a huge dive, our real estate investments have continued to return.”
This confidence has even inspired David and Sharon to actively pursue one of their more fantastic dreams. “We’ve joked forever about a sea condo. We’re cruise people. I found one the other day, ran some numbers, and told Sharon it’s not so crazy after all! What once was a dream might just become a plan in the making,” David says with a chuckle.
Their plan for retirement bliss may be on another wavelength, but they aren’t bothered. David whispers the best part, “when people say, ‘But don’t you get bored?’ we just smile and say with pleasure, ‘Absolutely!’”
The rebound after the 2008 housing market crash created an opportunity where home ownership was within reach for many Americans. Though lending standards tightened during this period, deflated housing prices, steady economic growth, and historically low interest rates meant that if you were credit-worthy and wanted to own a home, you could do just that.
As we enter 2023, housing prices have again soared, economic growth has slowed, and interest rates have rapidly increased. Simultaneously, record inflation and fierce competition have altered the landscape. Once again, many consumers that had been planning to purchase are now looking to rentals as a place to call home. Today’s rental market looks different than in years past, and successful multifamily properties are differentiating their offerings with access to features and amenities that were once considered luxuries. Most rental communities are finding it essential to focus on the overall resident experience to attract and retain quality tenants.
This article will discuss how the shift towards rental communities, combined with an investment strategy that focuses on providing amenities and management valued by residents, can increase the value of multifamily investment properties.
To Buy or Rent?
According to a recent survey measured by the Fannie Mae Home Purchase Sentiment Index (HPSI), consumer sentiment toward home purchasing continues to decline, with only 16 percent of respondents believing it is a suitable time to buy a home.[1]
Why is that? For starters, mortgage rates have more than doubled relative to this time last year; a 30-year fixed-rate loan is sitting at seven percent. Compounding the impacts of rising rates is inflation, which is currently at a forty-year high. As a result, housing prices have soared in nearly every market, making home ownership unattainable for the average family. Rising interest rates, combined with inflationary prices have slowed economic growth projections. These conditions all play a part in why more and more people are choosing to rent.
As the rental market has picked up, so has the competition between landlords and management companies to differentiate their rentals and attract more residents. Multifamily communities are continually adding access to better facilities and features to remain competitive and help support the growing rent prices. This has created a better overall experience for renters, offering amenities that are likely unreachable within their budget for a home.
Building-to-rent communities have become a popular option for those who seek the single family versus multifamily option. In these communities, renters still enjoy management, maintenance, and amenities, like apartments, but with more space and often with longer rental terms. The number of single-family builds for rentals grew to 12 percent in 2022 but, for decades, has accounted for only three percent of newbuilds.[2]
While both housing prices and rental prices have spiked due to current market conditions, home prices have increased much faster than the growth of rental rates.[3,4]
Amenities and Management Matter to Renters
The increase in the renting culture has led to a renaissance in amenity-rich apartment communities. These multifamily properties provide a greater value proposition than traditional single-family homes, with higher quality finishes and better maintenance services. Rental communities can offer several benefits including: concierge services, tech packages, and access to amenities like a pool, fitness centers, garages, and additional storage.
“Modern living features” are the top reason why residents renew their lease with a property and without them, why they decide to leave a property. Renters are looking for community features including technology, amenities, and a property they are proud to call home.[5]
Additionally, high property management turnover negatively impacts resident retention. In multifamily properties, there is a 33 to 36 percent turnover rate, much higher than the national average of 22 percent for all property types.[6] Property managers who focus on lowering staff turnover and have adequate staff to service the residents typically see an increase in resident retention rates.
But it is more than management…It’s offering an opportunity to build relationships with fellow residents. Having a property manager that understands residents’ needs, provides opportunities for social interaction and engagement, and helps build the bonds in the community increases resident engagement and is critical for retention rates.
The Birchstone Approach
Ashcroft Capital’s in-house property management company, Birchstone Residential, was built to provide an unparalleled experience elevated by superior service in every facet — from quality lifestyle enrichment to resident-facing management. The services improve resident satisfaction and quality of life for our communities. And, because Birchstone only manages our assets, we have a perfect vertical alignment of interests.
“Birchstone prides itself on our customer-focused approach to management. We take care of our associates, and in turn, they take care of our residents, so our residents choose to stay in our communities. I think that’s the most important thing that Birchstone brings to Ashcroft investors.”
– David Deitz, Birchstone Residential President
Birchstone’s comprehensive property management platform provides all essential services, including leasing, maintenance, and construction management. Birchstone executes the value-add business plan for each Ashcroft property, optimizing financial returns while obtaining high resident satisfaction. Committed to a people-centric culture and employee development through job training and enrichment, Birchstone seeks to provide best-in-class service that attracts new residents and enriches the lifestyles of current residents.
The Birchstone approach helps build a strong community where residents are proud to live, effectively increasing resident loyalty.
Ashcroft Capital and Multifamily Real Estate
At Ashcroft Capital, we have a proven track record of creating value through renovating, rebranding, and repositioning our investment properties. We buy existing cash flow-positive, institutional-quality properties in high-growth markets with strong multifamily fundamentals.
Our acquisitions team works closely with our talented asset management, property management, and construction management groups to formulate a unique business plan for every property acquired. The collaboration of Ashcroft’s fully integrated platform enables us to quickly execute the property’s business plan upon acquisition.
Ashcroft Capital’s Real Estate Fund
Real estate funds, like the Ashcroft Value-Add Fund III (AVAF3), differ from syndications by investing in multiple properties rather than a single deal. The fund is structured so that investments are allocated across multiple properties, creating diversified sources of return.
AVAF3 is an open to accredited investors interested in diversifying their wealth portfolios into multifamily real estate. Investors can invest in Class A and/or Class B Limited Partnership Interests. The AVAF3 is targeting 6-10 multifamily properties throughout the Sunbelt region with an anticipated hold period of 5-7 years.
AVAF3 offers both Class A and Class B share types. An investment in Class A shares earns a 9 percent coupon, generating strong projected cash flows while reducing risk. Upon disposition of a property in the fund portfolio, Class A shares offer limited participation in the appreciation and upside in exchange for the higher coupon rate. Class B shares earn a 7 percent however, Class B shareholders have greater overall return potential through their participation in the profits from the disposition of fund assets.
Investor Feature: From Firefighter to Real Estate Cowboy
February 23, 2023
“If I research ten deals, I may only end up choosing one. A lot of it’s intuitive — I’m good at picking up on if somebody’s pushing their numbers or not just by looking at the comparables. And Ashcroft doesn’t push.”
As a former firefighter, two-time retiree Josh Beesinger has never been afraid to throw himself into the fire, so to speak.
“You could say I’m retired for the second time. But when I started investing in 2010, I was always working full-time,” Josh said. “I worked for the fire department in Fort Worth. We would work 24 hours on, then 48 hours off. I also had a business where I resold electronics on eBay. I sold that business and used the money to buy my first three houses. I just threw myself into the fire.”
Working between shifts, and even plugging away between calls at the station, Josh jumped into real estate investing headfirst — scouting, buying, and renting out single family homes on his own. John learned by doing.
“At first, I didn’t do well. I’d make $1,000 or $2,000 here or there. I had to figure it out from my mistakes,” Josh said.
After a few misfires, Josh knew he had to try something new. So, he decided to branch out into other areas — literally.
“I would go into lower-end neighborhoods and buy foreclosure homes for $20,000 to $25,000, turn them around, mark them up, and resell them,” Josh said. “I wouldn’t actually do anything to them. I would just provide people with financing, then take the loan and sell it to an investor, then repeat.”
Unlike his earlier ventures, the process proved successful. Josh’s investments enabled him to live off his salary, while putting the money he made in real estate back into the business.
“I was able to let that grow, and it was easier. As the years pile on, when you don’t spend that money, you start making more and more,” John said. “At first, you can use it to do more deals and grow your business. But then there comes a point where putting that much money to work becomes difficult, so I had to look for other places to put the money.”
It wasn’t long after this realization that Josh found his true investing calling: raw land as real estate.
“I definitely enjoy land deals much more than houses,” Josh said. “It’s not a lot of work. I’ll go look at a big ranch and just drive around all day. I enjoy being outside, assessing things, and deciding how I want to break it up and sell it.”
It’s easy to imagine Josh cruising through miles of rough, undeveloped land, windows down — a sort of real estate cowboy assessing his stock.
“To me, it’s more about having fun than anything else,” he said. “I spend about the same amount of time doing one big land subdivide, or less even, than I would rehabbing a single house. You make more money and it lasts longer. Because if you’re breaking up a piece of land into ten different pieces, well, now you’ve got ten different sales to make money from instead of one. You do a little bit of work upfront and then coast the rest of the time.”
Josh’s love for lower-effort, high-return investments naturally led him to syndication. Unlike past efforts, Josh was hesitant to throw himself into the fire. Instead, he proceeded with proper due diligence.
“The hardest part about finding a good syndication is needing transparency,” Josh said. “You want to look at all of their past deals, not just the good ones. You want to see the average. And there’s not a lot of syndicators who are fully transparent about that.”
Josh is highly selective when choosing where to invest his money, a strategy that has served him well.
“If I research ten deals, I may only end up choosing one,” Josh said. “A lot of its intuition — I’m good at picking up on if somebody’s pushing their numbers or not, just by looking at the comparables. And Ashcroft doesn’t push.”
In Ashcroft, Josh found a partner who prioritizes transparency, honesty, and high returns for less effort — meaning more time to spend driving through unrefined lands of potential. For this former firefighter turned real estate cowboy, it’s a perfect match.
“So far, it’s been great,” Josh said. “They’ve beat their numbers on everything that they’ve said. I always try to analyze different deals along with each comparable, and I appreciate Ashcroft’s approach. They underwrite conservatively, and I like that.”
Photographed below, Josh Beesinger and Daughter Maddison Beesinger
Relocation Trends: Why Residents Are Leaving High-Cost Cities for Suburban Markets
February 21, 2023
By: Ryan Wynkoop, Investor Relations Manager
An interesting report out of United Van Lines, which manages major relocations and moves for people across the country, demonstrates the migration patterns in the US of people leaving high-cost-of-living areas for new locales—with many focusing on Sunbelt submarkets.
We can deduce a few things from this analysis.
First, there is a trend of moving out of large metropolitan cities to suburban markets. On the outbound list below, the highlighted states center around New York City, Chicago, Philadelphia, Boston, Los Angeles, San Francisco, and San Diego. It’s worth noting that some of the inbound states are suburban states surrounding those cities, such as Rhode Island and Vermont outside New York City and Delaware outside of Philadelphia.[1]
The top inbound states of 2022 were as follows:
Vermont
Oregon
Rhode Island
South Carolina
Delaware
North Carolina
Washington, DC
South Dakota
New Mexico
Alabama
The top outbound states for 2022 were as follows:
New Jersey
Illinois
New York
Michigan
Wyoming
Pennsylvania
Massachusetts
Nebraska
Louisiana
California
One could extrapolate several reasons for why these migration patterns are occurring, but the primary reason seems to be the impact of inflationary pressures on the US population. Therefore, people have been migrating out of high-cost-of-living states to low-cost-of-living states.
Another reason is that the COVID-19 pandemic has made large metropolitan city living less attractive. Employees can work remotely on an increasing basis, which has allowed some to flee the increased expense of city living. In addition, large cities’ retail and commercial cores have been disproportionately affected by the financial fallout of the pandemic and have been slower to rebound. This has made the vibrancy of suburban markets seem more attractive. Finally, the economic pressures on construction material costs, labor costs, and lending costs have slowed large-city downtown development growth compared to the low-cost development in suburban markets.
Ashcroft Capital is focused on investing in the suburban markets outside of top-tier Sunbelt cities that are directly impacted by these migration trends. We have a presence in Texas, Florida, and Georgia and have recently expanded into the Carolinas with an acquisition in our Ashcroft Value Add Fund 3 in Chapel Hill, North Carolina. The fundamentals we are seeing in economic growth combined with shifting population growth make these submarkets attractive and support our long-term investment strategy.
Conversations | Q4 2022 Review and Q1 2023 Outlook With Scott Lebenhart
February 6, 2023
By: Evan Polaski, Investor Relations Managing Director
Evan Polaski:
Hi, I’m Evan Polaski, managing director of Investor Relations with Ashcroft Capital, and back with us today is Scott Lebenhart, Ashcroft Capital’s chief investment officer. Today, we really want to touch on a Q4 recap and a Q1 outlook for our past and future acquisitions. We’ll jump right into it. Thank you for joining us today, Scott.
Scott Lebenhart:
Thanks for having me, Evan.
Evan Polaski:
Very grateful to have your time and share some of your insights with our investors. Why don’t we start with Q4 and look back at what we bought, how many deals we had underwritten throughout, and what the acquisition pipeline looked like?
Scott Lebenhart:
Absolutely. Given the volatility in the market, the pipeline significantly decreased from where we were in Q4 2021. That was a robust period. We closed seven deals in the fourth quarter of 2021. In 2022, during the fourth quarter, we closed two deals that we’re extremely excited about. These were deals that we targeted specifically. We closed on Halston Paces Crossing in November. This deal is in Atlanta. It was a loan assumption deal with a fixed interest rate at 3.25%. It was over 200 basis points lower than current rates. We were already familiar with the submarket, because it was the fourth property that we had purchased in Gwinnett County in Atlanta. We were excited to get that one done.
Then, we closed Midtown 501 right before the holidays. That deal is in Chapel Hill. It is in an A++ location, with very minimal deferred maintenance, a light value add strategy, and tons of operational upside. It’s a deal that was owned by a group that we have worked with several times in the past. We have bought several deals from them before, so we knew how they operate and how we could improve the value from the get-go. So, those are two fantastic deals that we were able to get our hands on and make sense of. We found a meeting of the minds at the right price—or what we believed to be the right price—but, overall, the acquisition market was much slower. We underwrote about 50 deals in Q4. That’s about 50% of the deals that crossed our desk. And, of deals that we were actually pursuing, we only submitted seven LOIs in the fourth quarter—and that’s dating back to when we would submit seven LOIs in a week based on some of the heavy volume that we saw over the past couple of years. Things are definitely slowing down in the market, but we’re still able to find the right deals and sellers who are willing to sell at today’s pricing.
Evan Polaski:
Looking back at Q4, not only the deals that we acquired but even the deals that we were underwriting LOIs issued, how were we finding those deals? Were those mostly off-market? Was there a balance of off-market and on-market? What efforts were we making on that front?
Scott Lebenhart:
It was a balance, and at the end of the day, we always say real estate is a relationship business. We try to position ourselves to be the group that people want to work with and want to sell their deals to. That really came to fruition in the fourth quarter when our reputation and level of trust helped us get the deals done. Paces Crossing was a true off-market deal that we were able to get a look at from a seller who we knew wanted to sell out of certain deals in their portfolio. They bought the deal in 2018 and refinanced out of it in 2021—or, refinanced out their equity in 2021—which gave us the ability to assume a 2021 loan with a lot of interest only remaining. We were able to convince them to sell at a price that made sense for us just because they were looking to. They didn’t know where the world was going, and they said, “We’re done with this one, and we’ll move on.”
Midtown 501 was a deal that was marketed. However, we had bought two other deals previously from the seller. We knew them well. We were able to negotiate with them directly. Given the level of comfort that they had with us, they wanted to close before the end of the year. We wanted to close before the end of the year to allow investors to benefit from certain potential tax advantages. We were able to get the seller comfortable with moving forward with us at a discounted price compared to the other groups.
We’re continuing to have conversations with groups that we know and are trying to price some deals away from them. We‘re doing an intense amount of research right now. We did a lot of research back in Q4 wherein we targeted quality deals at specific locations. We have our databases in which we’re able to search when deals were purchased and what type of loan structures they have. Those are the deals for which we’re approaching sellers and saying, “Hey, we know you bought this in 2018. You have your debt maturing next year, et cetera, et cetera.” For the people who bought then, even though the market is in some turmoil right now, they’re still making money on their deals and perhaps incentivizing them to negotiate and decide that we’re the right buyers for it, that we will make it nice and smooth. Right now, we’re doing a lot of targeted approaches on our deals to drum up deals off-market.
Evan Polaski:
In terms of the actual deals themselves, you talked about targeting a much more specific type of deal through research. Are there changes in the general focus of the type of risk profiles or anything along those lines that we’re looking at today, kind of like Q4 starting to blend into future looks or looking for it relative to the end of 2021 or early 2022?
Scott Lebenhart:
I’d say it’s more of a narrowed focus where certain quality deals make a lot of sense right now versus others. Loan assumptions make a lot of sense because it takes one of the most uncertain and volatile components out of the deal by having an in-place loan that you can assume. Right now, lighter value-add deals make a lot of sense with limited deferred maintenance. Historically, [at] the beginning of 2022 and beyond, there was plentiful debt out there that was willing to fund future CapEx projects. Right now, we’re able to be selective and lean on some of our relationship lenders for loans like that. But if you’re going with an agency loan or some type of fixed-rate product, the cost of those deferred maintenance items and the cost of the renovation, that’s coming out of equity, which is obviously more expensive than debt. This is why people put debt on their property. This is straining the ability to project some decent returns on certain deals.
Deals that are in great shape are targeted more. We are not looking for super heavy lifts right now. We’ve made a lot of great acquisitions in the past that are heavy lifts, but right now the environment is not conducive to that. We’re also really focused on the potential of a recession in 2023. We’re looking at recession resistant locations with highly ranked school systems, great access, and diverse employment drivers in the area. So that’s another factor that we’re focused on at the moment.
Evan Polaski:
With everything we mentioned in terms of how we’re sourcing deals, the types of deals that we were focusing on both Q4 and forward, how do we see that continuing to evolve, or what areas are we focusing on more heavily given the information we’ve received over the last three months?
Scott Lebenhart:
I think that in Q1 we will continue to be extremely selective on the deals that we’re targeting from an acquisition projection. Unfortunately, we still expect limited transactions to occur in the first half of 2023. We’re going to continue to be disciplined and make sure we’re buying the right deals at the right price. And a lot of that goes into what I was talking about in Q4, how we’re targeting specific deals in specific locations. That’s going to be where we continue to focus. We will also continue to have conversations with the groups and the potential sellers out there that we’ve worked with in the past in order to try to pry some deals away from them later in the year toward the second half of 2023. We do expect there to be more transactions.
We expect there to be some deals that happen in Q1, which helps create data points and the bid/ask spread becomes a little narrower. Hopefully, there will be some more stabilized stabilization in the debt markets. The belief is that by midyear the rate increases will come to a halt and even potentially by the end of the year start to decrease. So there should be more clarity on that front.
We also believe toward the end of this year, there’ll be some more distress in the market. We’re going to see sellers that have debt maturities coming up and have rate cap purchase obligations to fulfill and cash flow being drained from properties based on higher-than-expected debt service. We expect those deals to start to come out in the second half of the year. Right now, it’s a lot of positioning with the groups that we believe will have those opportunities for us throughout the year and staying true and making sure we’re buying safe, conservative deals in strong locations.
Evan Polaski:
How are we then making sure that we’re not in a similar pinch if rates don’t drop like they’re anticipated to in the next few years? How are we adjusting our financing structure and overall deal structure accordingly?
Scott Lebenhart:
A lot of that is being proactive with our existing deals. We’re being extremely proactive. We’re having conversations with lenders today. I actually just double-checked a couple weeks ago to confirm that there were no loans maturing in 2023, and this was triple-checked the other day to make sure we didn’t miss anything. We have no loans maturing this year, which is fantastic. We have no reasons that we need to sell deals. May we want to sell a couple of deals this year? Absolutely. But those are probably deals where we have already been able to implement our value-add strategy. So it’s not going to be a deal that we bought six months ago that we’re looking to sell out of this year, but we are having conversations with lenders in terms of future rate cap obligations that we have.
We are extremely focused, as always, on operations and making sure that our expenses are in line with where they should be and not running up. We are focused on maintaining extremely strong occupancy on the construction side. We are still seeing plenty of demand for our renovated product, renovated units, and our properties that we’re repositioning in the market. As we’re getting into a recession, there’s usually a sense of some sort of flight to quality. People with higher average incomes, like the markets that we’ve been buying, tend to live in those quality locations, perhaps at a slight discount to where they would’ve been at a stronger economic time. So again, we’re focused on these strong submarkets a lot right now.
Evan Polaski:
I appreciate all of your input, and I’ll leave it to you if you have any other closing remarks that you’d like to add before we part ways.
Scott Lebenhart:
It has been an interesting year. As you know, I think the world has a lot of sorting out post-COVID-19. Hopefully, supply chain issues figure themselves out. Inflation seems to be starting to get under control and trending in the right direction. Last year was a tale of two halves, where the first half was all rosy and the second half was, “I have no idea what’s happening.” We saw that after COVID-19 in 2020, [there was] a ton of uncertainty, obviously for different reasons, but we relied on our relationships in the summer of 2020. We closed three deals at the end of 2020 that we were able to tie up throughout all that uncertainty. Those deals were potentially some of the better deals that we’ve done. Ultimately, they were deals that we were able to buy from groups that knew us, felt comfortable selling to us, and knew that we would execute and close. We expect now to be similar to that period of time, where people are going to want to de-risk themselves during the sales process as well. We’re looking to put ourselves in a strong position.
So the beginning of 2023 continued with uncertainty. Hopefully, we will have some more clarity by the end of 2023. We’re excited to see what the year has in store for us. We’re awaiting some more surprises, so we’ll say.
Evan Polaski:
I think over the last three years, 2020 through 2022, uncertainty is the only certainty. I appreciate all your time and insights and, as always, am grateful to you for sharing your thoughts with us.
Since the pandemic, midsize cities with tourist resilient economies are growing. Raleigh is one of those areas experiencing record job, population, and economic growth. In 2022, Raleigh was ranked as the 6th best place to live in the United States and 1st best place to live in North Carolina based on the 150 metro areas analyzed.[1]
As the capital of North Carolina, Raleigh brings thousands of state government jobs to the area and boasts a 7,000-acre Research Triangle Park (RTP) that provides 55,000 jobs to residents at more than 300 companies. Additionally, the region boasts numerous opportunities in higher education, with colleges such as Duke University, the University of North Carolina at Chapel Hill, Wake Forest, and North Carolina State University, all located within the major metropolitan area.
The submarket is known for its highly educated workforce, warmer climate, and bustling nightlife, making it one of the top midsize cities for multifamily investment in the United States.
Population Growth
The pandemic has demonstrated that many industries are able to not only sustain a remote workforce, but also to grow in spite of one. Modern day collaboration tools have allowed people to work together effectively, even from disparate locations. As a result, people are leaving larger, more expensive cities, like New York and Chicago, and relocating to midsize cities, like Raleigh.
This is especially true for technology jobs, of which Raleigh is no stranger, laying claim to the largest research park in the United States. Historically, Raleigh has also been among the most inexpensive technology hubs in terms of median house prices in the U.S.[2] Nicknamed ‘The City of Oaks,’ the downtown streets are lined with mature trees, and the greater metropolitan area is home to almost 20,000 sq. ft. of green space per capita.[3] The temperate climate, along with proximity to both the mountains and the beach also acts as a major draw.
In ten years, Raleigh’s population of 400,000 has risen by 15 percent, and the state has seen the third highest migration, behind Florida and Texas.[4] The Raleigh metropolitan area is projected to grow from 1.4 million in 2022 to 2.6 million in 2060. In addition, the projected growth will rank 11th among 384 U.S. metro areas.[5]
This huge population surge drives up wages and the demand for services, ushering in job and economic growth, and helps to create multifamily investment opportunities.
Job Growth
A growing population is primarily supported by the employment opportunities in the area. In 2022, exponential job growth in Raleigh ranked the city as the third-hottest job market out of 300 metro areas in the country. This was based on job, labor-force and wage growth, labor force participation, and unemployment rate.[6] Raleigh’s unemployment rates are lower than the national average, and the region’s annual average income is similar to the national average. The shift away from major metros, availability of technology jobs, and opportunities in higher education have all helped fuel this growth.
Research Triangle Park (RTP), the largest research park in the country, is a major economic driver with industries spanning technology, life sciences, manufacturing, and finance. Stretching over 7,000 acres, RTP is home to more than 300 companies that employ over 60,000 people. Even during the pandemic, when many physical locations shut down, Raleigh witnessed strong demand for office, life science, and lab space. More than a dozen major companies have relocated or announced expansions – this includes a new Apple campus, a Google engineering hub, and Fidelity adding 1,500 jobs at RTP.
Over the next few decades, North Carolina is expected to grow its economy by more than $209 billion, with fifteen big businesses announcing their arrival in the last year, leading to the creation of 20,000 jobs over the next few years.[7]
These continued corporate expansions and relocations have spurred job growth and helped to create a more affluent demographic, making Raleigh one of the top submarkets for multifamily investments.
Economic Growth
With employment expanding and the population growing to catch up, overall economic growth is never far behind. The Raleigh region’s economy is supported by its large talent base and highly educated workforce, which has attracted billions of dollars of corporate investment over the last decade. The many major local universities produce thousands of graduates every year, many of whom enter the local workforce. After earning a bachelor’s degree, nearly 80% of UNC graduates remain in North Carolina.[8] In fact, higher education supports so much of the growth and is so embedded in the area that Duke, UNC, and NC State are collectively known as ‘University Triangle.’
All these factors have contributed to Raleigh becoming the 7th fastest growing housing market in the country. It has also supported rental housing, with prices remaining up 4.8% year-over-year, even as rising interest rates and an economic slowdown has cooled off demand in other markets. With a median price of $1,487 per month for a one-bedroom apartment, vacancies remain quite low compared to the last five years.[9]
Steady job, population, and economic growth all contribute to Raleigh’s investment appeal and help ensure long-term growth in housing demand and rents.
Ashcroft Capital and Multifamily Investments
At Ashcroft Capital, we have a proven track record of creating value through renovating, rebranding, and repositioning our investment properties. We buy existing cash flow-positive, institutional-quality properties in high-growth markets with strong multifamily fundamentals.
Our acquisitions team works closely with our talented asset management, property management, and construction management groups to formulate a unique business plan for every property acquired. The collaboration of Ashcroft’s fully integrated platform enables us to quickly execute the property’s business plan upon acquisition.
The Apartments at Midtown 501 (Midtown 501) is the first acquisition within the Ashcroft Value-Add Fund III. Midtown 501 includes 248 units and is located in the Chapel Hill submarket of Raleigh. Midtown 501 was built in 1975; however, an extensive transformation of the property was completed in 2015. The renovation fully modernized the amenities, units, and physical attributes of the property, leaving only minimal deferred maintenance. Midtown 501 provides Ashcroft the opportunity to focus efforts on operational improvements, maximizing income through minimal interior and exterior luxury upgrades.
Our other communities are located in some of the highest-growth markets within the Sun Belt, including: Dallas-Fort Worth, Atlanta, Orlando, Tampa, and Jacksonville.
Ashcroft Capital’s Real Estate Fund
Real estate funds like the Ashcroft Value-Add Fund III (AVAF3) differ from other syndications by investing in multiple properties rather than a single deal. The fund is structured so that investments are allocated across multiple properties, creating diversified sources of return.
AVAF3 is an open private placement fund for accredited investors interested in diversifying their retirement and wealth portfolios into multifamily real estate. Investors can invest in Class A and/or Class B Limited Partnership Interests. The AVAF3 is targeting 6-10 multifamily properties throughout the Sunbelt region with an anticipated lifespan of 5-7 years.
AVAF3 offers both Class A and Class B share types. An investment in Class A shares earns a 9 percent coupon, generating strong projected cash flows while reducing risk. Upon disposition of a property in the fund portfolio, Class A shares offer limited distributions in exchange for the higher coupon rate. Class B shares earn a 7 percent coupon; however, Class B shareholders have greater overall return potential through their participation in the disposition of fund properties.
2. Forget Austin and Miami: 3 up-and-coming tech hubs with more affordable home prices are luring droves of new residents from nearby areas. businessinsider.com™. (n.d.). Retrieved December 6, 2022, from https://realestate.usnews.com/places/north-carolina/raleigh-durham
Today I want to discuss what the Ashcroft Value-Add Fund III “AVAF III” is, how you can potentially benefit from it, and the key differences between previous funds offered at Ashcroft Capital.
AVAF III is a 506(c) real estate private placement investment opportunity for accredited investors. The fund is closed-end, which means once we raise the capital needed to acquire six to ten multifamily properties, the fund will be closed with no further properties or investors entering after that point. AVAF III is being offered on a first-come, first-served basis.
The objective for the fund is to acquire six to ten multifamily apartment communities in high-growth and high-demand Sun Belt markets (currently Texas, Florida, Georgia, and North Carolina). Once we acquire an apartment community, we renovate, rebrand, and reposition it for resale. In other words, we are buying preexisting multifamily apartment communities and modernizing them to make them more efficient and to appeal to today’s renter standards.
We target to hold these properties for five to seven years, and throughout the hold period, we offer investors monthly cash flow distributions and provide monthly updates. We also release full detailed financials every quarter.
A couple of new, exciting updates on AVAF III that differ from AVAF I and II are as follows:
First, we launched this fund earlier compared to prior years. Historically, we have opened our funds for investment around January or February. In late 2022, we were able to get the first property for AVAF III under contract, and investors who got in early were able to benefit from the last year of 100% bonus depreciation. The bonus depreciation benefits are set to phase out over the next several years:
80% in 2023
60% in 2024
40% in 2025
20% in 2026
0% in 2027
Another exciting update is that we are offering investors preferential terms for investing larger amounts of capital. For example, in AVAF I and II, whether someone invested $25,000 (our minimum) or $1 million both investors had the same terms. A “coupon” is paid 100% to investors first, and then there is a 70/30 split on profits above the coupon rate up to a 13% IRR return and a 50/50 split thereafter.
In AVAF III, we are keeping the minimum investment low at $25,000 with the same split structure as before, but if you invest $100,000+, the split above the 13% IRR hurdle is improved.
See below for details:
Note that the splits shown above are applicable to the Class B shareholders participating in the appreciation and potential upside, not to the Class A shareholders. Class A investors receive a higher coupon amount at 9% annualized versus 7% and have limited to no upside on the equity appreciation.
The next difference in AVAF III is that we are starting to see discounts happening in the multifamily sector because of increased interest rates. We are transitioning toward a buyer’s market, rather than a seller’s market. The first deal that we closed in AVAF III (Midtown 501) was purchased at an approximate 25% discount relative to pricing one year ago in 2021. The current market shift creates a unique buying opportunity with a potentially small window of time to purchase multifamily assets at discounted prices, potentially throughout the year.
More exciting news is that we are expanding our markets with AVAF III. Midtown 501 is in a fantastic submarket of Raleigh–Durham, North Carolina. Historically, we have bought properties in Texas, Florida, and Georgia, and now we can offer investors even broader diversification by expanding into more Sun Belt markets.
Our top priority at Ashcroft is capital preservation, meaning we will maintain strong property-level operations on each asset in the portfolio and focus all of our efforts on continuing this success in 2023. It is not only activity that we seek but also great assets at appropriate pricing. Good opportunities will present themselves, but we feel it is critical to remain disciplined and patient. And we believe the next 12 to 18 months will present great opportunities. Many economists predict that it is more likely than not that there will be some distress in the market. As owners seek liquidity and the bid-ask spread tightens, we foresee a window of opportunity to take advantage of some compelling acquisitions, and we will do so with a careful, highly selective approach. With all of this in mind, we are thrilled to bring you AVAF III. To learn more or get started now, please visit https://info.ashcroftcapital.com/fund.
There are many factors when structuring debt that can impact debt servicing costs and, therefore, net operating income. Some investors might look for loan structures that provide flexibility for the duration of their hold. When acquiring commercial real estate, syndicators base their decision on financing structure by the asset type, estimated holding period, and investor .
Fixed rate loans yield fixed monthly mortgage payments and can provide a hedge against volatility. Because the rate is locked in, investors are assured that any inflationary effects on rates are risks that will be borne by the lender during the life of the loan. Additionally, in periods of rising market rates, a fixed rate loan can provide cost savings.i, ii
On the other hand, fixed rates are typically 1.5 to 2.0% higher than floating rates as the higher margin allows lenders to hedge future market fluctuations and account for all potential risks. On a $10,000,000 debt, this higher fixed rate means paying an additional $150,000–$200,000 each year. Fixed rate loans also can become costly in a climate where interest rates are falling. For example, a borrower may be locked into a fixed interest rate of 8% even though market rates have dropped to 3%.iii, iv
In addition, exiting fixed rate loans can be costly. Specifically, if a borrower decides to refinance a property prematurely it may trigger prepayment penalties. Prepayment penalties are fees borrowers are required to pay when they pay off (through refinance or sale) their loan balance prior to the maturity date. This high cost could limit syndicators’ flexibility to maximize their return by refinancing or their ability to accelerate their exit timing.v
Distinct from a fixed interest rate, a floating interest rate is one that is variable and fluctuates over time. Typically, floating rates are tied to an underlying benchmark rate or index. In the United States, we are now using alternative benchmarks like the Secured Overnight Financing Rate (SOFR) that, unlike LIBOR, bases rates on historical figures. The payment due on the loan changes in regular intervals, either monthly or quarterly, depending on the benchmark used.vi, vii
Floating rate loans are usually initially offered at a lower rate. If the fixed rate on a loan is 10%, the floating rate will usually range between 7.5% and 8%.viii These floating rate loans are mostly structured as interest-only loans, requiring a balloon payment at the end. A key benefit for floating rate debt is the inherent flexibility of limiting prepayment penalties and offering more flexible funding facilities. A funding facility works similarly to a line of credit or construction loan and can be used at the borrower’s discretion for capital expenditures such as construction and improvements, tenant leasing costs, tenant improvements, interest shortfalls, carry shortfalls, and tenant buyouts.ix, x
To help plan for expenses and to underwrite deals 5, 10, or even 15 years out, an interest rate cap is usually purchased to limit how high an interest rate can rise on floating rate debt. For example, a borrower can get a 10- year commercial property floating rate loan that charges 4% interest with an interest rate cap of 7%. The interest rate can go up or down, but it can never go higher than 7%.xi, xii
Let’s look at some historical charts.xii Shaded in blue is the LIBOR rate, the gold line is the swap rate— the interest rate at which floating rate holders can switch to a fixed rate—and the gray line the effective market rate floating rate holders were currently paying at that time. As Chart 1 shows, between 2006 and 2013 the gold line (the swap rate) for two years moving forward was, in fact, higher than the gray line (the floating rate) debt holders were paying.xiii
The chart below depicts a 5-year time period between 1990 and 2017. Floating the rate for five years resulted in a maximum savings of 4.82% over that time. Fixing the rate yielded a 0.90% savings on swap.xiv
When looking at 10-year swaps between 1990 and 2012 (Chart 3), the maximum savings earned by floating topped 4.7% annually over a ten-year span, as shown.xv
The data illustrate that, at any point between 1990 and 2010, borrowers who leveraged floating rate financing, whether for a 2-year, 5-year, or 10-year period, saved more money than they would have with a fixed rate loan or by switching to such a loan during the course of their loan period.
Significant cost savings is the key reason Ashcroft Capital’s financing structure of choice is a floating rate loan. As a real estate investment firm that specializes in a multifamily value-add strategy, Ashcroft Capital’s typical holding period is 5 to 10 years. Securing extremely flexible debt allows us to remain nimble and maximize our exit strategy. Ashcroft Capital recognizes rates are climbing, which is why in all our debt structuring we purchase interest rate caps, thereby limiting our exposure from rate increases beyond what we are already expecting. This allows us to properly underwrite our deals and remain focused on reducing debt costs and maximizing NOI.
Even though no two investors are exactly alike, there are patterns to investors, and generally speaking, they fall into two types:
• The Passive investor
• The Active investor
Knowing which type resonates best with you can help align your investing to your personality and lifestyle preferences. Having this self-awareness is key when it comes to achieving your desired outcome. To help you figure out the best path and to understand the differences, let’s dive into these two investor profiles.
The Passive Investor
This is the most common type of investor, although, I’ve noticed over the past few years, there are not a lot of educational resources to help clarify the passive side of real estate investing.
Common Traits of a Passive Investor Often Include:
• Lacks the time to frequently monitor investments
• Enjoys reading financial news
• Likes to own a little bit of a lot (values diversification)
• Seeks to match, not beat, the market
This type of investor is often unemotional about the investing process while being more “active” on the portfolio management side rather than on the investment itself. Passive investors have an understanding of multiple types of investments, as well as the overall associated risks.
Portfolio Investments May Include:
• Real estate syndications
• Private placement offerings
• Notes or hard-money loans
• Tax liens
• REITs (Real Estate Investment Trusts)
• Stocks, ETFs and other publicly traded assets
Generally speaking, this type of investor is proactive when selecting investments, and then tends to sit back and enjoy the ride. The philosophy? Primarily long-term buy and hold, hands-off investments.
The Active Investor
In contrast to the passive investor, an active investor may also enjoy reading financial news; however, they often spend several hours each week or month actively monitoring and managing their investments. This person may seek to have involvement in a number of areas in the investing process. An active real estate investor could be similarly compared to an active day trader who follows the stock market, even if they don’t execute dozens of trades each month. This kind of investor usually prefers a more hands-on approach to their investing. An active investor is often more interested in the “business” of a particular investment or industry.
Common Traits of an Active Investor Often Include:
• Likes to create their own unique strategy or business plan
• Doesn’t necessarily value diversification as a top priority
• Seeks control over his or her investments
• May have a unique skill or upper hand compared to competitors
• Seeks to beat the market
Generally speaking, this type of investor is actively involved when selecting and underwriting investments. The philosophy? Short-term and long-term, “do-it-yourself” approach.
More About Your Personality
Consider how you respond to financial transactions, emotionally. This can help you invest in a way that’s aligned with your comfort zone. For example, if you’re investing and you sometimes feel nervous about making a mistake, this is a sign to be aware of, especially if it causes you to buy or sell on a kneejerk reaction. As another example, if you tend to develop an emotional attachment to a certain stock or piece of real estate, this may cause you to hold onto the investment longer than you should, in hopes that it will rebound; this can hurt your investment portfolio returns.
If these two examples describe your personality type, you may decide that a passive investing approach is more suitable. No matter what investing decisions you make, there can be real value in having insight into your investing personality, which ultimately allows you to feel more comfortable with the investing process. The sooner you identify what suits you best, the better off you will be in the long-term.
Emotions connected to money and finance can be traced back as far back as your childhood. For example, if your parents were anxious about how to invest; you may have picked up that habit yourself. It is helpful to be aware of these emotion-based patterns and break them as soon as possible, so they do not hinder your financial future.
Understanding Your Risk Tolerance
How Do You Handle Risk?
There Are Four Common Personalities When it Comes to Risk:
If you are cautious, you may be extra sensitive to losses in your portfolio, and you may feel more comfortable with safer or more conservative types of investments. Fear is usually playing the primary role with this personality type.
If you are systematic, you likely make investment decisions based on hard facts and data. Details and analysis matter and this personality type will often refer to research to make a decision. This personality type can also have a lower risk tolerance, but will rely on “the facts” to make a decision.
A spontaneous investor often has a higher risk tolerance as does the individualist. If you’re spontaneous, you may quickly switch from one investment or strategy to another. Perhaps on advice or knowledge you’ve recently received, or because of a new developing trend. This personality type finds satisfaction from frequent change and new investing ideas.
Individualists, typically seek unbiased research and due diligence to make decisions independently. They are often willing to take calculated risks because they are confident in their research. New trends and media hype often do not persuade an individualist.
Getting Started
No matter what personality type you have or what your risk tolerance is, self-awareness is a key ingredient to a successful investment strategy. Whether active or passive, investing is not a short-term endeavor, so it is beneficial to take a little time to reflect on your goals, your strengths, and the lifestyle you desire.
Step one is to simply get started on your own self-awareness
Why Apartments Are “The Asset Of Choice” For Limited Partners
January 5, 2023
By: Travis Watts, Director of Investor Education
Large multifamily properties have historically been owned by institutional investors such as mutual funds, REITs, insurance companies, and pension plans because of the stability and yield that apartments offer.
Being a Limited Partner investor allows an accredited investor and in some cases, a sophisticated investor an opportunity to buy a passive ownership stake and participate in these same large real estate acquisitions; a 400-unit apartment building, as an example. The Limited Partners (individual passive investors) can experience the same buying power, leverage, and potential tax benefits, just as institutional investors do.
The individual passive investor has the benefit of owning a percentage of an apartment community without day-to-day management obligations. Additional benefits may include monthly or quarterly cash flow distributions, potential income sheltering through depreciation and tax benefits, debt leverage, principal pay-down, and potential appreciation in value.
Predictable Income
An apartment building’s revenue is derived from rents paid by the residents for leased units and other income-generating items such as covered parking spaces, fenced-in yards, coin laundry facilities, and on-site storage facilities, to name a few. A strong property management team will focus on attracting qualified residents to the property and carefully have lease agreements executed, often with contracts lasting 12 months or longer. These practices in turn, generate long-term, consistent cash flow for the Limited Partner investors.
Forced Appreciation
By making improvements to an existing property (known as a value-add business plan), the property’s value can increase through this repositioning process. By increasing rents and occupancy, higher levels of revenue are generated. Since multifamily apartments are primarily valued based on the income they produce, a value-add business model can in a sense, “force” the property to appreciate in value rather than relying on market conditions or annual inflation. When the property is refinanced or sold, the proceeds can be returned to the Limited Partners or in some cases, can be rolled into another “like-kind” investment property using a 1031-exchange to defer the taxes.
Steady Cash Flow
One of the greatest advantages of real estate investing is the steady, and often tax-sheltered, monthly cash flow. Few investments can be bought with the same kind of steady cash flow return combined with the appreciation potential.
Tax Benefits
Distributions made to the Limited Partners are treated more favorably than most other types of investments because a significant portion of the distributions are often not considered income according to the tax code. This is due to the flow-through of expenses and depreciation. Additionally, the capital appreciation is deferred from taxation until the assets are sold and may be further deferred from taxation if a 1031-exchange is implemented.
Total Returns
An apartment’s combination of stable cash flow (primarily derived from rents), capital gains (resulting from increased property value upon sale), principal paydown (from residents paying down the loan balance over time) and tax savings (due to the current IRS rules and the additional benefits from the Tax Cuts and Jobs Act passed in 2017) provide returns that can be quite impressive given the current state of the stock market and the lack of yield offered by banks, money markets, CDs, and bonds.
A Hedge Against Inflation
Historically speaking, rents, property values, and the replacement cost of real estate improvements rise with inflation. This makes real estate a particularly effective hedge against inflation, and might be an asset class to help you balance your investment portfolio, especially in the low yield environment we are in today.
Ownership of Real Estate
Passive investors desiring steady income with a balance between risk and reward, may consider multifamily apartment investing as a Limited Partner to provide a solid foundation for building lasting wealth. Additionally, the ability to use a “hands-off” investing approach can be useful in building passive income streams that, in turn, free up time to spend on what matters most to the individual investor.
As Good As It Gets: Multifamily Apartments In 2023
January 3, 2023
By: Travis Watts, Director of Investor Education
The news about today’s economy sounds bleak – “Are we going to enter a recession?” “Are we already in a recession?” “Did you hear the Fed raised interest rates again?” “When is inflation going to peak?”
While much can be said about the current state of the U.S. and global economy at large, savvy investors are not without opportunities to profit during volatile times.
Did you know $63 billion dollars was invested in multifamily apartments during the first quarter of 2022? That is 56 percent more than Q1 of 2021.[1] People need a place to live and we have been behind as a country since around the year 2000 in keeping up with demand for safe, affordable, workforce housing. While the dramatic increase in home prices and rising interest rates have put a pause on many people’s dreams of homeownership, it has also pushed demand for apartments and rental properties.
Let’s examine some recent history of when we experienced elevated levels of volatility and uncertainty in the United States.
MULTIFAMILY APARTMENTS – LESSONS FROM RECESSIONS
Recessions are seemingly unavoidable and present plenty of reasons for investors to question how their investments will fare in a downturn. Between 2007 and 2010, The Great Recession occurred, and vacancy rates spiked to the highest levels since the 1960s.[2] For multifamily property owners, that meant for every 100 units you owned, 10 were vacant or unrented. The percentage quickly spiraled down after 2010 as people who lost their homes and jobs needed affordable apartment housing to rent. So, even though vacancy rates shot up in the short-term, they recovered about a year later, and this proved to be a temporary setback.
Let’s take a look at the overall revenue change in multifamily apartments. During the Great Recession, revenue did indeed fall in 2008.[3] Then In 2009, while still amid the recession, revenue started growing again because of the demand placed on apartments. Take note, that Class B properties quickly returned to their pre-recession levels and were less impacted than Class A and Class C properties during the recession.
REAL ESTATE PROPERTY CLASSES AT-A-GLANCE
Class A: properties that generally were built in the last ten to fifteen years Located in prime locations, highest rents, new amenities, luxury communities, little to no deferred maintenance.
Class B: properties that generally range from ten to thirty years old. usually offering standard amenities, such as in-unit laundry, pools, and on-site fitness facilities, may be located outside of a major metropolitan market, due to their older age, often have deferred maintenance and may be slightly out of date.
Class C: properties with varying risks, including the age of the building, potentially located in a less desirable location, generally have lower income tenants. These apartments are often in a state of neglect, and may lack amenities such as a pool, fitness center, or community areas.
During The Great Recession, government-backed commercial real estate loan issued by Fannie Mae and Freddie Mac did see an increase in defaults but at mild levels of less than a one percent demonstrating the strength of this asset class.
Today, homeownership rates continue to decline due to housing affordability and access. [4] An increase in remote work in the post-Covid era, institutional buying of single-family homes, and mortgage rates nearly doubling over the past year has led to less inventory and greater competition, making homeownership even more expensive and less attainable for many. As home prices and interest rates soar, many consumers have found themselves priced out, and as a result, the demand for multifamily apartments has increased considerably.
Did you know there is currently half the volume of housing inventory compared to 2019 levels? Delays, worker shortages and inflation are increasing construction timelines and while 900,000 units are now under construction, another 3.7 million units will need to be built by 2035 to balance the supply shortage.[5]
Recession fears, combined with rising interest rates and high prices, have made consumers more cautious when it comes to purchasing a home versus renting. Given the economic outlook, multi-family real estate investments are assets uniquely positioned to weather a downturn.
RENT GROWTH AND RISING INTEREST RATES
In 2021, we saw historically high rent growth, with rents starting to climb in February due to inflation and demand.[6] Rental markets have experienced higher rent growth in the past 18 months than in the five years leading up to 2020.[7]
Multifamily apartments have historically held their ground during recessions and in the face of rising interest rates. High rent growth and an increase in demand help to strengthen returns, and if apartment rents continue to rise with inflation, this will also help offset rising interest rates.
Additionally, multifamily apartments have also been a good hedge against inflation. The figure below shows multifamily apartment returns compared to the CPI inflation over the last decade. In the last 10 years, the total return in multifamily has outpaced inflation every single year, averaging an excess return of 5.83% after adjusting for inflation.
Though interest rates have risen considerably over the past year, record-setting rent growth has effectively outpaced the additional costs associated with the rate increases to help make the case for multifamily apartments during this downturn.
KEY TAKEAWAYS
If apartment rents continue to rise with inflation, this can help offset rising interest rates and help multifamily apartments to remain an inflation-resistant investment vehicle.
If a lack of multifamily apartment inventory persists prices should remain
If the occupancy, collections, and net operating income continue to hold or increase, equity in multifamily apartments will be better protected
If homeownership continues to decline and housing remains unaffordable consumers will need to rent.
ASHCROFT CAPITAL AND MULTIFAMILY INVESTMENTS
National multifamily rent growth has risen more than 10 percent on a year-over-year basis, with Florida (specifically, Orlando, Miami, and Tampa), Dallas, and Nashville leading in rent growth.[8] Currently, Ashcroft Capital’s communities are located in the growth markets of the Sun Belt region, including Atlanta, Dallas-Fort Worth, and Orlando, which experienced 14 percent, 17 percent, and 24 percent year-over-year growth, respectively, all exceeding the national average.
At Ashcroft Capital, we have a proven track record of creating value through renovating, rebranding, and repositioning our investment properties. We buy existing cash flow-positive, high-quality, well-located properties in markets with strong multifamily fundamentals, employment growth, and population growth.
Ashcroft Capital is vertically integrated = – not only do we purchase multifamily properties; we also manage our properties after acquisition via Birchstone Residential and Birchstone Construction – both in-house and wholly owned subsidiaries of Ashcroft Capital. Birchstone Residential manages the properties providing an unparalleled renter experience with superior service, maintenance, and digital marketing for the properties. Birchstone Construction performs large-scale, value-add renovations with efficiency and with complete control of the construction process from start to finish. These integrations streamline our management structure, allowing us to make decisions quickly and act decisively. By having our own in-house construction group, we are able to work directly with manufacturers, which has reduced our materials costs by roughly 35 percent. And by not having to work with third-party contractors, we are better able to manage our renovation timelines.
Ashcroft Capital owns over 12,500 rental units, with over $2.5 billion in assets under management. We have taken 26 deals full cycle, all the way from purchase to sale. Our net return to investors after all fees has been 21.7 percent annualized (This IRR return includes both cash flow as well as an equity return on investment for properties sold). This historic return represents a 1.8x multiple.
The Ashcroft Value-Add Fund III (“AVAF3”) is open for enrollment. We introduced for AVAF3 our Ashcroft Investment Incentive, which provides the opportunity for you to see a larger return the more you invest. With our new waterfall structure, as a Class B investor, you have the potential to receive a higher return on your investments.
Many questions regarding AVAF3 are answered on our AVAF3 deck. Read more about the opportunities that the Sunbelt market offers and our continued efforts focused on capital preservation and reducing risk to our investors. To start your investment, enroll here.
In the fourth episode of Multifamily Market Report I cover inflation, the impact of inflation on the real estate market, what we saw last year and this year, and what we might expect in 2023.
Multifamily apartments are a resilient asset class, and we can see this by looking at past recessions, such as the dot-com crash, the Great Recession, and the Pandemic Recession. In general, multifamily performs well in up-trending markets, flat markets, and even in declining markets. Let’s uncover why that is.
According to research by Coldwell Banker Richard Ellis (“CBRE”), if we look at the national stats, in preexisting class B apartments during the Great Recession (2008–2010) rents fell by only $125 per month. The recovery was quick as Americans needed affordable housing during the recession, and many lost their homes. Once rents bottomed out, the rent decline was short lived. It took less than two years to get back to prerecession rent pricing levels.
So what’s happening right now? Looking at the government’s consumer price index (CPI) reading (you can learn more at www.bls.gov) reveals that we’ve been running at 40-year high inflation. The CPI measures the increase in the cost of goods, services, housing, and so on. All items are indexed into a “basket of goods” that allows the government to measure the inflation rate. The government runs the numbers every month, and that’s how it comes up with the annualized inflation rate. We have been running hot on inflation (7%–9% annualized) for the majority of 2022.
While inflation is not necessarily good news for consumers with the cost of groceries, gas, and everyday essentials increasing, there is a silver lining for multifamily apartments.
You may have seen headlines over the past two years stating that home building costs have risen at unprecedented rates. In fact, the cost of materials required to build an average-sized, single-family home increased 42 percent from 2018 to 2021, adding material costs of roughly $35,000 to the total cost of building. With inflation pushing up the price of materials, preexisting, multifamily housing tends to follow the inflationary trend as the cost of and demand for affordable housing increases as well. As single-family homes become more expensive, more people are priced out of the market, resulting in a higher demand for apartments. As a result, there is a severe nationwide shortage of affordable, safe, workforce housing.
You can think of it like this: Let’s say a real estate investor bought a single-family home in 2020 and rented it out. If the investor paid all cash and charged $2,500 per month in rent and the expenses for owning that property were $500 per month, the investor would net $2,000 per month. If we multiply that by 12 months, we get $24,000 per year in cash flow. Last, if we take that $24,000 and divide by the purchase price of the home (we’ll call it $300,000), that results in an 8 percent annualized return.
Because the housing market went up between 2020 and 2021, the investor decided to sell that property for $400,000. As a result, the next buyer must figure out how to make a profit based on the higher purchase price. If the next investor decided to buy the property at $400,000 and did not increase the rent, the new owner would be looking at a 6 percent annualized return instead of the previous 8 percent. So in order to generate an 8 percent return (assuming that is the goal), the new buyer would need to raise the rent to $3,150 a month. The following is the breakdown of how the 8 percent annualized returns would be generated:
– Monthly holding cost is $500
– Net profit is $2,650 per month
– Multiplied by 12 months equals $31,800 annually
– Divide by the purchase price of the home ($400,000)
– The result is an 8 percent annualized return
The simple takeaway is that with high inflation, rents tend to increase. What we have not addressed yet is a value-add business plan. Value-add refers to adding value to both the residents and property through renovations and upgrades. Some examples of value-add would include the following:
– Renovating apartment units and the clubhouse
– Improving the landscaping
– Renovating or adding amenities (e.g., pools, gyms, dog parks, and barbecue areas)
– Adding resident features (e.g., covered car parking, fencing for ground-level yards, package locker systems, in-house security systems, USB charger outlets, smart thermostats)
A value-add business plan can create an updated look and feel and provide a safer and nicer place to live. Because the residents have a higher quality of life, there can be justification for raising the rents. That is another way investors can benefit despite the general market trend.
Of course, it’s not all good news. Inflation’s running at 40-year highs, and the Fed Funds Rate today has not increased to where it was in the early 2000s (around 6.5%) and is not even close to the all-time highs of the 1980s. To help tackle inflation, the Federal Reserve has been raising rates all year, and it has suggested there are more rate hikes on the horizon. And with the higher interest rates, more borrowing costs are passed on to the next buyer.
When mortgage rates increase from 3 percent to 6 percent, as we have seen over the past year, it makes buying real estate more expensive. If we consider a 30-year fixed rate mortgage at 3 percent interest and a loan balance of $300,000, the payment falls somewhere around $1,265 per month. But if we raise the interest rate to 6 percent, the payment is closer to $1,799 per month.
This is what we’re experiencing this year, and it leaves investors with two options. You could try to negotiate a discount and ask the seller to reduce the price of the property to help offset the higher borrowing costs, or you could buy the property anyway and look for ways to raise the rent.
The first option has a negative impact on real estate pricing. If price cuts start happening on a large scale, this brings comparable sales down, which drags the price of real estate down. But the second option—raising rents—is an opportunity for investors. Rents rising with inflation, combined with a value-add business plan and discounted properties due to interest rates, may be the opportunity of 2023.
A few things to consider in 2023 if you’re going to be investing:
#1: Understand that real estate is local. For example, according to Yardi Matrix, San Francisco multifamily properties experienced only a 4 percent annual rent growth in 2021 whereas Tampa experienced more than 20 percent growth.
#2: The type of business plan you consider is important. For example, with an existing multifamily that already has renters in place, you have the ability to raise rents whereas a new developer does not have renters yet and may have higher interest rates to consider on construction loans. The developer also has higher labor costs to consider, nationwide worker shortages, and worldwide supply chain issues. In addition, if interest rates continue to rise, the property’s potential selling price may be lower once it’s completed.
#3: The type of real estate you choose matters. Multi-family, single-family, self-storage, hotels, retail, medical offices, industrial, and mobile home parks all fall under the category of real estate, but each is unique. For example, office rents were up 1.2% year-over-year as of August 2021-2022. At the same time, multi-family rents were up over 10% nationally according to Yardi Matrix.
Final Thoughts:
Inflation can be positive or negative depending on your investment strategy. 2023 is a year to use caution, conduct proper due diligence, and invest wisely with experienced operators who are underwriting conservatively.
“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.” – Warren Buffett
