By: Ben Nelson, Investor Relations Regional Manager

Investing can be exciting, and sometimes frustrating, but it is one of the greatest ways to build long-term wealth. For most investors, a singular and all-important question remains paramount: “How should I diversify my assets?” Those who have accumulated enough wealth to consider investing can find no shortage of strategies to minimize risk while maximizing returns. While many of these strategies work (until they don’t), some have withstood the test of time. One of those strategies is known as Modern Portfolio Theory (MPT).  

Put simply, MPT is the process of constructing a diverse portfolio of assets to drive strong returns, while reducing overall risk. Modern Portfolio Theory is founded on the idea that different investments and investment classes inherently carry different levels of risk and return. By diversifying your portfolio across multiple types of investments and asset classes with different risk/reward profiles, you can reduce the overall risk of your portfolio and still participate in positive performance. This theory is less about beating market indices year over year, but about a steady advance of your portfolio over a longer time horizon. 

In this article, we will discuss how investors use the Modern Portfolio Theory to create a diversification strategy to maximize portfolio performance while accounting for an acceptable level of risk. We will also discuss alternative investments, such as real estate, and how they fit into a diversified portfolio. 

Lessons from the Past: Looking Backward to Move Forward 

Modern Portfolio Theory is based on a concept called the Markowitz Efficient Frontier or Efficient Frontier. American economist and Nobel Laureate, Harry Markowitz, first proposed this theory in a 1952 issue of The Journal of Finance. Markowitz argued that portfolios should optimize expected return relative to volatility. He also asserted that a portfolio’s assets should be selected based on how an asset will impact others as the overall value of the portfolio changes.[1]  

The graph below illustrates this concept and the level of risk an investor should be willing to assume in order to achieve higher returns. The line represents all possible combinations of risk versus reward that can be obtained through diversification. Riskier investments will have a higher potential return, but also greater volatility and potential for losses. 

The illustration shows that a portfolio that falls outside the Efficient Frontier is suboptimal because it either carries too much risk relative to the anticipated return or too little return relative to its risk. If a portfolio falls below the Efficient Frontier, it does not allow for enough return compared to the risk level being taken. In contrast, the illustration shows that a portfolio whose anticipated return falls on the upper portion of the curve is considered optimal, maximizing the investor’s expected return based not only on overall market risk, but risk relative to the other investments in the portfolio. 

Markowitz believed that most investors are risk-averse and would select assets in a portfolio with the least risk, even with the possibility of lower returns.[2] Using MPT, an investor will consider how much risk they’re willing to take against the return they expect from their investment. 

Correlation measures how different assets move together or against each other over time. If two different assets have a high correlation (i.e., 0.85 to 1.00), they tend to react similarly. If they have a low correlation (i.e., 0.10 to 0.00), they tend to move in different directions at different times. According to the MPT, diversifying a portfolio across asset classes with lower correlations to each other could reduce investors total risk. Markowitz stresses that investors who can diversify and reach zero or near zero correlation between assets can minimize the volatility of their portfolio and maximize their expected returns on a risk-adjusted basis.[3] 

Risk is measured in terms of volatility and can be categorized into systematic and unsystematic risk.[4] 

Systematic risks affect all assets in an economy simultaneously. Interest rates, inflation, recessions, and geopolitical conflicts are all examples of systematic risks. Unsystematic risk refers to risks that affect only a particular asset or group of assets (e.g., a product recall or natural disaster). Once an investor has determined their level of risk tolerance and expected return, they can create a diversified portfolio that effectively manages both types of risk. 

Achieving Optimal Diversification 

Based on the MPT an important first step is to decide on an asset allocation strategy that suits the investor’s tolerance for risk. Asset allocation refers to the percentage of your portfolio invested in different asset classes (e.g., stocks, bonds, alternatives, real assets, cash). Asset allocation is an ever-evolving process, as market environments (and your personal situation) can shift quickly. 

Depending on the different asset classes an investor selects, they may reduce their overall exposure to any one type of risk. The crux of the MPT is to create a balanced portfolio that includes assets that tend to do well when the economy is growing and when the economy is contracting. 

Alternative assets, like private multifamily real estate funds, typically exhibit a low correlation with traditional assets. In addition, real assets, such as real estate, traditionally hold their value, even during recessions, as value is retained in the land. 

Introducing Ashcroft’s Value-Add Fund III 

Real estate funds like the Ashcroft Value-Add Fund III (AVAF3) differ from syndications by investing in multiple deals rather than a single property. The fund is structured so that investments are allocated across multiple properties in multiple states, creating diversified sources of return and mitigating concentration risk. Along with income generation, Value-Add Fund III will allow investors to participate in the upside potential of a portfolio of real-estate assets in different areas of the United States.  

The Ashcroft Value-Add Fund III (AVAF3) is an open private placement fund for accredited investors interested in diversifying their retirement and wealth portfolios into multifamily real estate. 

If you would like to learn more about investing in multifamily assets, visit https://info.ashcroftcapital.com/fund, or schedule a call with our Investor Relations Team at investorrelations@ashcroftcapital.com.

ben@ashcroftcapital.com

Sources:

1. Portfolio Selection. Retrieved September 23, 2022, from The Journal of Finance, Vol. 7, No. 1. (Mar., 1952), pp. 77-91. https://www.math.hkust.edu.hk/~maykwok/courses/ma362/07F/markowitz_JF.pdf
2. What Is Modern Portfolio Theory (MPT) and Why Is It Important? thestreet.com™. (n.d.). Retrieved September 30, 2022, from https://
   www.thestreet.com/investing/modern-portfolio-theory-14903955
3. Ibid.
4. Ibid.

Join Ashcroft’s Director of Investor Education, Travis Watts for his series, “Multifamily Report: Market News and Industry Updates.” Tune in weekly as Travis keeps you up to speed on what’s happening in the news and market as it relates to multifamily apartments.

In this episode of Multifamily Market Report, Travis draws attention to rising interest rates and what you can do to help protect yourself against them. There has been a lot of talk about interest rates recently. While nobody can predict the future, what we can talk about is what you do in multifamily apartments to help preserve capital, increase net-operating-income, and combat interest rates.

• Interest Rate Caps
• Assumable Loans
• Interest Only Long Term Loans
• Ability to purchase property at a discount

Please take a couple of minutes to watch the video below.

To learn more or schedule a time to talk to Travis, visit https://www.ashcroftcapital.com/travis/.

Watch more episodes here.

travis@ashcroftcapital.com

By: Danielle Jackson, Investor Relations, Senior Manager

Join Ashcroft Capital’s Investor Relations Senior Manager, Danielle Jackson, for her series, “3 Minutes of Real Estate.” Tune in to our YouTube channel weekly for an easy 3 minutes of learning about investing in real estate.

In 2021, Ashcroft Capital switched from a one-off syndication structure to a fund model, and since has successfully closed 2 funds with our third, the Ashcroft Value-Add Fund 3 open. On this edition of 3 Minutes of Real Estate, Danielle discusses the purchasing power of the fund model. The fund model creates a more positive perception that you can achieve greater success with:

• Having cash on hand to close on the property
• Your ability to raise the capital quickly
• Presenting your built-in investment process –
• Completing/conducting due diligence and securing debt financing

Take a couple minutes to watch the video. If you would like to learn more about investing in multifamily assets schedule a call with our Investor Relations Team at investorrelations@ashcroftcapital.com.

Start your investment here.

danielle@ashcroftcapital.com

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, largely due to the capital required to acquire them. 

Real estate private placement offerings provide accredited investor(s) the opportunity to invest and have an ownership stake in large real estate acquisitions (i.e. a 400-unit apartment building). The Limited Partners (investors) can benefit from passive income, debt leverage, tax benefits, and potential equity upside. Rather than investing $25 million to buy the property on their own, an individual can invest as little as $25,000, for a stake in a commercial property.  

Better yet, a limited partner investor has the benefit of owning a percentage of an apartment community without the day-to-day management obligations. No managing tenants, toilets, termites or underwriting deals. 

Passive Income 

An apartment building’s revenue is derived from rents paid by the residents for leased units and other income-generating items: covered parking spaces, fenced-in yards, laundry facilities, on-site storage facilities, package locker systems, profit sharing programs with internet and TV providers, etc. A property management team will focus on attracting qualified residents to the property and will have lease agreements executed, often with contracts lasting twelve months or longer. These practices then can generate long-term, consistent cash flow for Limited Partner investors. 

Forced Appreciation 

By making improvements (updated amenities and units) to an existing property, also known as a “value-add” business plan, the property’s value can increase; therefore, increasing rents once the renovations have been completed. With the combination of higher rents and occupancy, higher levels of revenue can be generated. Since multifamily apartments are primarily valued based on the income they produce, a value-add business model can “force” the property to appreciate in value, rather than relying on market conditions or inflation. When the property is sold, the proceeds are returned to the Limited Partners and, in some cases, can be rolled into another “like-kind” investment property using a 1031-exchange to defer any taxable gain at the time of sale. 

Steady Cash Flow 

One of the greatest advantages of real estate investing is the steady monthly cash flow generated from rent and other sources of revenue.  

Tax Considerations 

If a partnership (including for this purpose any entity treated as a partnership for U.S. federal income tax purposes) is a Limited Partner, the U.S. federal income tax treatment of a partner in the partnership generally will depend on the status of the partner and the activities of the partnership. A Limited Partner that is a partnership, and the partners in such partnership, should consult their own tax advisers about the U.S. federal income tax consequences of an investment in the Partnership. 

Many private placements syndicators issue a Schedule K-1 tax form to report each limited partner’s annual share of the partnership’s income, deductions, credits, etc.  

The tax considerations relevant to a particular Limited Partner depend upon its particular circumstances and state of residence.  Please consult with a licensed CPA or tax advisor for more details. 

How Does a 1031 Exchange Work with a Syndicator R.E. Fund? 

In the event that an investment is sold, the real estate syndicator may seek to structure such sale to qualify, in whole or in part, as a like-kind exchange pursuant to Section 1031 (as amended or replaced from time to time), or other applicable tax deferral or savings provisions of the U.S. Internal Revenue Code, to the extent available, with providing each Limited Partner with the right to contribute such Limited Partner’s Partnership Interests to a newly formed investment vehicle on a tax-deferred basis for a capital account in such investment vehicle in the amount of the Liquidation Value of such Limited Partner’s Partnership Interests with respect to such properties. 

“Liquidation Value” means the amount that a Limited Partner receives upon an actual sale, or would have received upon a hypothetical of the relevant Properties at their then Fair Market Value, and distribution of the net proceeds of such sale (i.e., in the event of a hypothetical sale, the Fair Market Value less any Fund Expenses and other transactional expenses related to such sale, assumed in the case of a hypothetical sale as 3% of such Fair Market Value) to the Partners through the Fund’s distribution waterfall.[1]

IRA Investing 

Many investors are not aware that they can invest in real estate private placements using a self-directed IRA. Currently, there are over 30 trillion dollars in American retirement accounts nationwide.1 The private equity sector has been recently reaching all-time highs and helps to provide investors diversification from traditional stocks, bonds, and mutual funds. 

Self-directed IRA’s are held by a custodian that allows investments in a broader set of assets.  These are “alternative assets” such as real estate, promissory notes, tax lien certificates, and private placement securities.  Therefore, investors are encouraged to conduct their own due diligence on investments, pay attention to the details, and to talk with a qualified legal or investment advisor.[2] 

Total Return 

The combination of 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 potential tax savings (based on the current IRS tax code) can provide an overall potential return that is unmatched by many asset types. 

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, especially in the low-yield environment we are in today. 

Private Ownership of Commercial Real Estate 

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 free up time to spend on what matters most to the investor. 

If you would like to learn more about investing in multifamily assets, visit https://info.ashcroftcapital.com/fund, or schedule a call with our Investor Relations Team at investorrelations@ashcroftcapital.com. 

travis@ashcroftcapital.com

Sources:

1. $35 Trillion in Retirement Savings Tells a Tale of Two Economies™. (n.d.). Retrieved January 20, 2023, from https://www.planadviser.com/35-trillion-retirement-savings-tells-tale-two-economies/2 SEC.gov | Investor Alert: Self-Directed IRAs and the Risk of Fraud
2. SEC.gov | Investor Alert: Self-Directed IRAs and the Risk of Fraud

By: Annalisa Povlock, Investor Relations Regional Manager

Many investors look to real estate syndications for passive income and capital preservation. Real estate offers many benefits, such as lower volatility than other asset classes, a low correlation to stock market performance, a hedge against inflation, and the opportunity for depreciation.   

A real estate syndication is a group of individuals who pool their money to invest in a property or in a fund model—several properties. Syndication opportunities exist in all asset classes of commercial real estate, including multifamily, hospitality, office, retail, self-storage, mobile home parks, and industrial.   

Syndication opportunities are typically structured as limited partnerships; those who invest passively are referred to as the limited partners. The general partner, or syndicator, actively manages the deals, establishes the team, assembles the resources, and manages the day-to-day responsibilities to execute the business plan.   

We understand that investors have many options to consider when deciding with whom to place their hard-earned funds. Investors often wonder if they are asking sufficient questions and how to compare one investment opportunity to another.   

We talk about assessing deals and syndicators in our Passive Income Workshops, and we would like to share some of that information with you.  

First, there are key financial metrics that should be available to potential investors for any deal. These are the following: 

• Preferred return: This is also referred to as the “coupon.” This is a legal term for the agreed-upon return the general partner must pay the limited partners prior to splitting the profits. 
• Cash-on-cash return: This is an annualized percentage that shows the total cash flow received from an investment divided by the total investment amount. 
• Internal rate of return (IRR): This is a similar measure to cash-on-cash return, except it considers the time value of money. IRR can be helpful to reference when comparing different syndication opportunities with different hold periods.   
• Equity multiple: This is similar to cash-on-cash return, except it is shown as a ratio instead of a percentage. For example, if $100,000 is invested, $80,000 is paid in distributions over the course of the investment period, and the initial investment is returned, the equity multiple is 1.8x.  

In addition to these important financial metrics, here are some questions to ask syndicators. This is not an all-inclusive list, but it is a great place to start in your conversations and due diligence.   

• What is your track record? 
• What is your business plan? 
• Who operates your day-to-day deals? 
• What is the minimum investment? 
• Will you share references of existing investors? 
• Is this a single asset or a fund structure? 
• What has been your experience through previous recessions? 
• How frequently do you communicate with your investors? 
• What percentage of your investors invest with you multiple times? 
• Are your returns gross or net of fees? 

What questions or information would you add to this list? We would love to hear from you.   

At Ashcroft Capital, we focus on multifamily syndication, and to date, we have taken 26 properties full cycle. You can view more information about our current offering, the Ashcroft Value-Add Fund 3, here.  

Please reach out to me at Annalisa@AshcroftCapital.com to ask questions and to learn more. 

By: Ryan Wynkoop, Investor Relations Manager

One of the critical elements for maintaining and driving consistent NOI growth, high occupancy rates, and overall tenant satisfaction is being a vertically integrated multifamily operator. Ashcroft recognized these were key needs for us as a company to support our growth and establish a successful model for the long term. It was clear, as our company grew, that a robust operations team was required to oversee property management, engineering, and construction management. This is essential not only during times of robust growth but also during times of a tightening market, which many in the industry see as a differentiator for successful owner operators in the industry outlook for 2023. [1]

Ashcroft has an in-house robust, comprehensive property management and construction management team in Birchstone Residential. Birchstone was established in 2020 and manages all the properties in the Ashcroft Capital portfolio—currently 37 properties and growing. This growth has enabled Birchstone to quickly expand to more than 400 people and required establishment of a tight system for overseeing operations while managing capital projects and apartment renovations as properties are taken through the Value-Add process. 

Ashcroft and Birchstone hold a wonderful partnership in maintaining vibrant communities for tenants and improving the properties we acquire while generating a return for our investors. We wanted to take a moment to highlight the role they play and how critical it is to our success as a firm.   

ryan@ashcroftcapital.com

https://info.ashcroftcapital.com/fund

Sources:

1. Multifamily Dive. “2023 Multifamily Industry Outlook.” https://www.multifamilydive.com/trendline/multifamily-trends-outlook-2023/308/  

Join Ashcroft’s Director of Investor Education, Travis Watts for his series, “Multifamily Report: Market News and Industry Updates.” Tune in weekly as Travis keeps you up to speed on what’s happening in the news and market as it relates to multifamily apartments.

In this episode of Multifamily Market Report, Travis walks us through the most recent CBRE report that recaps multifamily in 2022 and provides a forecast for the market in 2023.

• How is multifamily expected to perform in 2023?
• Is the price gap between owning a home verse renting growing?
• Will supply and demand balance out this year?
• Will cap rates continue to expand in 2023?

Please take a couple of minutes to watch the video below.

To learn more or schedule a time to talk to Travis, visit https://www.ashcroftcapital.com/travis/.

Watch more episodes here.

travis@ashcroftcapital.com

By: Travis Watts, Director of Investor Education

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? In fact, the financial literacy rate among Americans has decreased from 42% to 34% since 2009.[1] At Ashcroft Capital, we are committed to educating investors on navigating commercial multifamily real estate investments. As part of our mission, we are hosting Building Passive Income Workshops around the country. 

When your passive income exceeds your lifestyle expenses, you are financially free.

If you are looking to create more passive income, you might want to consider the many benefits that real estate has to offer. Passive income investing is a way to put more money in your pocket while freeing up your time. This strategy allows you to expand your lifestyle without the hassle of becoming a landlord. Investing in real estate is ideal for those who prefer a more conservative approach to growing and preserving wealth, and the great news is you can begin today even if you do not have past experience.  

At our Building Passive Income Workshops you will learn:

– The power of passive income 

– How to create passive income through real estate 

– How to become an investor, rather than a landlord  

Register for a workshop in your area today:

4/18/2023 Tampa, FL

4/19/2023 Tampa, FL

4/25/2023 Cincinnati, OH

4/27/2023 Cincinnati, OH

5/15/2023 Phoenix, AZ

5/17/2023 Phoenix, AZ

About Ashcroft Capital:

Ashcroft Capital currently manages 12,814 units throughout Florida, Georgia, North Carolina, and Texas. Our national reputation has attracted thousands of investors just like you. We purchase well-located properties in Sun Belt states that need improvement. By improving the properties and focusing on operational efficiencies, we create value for our investors and our residents. Simply put, we do the heavy lifting for you so that you can focus your time on the things that matter most.  

Ashcroft Capital attracts and develops the best talent in the industry to serve our investors and residents while providing superior service. If you would like to learn more about investing in multifamily properties, please visit https://info.ashcroftcapital.com/fund or schedule a call with one of our investor relations team members today at investorrelations@ashcroftcapital.com. 

travis@ashcroftcapital.com

Sources:

1. The State of U.S. Financial Capability: The 2018 National Financial Capability Study, FINRA Investor Education Foundation, 2019. 

Workshop Disclaimer:

Ashcroft Capital LLC is not an investment adviser or a broker-dealer and is not registered with the U.S. Securities and Exchange Commission. The content shared throughout this workshop is for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice. Any ideas or strategies discussed therein should not be undertaken by any individual without prior consultation with a financial professional for the purpose of assessing whether the ideas or strategies that are discussed are suitable to you based on your own personal financial objectives, needs and risk tolerance.

By: Danielle Jackson, Investor Relations, Senior Manager

Join Ashcroft Capital’s Investor Relations Senior Manager, Danielle Jackson, for her series, “3 Minutes of Real Estate.” Tune in to our YouTube channel weekly for an easy 3 minutes of learning about investing in real estate.

On this edition of 3 Minutes of Real Estate, Ashcroft Capital’s  Danielle Jackson, walks us through what Ashcroft Capital’s strategy is to stay active and continue acquiring properties in the current multifamily market.

Investor Question: In this market environment, where there is some volatility in capital markets and rising rates, how is Ashcroft Capital staying active?

• Acknowledging that where there is market dislocation, there is opportunity.
• We are sourcing and identifying the right deals using our disciplined underwriting approach.
• Identifying opportunities where the purchase price is less than the current market evaluation.

Take a couple minutes to watch the video. If you would like to learn more about investing in multifamily assets schedule a call with our Investor Relations Team at investorrelations@ashcroftcapital.com.

Start your investment here.

danielle@ashcroftcapital.com

By: Evan Polaski, Investor Relations Managing Director

Conferences are a great way to meet new people, while boosting your personal and business investment profiles.  As we are becoming fully entrenched in an unavoidable recession, these connections can help bring your personal and business objectives out unscathed.  Whether the outcome is seeking new investment options, a partner to launch a new business, investors to help fuel that business, or simply a desire to connect with people and add value to their goals, it all starts with networking.  

Conferences, like the Best Ever Conference, are known to foster advancement on attendees’ goals, but only through effective networking.  Here are five steps to get the most out of any networking event: 

1. Know Your Goal

Before you ever set foot in the conference venue, you should know the answer to:  

“If I only get ________ out of this conference, it will have been a success.”   

This will vary for each attendee.  Some will be arriving to learn more about investing and to meet different operators in order to broaden their investment options. Others may be looking for a business partner to launch a new endeavor. Some may be pursuing an investor to expand their existing business.  

Regardless, be prepared to meet said investors, podcasters, or others who are accomplishing the goals you wish to accomplish.  Enter the conference with a growth-mindset and a willingness to find value from each interaction.  These interactions can form a lasting impression and could be an incredible boost to your own ventures. 

Be cognizant of the importance of building an infrastructure of solutions, not just meeting investors.  Being in a referral position that also helps others meet their needs can generate a positive reputation in investment circles.     

Lastly, as Benjamin Franklin said, “If you fail to plan, you plan to fail.”  

2. Do Your Research  

Ideally, a conference will offer a list of attendees ahead of time. Use this list to begin connecting to a “target person” or building a “target list” (i.e. LinkedIn searches, google searches).  Through these searches, scaffold background information to find shared interests.  This serves two functions: 1. you may find someone else who has a skill set or association that the “target person” needs; therefore, securing a way to approach them through mutual benefit and/or 2. you may find a commonality between interests to encourage authentic conversation. 

Nonetheless, if your aim is to learn more about investment opportunities, a conference like the Best Ever Conference is ripe with benefits. Even without an attendee list, you will be able to view the speakers, many of whom run investment businesses themselves.   

And, if the conference attendee list is not available, utilize social media and online forums to tap into your existing network.  Make inquiries about who will be attending the conference. On online forums, like BiggerPockets.com, there tends to be entire discussions about conferences and who is attending.  Creating and nurturing connections with others is crucial; therefore, completing the research into who will be attending these conferences will create the best possible networking results for you. 

3. Be Ready to Add Value to Those You Meet 

Your goal is outlined, you have a target list of people you would like to meet, now it is time to complete a self-assessment of your current strengths and where you can add value to each of these connections.   

If your goal is to find and meet with investment managers, your value is the possibility of a future investment. If you are focused on staying active, you may have an outgoing personality and a network of potential investors, but are not comfortable with the underwriting and day-to-day operations of the business. 

The primary point is to think of what you can offer, not what you need.  Humans have two ears and only one mouth, so ask questions, seek to find the challenges of others, and propose possible solutions.  Helping resolve challenges opens others to be able to view you in a positive light, thus encouraging the connections you want to seek you out.  Providing value in this way requires a long-term outlook, while simultaneously providing a most advantageous result. 

In addition, the goal of a conference should be quality over quantity.  Diving past the surface level conversations to create valuable and meaningful connections will be more conducive to long-term goals. 

4. Follow-Up  

Keep in mind, meeting and shaking hands with people are just the beginning. The real work in any relationship comes from the maintenance.  Contrast one of your good friends asking for help versus someone you have not spoken to in over a year.  One feels genuine and is likely to receive a positive response, where the other likely gets ignored.   

In professional networks, the goal is not always to become best friends; however, like any relationship, you need to build up your “emotional bank account.” This comes from follow-up conversations, creating authentic, respectful relationships, and building professional trust before seeking anything more from them.  In personal relationships, researcher centers around a 20:1 ratio of positive interactions to negative interactions. The ratio is most likely smaller in professional relationships, making each interaction extremely important.  Positive responses are obtained through contacts of value prior to that point: follow-ups, follow-through, and simple acts of kindness. 

5. Stay Open-Minded 

Open-mindedness, arguably the most important step. As humans, we all have a limited amount of knowledge: we “don’t know what we don’t know.” You may be a successful physician with the intent of seeking to better understand new investment options in real estate. But through the power of network, you may run into someone looking to start a new tech-focused real estate software package.  You may connect with someone that is the right match to go from a passive to active role in real estate.  But these investment opportunities are only available through broad-minded networking.  

Keeping an open-mind creates a positive pivot that catapults you to a direction you never imagined.  

At the end of the day, studies of older individuals show that their personal relationships are the most important factor in their lives. Many of these personal relationships stem from a common career and finance focused goal. Goals that can be established at a well-rounded conference.  

Join 1200+ investors, operators, and syndicators at the Best Ever Conference in Salt Lake City, March 8-10 for three days of learning, unparalleled networking, and making deals. www.besteverconference.com. 

Save 30% on your ticket with promo code ASHCROFT23.

Invest in AVAF3 here.

evan@ashcroftcapital.com

By: Danielle Jackson, Investor Relations, Senior Manager

Many first-time investors shy away from investing in multifamily real estate. Concerns like the time commitment involved, the significant initial investment, the risks involved, or simply not understanding the basics of real estate investing are just some of the most common reasons why first-time investors miss out on the abundance of opportunities that come with real estate investing. Yet, by understanding the basic terminology of multifamily property investing, such as property classes, it quickly becomes apparent that when done correctly, it can be a lucrative form of investing. By breaking down the various property classes below, we aim to
help first-time investors to seasoned professionals understand the potential value and risks that each property class presents.

WHAT IS A PROPERTY CLASS?
When choosing to invest in multifamily homes, the most important thing is to understand the risks and rewards that your investment will bring. Property classes, therefore, refer to the classification system used in determining the potential value and risk of an individual investment property. This system breaks down properties into Class A, Class B, and Class C buildings and is based on geography, demographics, and physical characteristics. Additionally, it is essential to understand that these classifications are not fixed. Various strategies and practices, such as a value-add strategy, can leverage specific attributes to increase a property’s class. Understanding the basics of each property class can help even the most novice investor make the right choice for their investment.

CLASS A PROPERTIES
In multifamily investing, Class A properties are typically defined as properties that are less than fifteen years old with modern amenities, such as gyms, laundry rooms, and high-end finishes, such as stainless steel appliances and hardwood floors, and granite countertops.

On top of their well-kept exterior and luxurious amenities, Class A properties are in the most desirable areas with low crime, green space, and good school districts. These properties will typically be found within the best neighborhoods in and around the city. Residents of these buildings and neighborhoods typically treat the area well, keeping it free of pollution and trash. Because of these luxurious features and great communities, these properties charge a high monthly rent and can be the most rigorous when screening tenants.

While Class A properties are often viewed as top-notch for renters, they offer lower returns for investors. Class A properties have minimal maintenance costs, offer higher rental prices, and are extremely desirable due to their location and property appeal. All factors that make these properties more likely to offer investors a steady stream of income. Yet, the overall upfront costs of the initial investment are far greater than the other class properties. This higher-priced initial investment can limit the appreciation of the asset.

In addition, although the common location, asset, and financial risks are less of a concern in Class A property investments, there are still risks. One of the risks of Class A properties is that they depreciate faster than other properties. Dynamics that make a location “desirable” are often shifting, and newer, nicer buildings are being built all the time. Therefore, a building that is only ten years old may be reclassified as a Class A- or Class B property much sooner than other property classes.

While Class A property investments have a more conservative risk/return profile relative to other classes, they are not risk free investments. Instead, the risk focus tends to shift to operator risk, or the person executing the investment strategy and business plan. Executing the business plan, while not all inclusive, may include managing the day-to-day operations, investor communication, property management and maintenance, and ensuring you are holding the correct types of insurance. These reduced risk factors relative to other property classes make these properties more likely to offer investors a lower, yet steady stream of income. [1-2]

CLASS B PROPERTIES
Class B properties can represent a balance of multifamily property investing for seasoned and first-time investors. This is because, through various strategies, such as Ashcroft Capital’s value-add strategy, there is an excellent opportunity for financial growth for these properties.

A Class B property is typically a ten to thirty-year-old building often in a well kept condition with limited deferred maintenance. These buildings share many features with Class A buildings, but have dated architectural features and require more maintenance overall. Additionally, similar to Class A buildings, these buildings are in desirable locations with low crime and good school districts. Tenants of these buildings are typically middle-income workers who also provide a reliable source of income to investors.[3]

The primary risks associated with Class B properties are similar to Class A properties, with location and sponsor being towards the top of the list and the somewhat dated physical condition of the asset. Additionally, because Class B properties are often on the border of desirable neighborhoods, a shift in neighbor dynamics can often reduce the value of these properties.[4] Because these assets often come with some deferred maintenance and general renovations within the business plan, the sponsor risk remains present but can be mitigated by investing with specialists that focus exclusively on this product type. One reason many investors prefer this asset class is because the potential return within Class B properties can be much higher than the perceived increased risks.

Class B properties offer many benefits to investors. First and foremost, they have a lower initial investment than Class A properties. Additionally, because of the moderate rent prices and amenities, these buildings are also highly desired by renters. These two factors alone can offer a higher and more stable cash flow than either Class A or Class C properties, making them ideal for investors.

However, sponsors can also leverage specific strategies to increase the overall value of the Class B properties. At Ashcroft Capital, we advocate for a light value-add strategy, one of the many ways to increase the return on investments for Class B properties. This light value-add strategy consists of active asset management to minimize the risks in property andmaximize appreciation over time.[5] In multifamily property investments, this is done through renovations, repairs, and
improvements to the property, to turn a Class B or a lower Class A property into a Class A property. When successfully executed, this strategy can help generate stronger cashflow, as well as strong appreciation, both of which generate the overall returns for investors.

Although Class B properties are riskier properties overall than Class A properties, they tend to offer higher returns. They can be the right investment for investors who are willing to accept additional risk in exchange for possible higher investment returns.

CLASS C PROPERTIES
Class C buildings are often the least desirable in multifamily property investing. Unlike Class A and Class B buildings, which are kept in good condition with minimal repairs, Class C buildings often have internal and external signs of deterioration. These buildings often rely on charging the lowest rents to attract tenants. Additionally, the locations of these buildings are not as desirable to tenants. The neighborhood itself may also show signs of deterioration and neglect compared to the neighborhoods of Class A or Class B buildings.[6]

While these buildings may appear to be not ideal for investors, they offer some benefits. Class C buildings often have a low initial
investment cost, leading to a higher cash flow than other properties when paired with the right strategy. Class C buildings are also a great opportunity for those
looking to be more hands-on with their investment, often employing a heavy valueadd or full redevelopment strategy through renovations and remodeling to increase the overall value of the property. Additionally, if a Class C building is in a location that is focused on development, then there is an increased desire to occupy the area at a lower rate.[7]

WHICH PROPERTY IS RIGHT FOR YOU?
Knowing the type of building you are investing in is critical when it comes to investing in properties. Factors such as risk tolerance and financial goals should be weighed with many other factors to choose which investment type is right for you. High-end properties come with lower risks but with a lower cash flow. Inversely, lower-class properties come with much higher risks, but have the chance for a higher cash flow with the right strategies. Overall, Class A- and Class B properties tend to balance risks and value-add strategies to earn investors a steady, higher cash flow and investment return.

If you would like to learn more about investing in multifamily assets, visit https://info.ashcroftcapital.com/fund, or schedule a call with our Investor Relations Team at investorrelations@ashcroftcapital.com.

danielle@ashcroftcapital.com

Sources

1. Hart, M. (2021, February 4). Class A real estate: An investor’s guide. Millionacres. Retrieved February 15, 2022, from https://www.millionacres.com/realestate-investing/commercial-real-estate/class-a-property

2. Schena, A. (2021, June 7). Council post: The risk in real estate: Six types to evaluate before you invest. Forbes. Retrieved February 15, 2022, from https://www.forbes.com/sites/forbesrealestatecouncil/2021/06/07/therisk-in-real-estate-six-types-to-evaluatebefore-you-invest/?sh=177d366346b6

3. Rohde, J. (2020, May 22). What is a class B property and are they good investments? Learn Real Estate Investing. Retrieved February 15, 2022, from https://learn.roofstock.com/blog/class-b-property

4. Schena, A. (2021, June 7). Council post: The risk in real estate: Six types to evaluate before you invest. Forbes. Retrieved February 15, 2022, from https://www.forbes.com/sites/forbesrealestatecouncil/2021/06/07/therisk-in-real-estate-six-types-to-evaluatebefore-you-invest/?sh=177d366346b6

5. Felton, S. (2021, February 4). Real estate strategies: Core, core plus, value-add and opportunistic investments. Jasper. Retrieved February 15, 2022, from https://www.jasper.io/global/blog/realestate-strategies-core-core-plus-valueadd-and-opportunistic

6. Class C buildings – walk up Apartments. PropertyShark. (2021, March 10). Retrieved February 15, 2022, from https://www.propertyshark.com/info/class-c-buildings-walk-apartments

7. Rohde, J. (2021, June 4). What is a class C property and should you invest in them? Learn Real Estate Investing. Retrieved February 15, 2022, from https://learn.roofstock.com/blog/class-c-property

By: Travis Watts, Director of Investor Education

Most of us are seeking some version of financial freedom, but what exactly does that mean? Financial freedom, or financial independence as I like to call it, is for the most part, subjectively defined in terms of your own life and/or financial goals. For me, financial freedom is defined as a financial status where I generate more passive income than I need to cover my living expenses. A financial status where you can stop trading your time for money, and work becomes an option, rather than an obligation. It’s a goal that arguably almost everyone aspires to. Yet the path to financial independence can feel elusive and overwhelming to many.  

So what is required to become financially free? How do you know when you’ve attained such a status?  

The answers to questions like these will be different for each person.  

For me, four fundamentals have helped me pave my path to my own financial goals and optimal lifestyle. I call these my “Four Pillars to Financial Independence,” and while these are unique to me and may or may not work for you, my hope is that it will lend you some motivation and insight to come up with your own path to achieving your financial goals and optimal lifestyle.     

Earn at Your Highest and Best Potential  

For my first pillar of financial independence, I’ve learned that it is essential for me to earn as much income (actively) as I can using my highest and best earning potential. I know, it sounds counterintuitive to the end goal, but the reality is, absent inherited wealth or a major windfall, the path to financial independence usually starts with active income. I define my highest and best earning potential as a factor of two things:  

• My available time  

• My hourly rate or salary 

In an ideal scenario, I always aim to make the most amount of money possible in the least amount of time. However, sometimes this isn’t always possible, for example when you are just starting out in your career or role. There may be only so much I can charge for my time, which is why I found that the best way to expand my earning potential is to expand my time. We all have 168 hours every week.  

Years ago, in the pursuit to financial independence, I was an active W2 employee in the oil and gas industry working literally 98 hours per week. I would work for 14 days in a row and 14 hours each day. I was determined to achieve financial freedom, so in the little spare time I had and my days off, I would flip homes to generate additional income. The extra income I made from flips was used to invest in long-term, buy and hold single-family rentals for cash flow. At that point in my life, my fullest potential was limited to the numbers of hours I could physically work. The same may be true for you.  

I want to be clear, I’m not saying that anyone should work 98 hours per week, but always think about where you may have additional hours because it could possibly be used to make additional income.  

Are there promotions that might be available in order to generate more income? Is it possible to pivot careers or companies to a position that pays better? Are consultant or self-employed jobs an option? These are things I’ve considered as an approach toward my end goal(s).  

You Can Be Twice As Rich By Desiring Half As Much 

The second pillar I established on my road to achieving financial independence is reducing my living expenses. I’ve managed to live off as little of income as possible for a set period of time (not forever) to expedite my process drastically. I’m not saying that I’ve lived or currently live drastically below my means. However, for me a little sacrifice has gone a long way.  

In the first 7 years of my pursuit towards financial independence, saving as much money as I could played a critical role. For example, if I made $100,000 working full time in oil and gas, plus $75,000 a year fixing and flipping properties, and $25,000 a year in passive income generated from my long-term rentals, then I had a total of $200,000 in annual income. This was nearly double my salary on its own, which is the power of having a side hustle. Rather than increasing my expenses and lifestyle in the short run, I kept my overall expenses around $50,000 per year, so I could invest the remaining $150,000 a year. While I am not including taxes in this example for simplicity purposes, I am grateful for the tax advantages I’ve been able to utilize investing in real estate. 

I was disciplined enough to manage a 75% savings rate. This is certainly extreme, yet it allowed me to kickstart the journey to my own financial independence.  

Invest For Passive Income 

The third pillar of achieving my financial independence was by investing the difference between my earnings and expenses into something that could produce passive income. I never want the margin between my income and living expenses sitting on the sidelines. Especially knowing that it can be used to generate additional income that I will not have to trade my time for.  

I was taught to be a saver, by simply putting my money in the bank for a rainy day or hoping for the right opportunity to pop up. Overtime, I learned that the problem with this strategy is that my money loses value against inflation and the opportunity cost has been substantial over the long run.  

Instead, the key to my success so far has been being a long-term investor focused on acquiring passive income assets that replaces some it not all of my earned income. My goal when seeking financial independence is to acquire assets that will “work” for me.  

Avoid Bad Debt 

The fourth and final pillar of my road to financial independence is to avoid bad debt. For the sake of this article, I consider bad debt anything that has a higher interest rate than I could otherwise achieve by investing for passive income. Two examples could be credit cards and personal loans. Here’s the simplest approach: If I can reasonably and conservatively invest in something that produces passive income and that investment has a higher yield than the interest I owe on my debt, then I’m not focused on paying off the debt. I considered this “good” debt in my book.  

Let’s assume that I have student loan debt with 3% annual interest and let’s say that I can reasonably and conservatively invest in a real estate project that provides a 7% annualized yield. Given the positive spread, I’d rather place my money into the real estate project because I can potentially earn 4% more than what I owe on the debt. 

On the flip side, if I have credit card debt at 15% annualized and I can only achieve a potential 7% yield, I’d rather pay down the credit card debt. For me, it wouldn’t make sense to take on the additional risk. While I know that there are no guarantees in investing, there is a guaranteed savings of 15% for me by paying down the credit card.  

In Conclusion  

To recap, what has been the fundamental the “Four Pillars of Financial Independence,” for me are:  

1. Earning at my highest and best earning potential 
2. Living on as little as possible (for a period of time)  
3. Investing the difference in assets that produce passive income 
4. Minimizing high interest debt     

Please note, this is a summary of my personal journey and based on my own definition of financial independence. What worked for me may not be right for you, but hopefully there are a few practical takeaways for you, nonetheless.

Download the full article here.

If you are interested in learning more about investing with us please schedule a call with our Investor Relations Team at investorrelations@ashcroftcapital.com. 

Travis@ashcroftcapital.com