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.
Sources:
- $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
- SEC.gov | Investor Alert: Self-Directed IRAs and the Risk of Fraud