This past week, we published Part 1 of our Covid-19 Investor Update, focusing on our Pineapple Farm in Panama. In Part 2, we looked at multiple Agricultural investments in Colombia. Our Part 3 today is focused on a few of our Multifamily investments in the United States.
Multifamily (also known as Apartment Buildings of 5 or more units for newbies) investments are the foundation of our wealth from a Real Estate investment perspective. We believe value-add multifamily investments are the best asset class for medium-term cash flow AND long-term growth of our overall net worth. For those of you unfamiliar with this investment strategy....quick education:
Let’s break it down. A real estate syndication investment is a way for investors like us to pool our financial capital to invest in properties and projects much bigger than we could afford or manage on our own. I add my $50,000-$100,000 to yours and Jim’s and Jessica’s and 97 other people and we invest the total $5,000,000-$10,000,000 in a large real estate transaction.
The real estate syndication is actually a transaction between an Asset Manager or Sponsor and our group of investors. As the manager and operator of the transaction, the Sponsor invests their knowledge and time and experience in finding prospective properties, raising capital and purchasing the property, then managing day-to-day property operations. Our group of investors provide the majority of the financial capital for the project in combination with prudent use of mortgage debt and we split the proceeds or profits from the project.
Now what is a Value-Add component of the transaction? This is where the Sponsor finds properties to buy at a discount from market rates. For instance, maybe a property is only 75% occupied or the apartments are really old and haven’t been updated in decades. By definition, those apartment rents will be lower than newer apartments in the same market area. So the Sponsor buys the property for the LLC at a discount and then invests some of the raised capital into improving the property; for instance, painting or carpeting the common areas like building entrances or stairways, replacing old or leaking roofs, new kitchens and/or bathrooms in the units, replacing old single pane windows with modern double-glazed windows, adding a fitness center etc. And then we can charge more to existing or future tenants. We then increase the rents over time as we make the improvements and that is Value-Add to the property we purchased. It makes more money from rents on a monthly basis AND over the long-term increases the value of the building(s) substantially. We often receive the majority of the transaction profit upon sale of the building(s) 3, 5 or 10 years out.
Here is an example value-add project that Karen and I personally owned and completed during 2017-2018. A simple 12-unit multifamily apartment building in Florida:
We improved the external face of the property to make it more attractive to renters including rebranding, replaced the roof, electrical and lighting upgrades, external paint, dedicated numbered car parking spaces with signage etc.
We also upgraded the interiors of each of the 12 apartments over a 14-month period upon tenant move-out with new kitchens and bathrooms, fresh paint and floors. Eventually increasing rents from $725 per month to $1,100 per unit per month. Increasing the value of the overall property by more than 30% from when we purchased.
These value-add investments therefore provide us with regular, increasing (as we rehab and raise rents) monthly cash flow payments and long-term wealth appreciation upon sale of the property(s). That is why we now invest in larger-scale syndication investments to both receive the same financial result but also reduce our workload (remember, the Sponsor does the heavy lifting instead of us and are compensated accordingly) and long-term increase in our personal wealth upon sale of improved assets.
Now we’ve covered the basic strategy, let’s discuss how a few of our syndicate investments are performing during Covid-19 and the steps our Sponsors or Asset Managers are taking to address the (still unfolding) Covid-19 crisis.
Our 346-Unit & 91-Unit Value-Add Multifamily Investments in Cincinnati, Ohio
We invested in 2 syndication investments last year, in July and December 2019. We invested alongside 60+ other investors and purchased a 5-property 346-unit set of apartment buildings and a 91-Unit Apartment complex in the best locations in Cincinnati, Ohio.
The original business plans involved raising an additional $3.6m and $1.5m respectively for the value-add rehab components of both syndication investments and for some additional working cash reserves. Our Sponsor has already completed many of the external improvements across the properties and upgraded dozens of units across the 6 total apartment complexes and have started raising rents across the board. The business plan was going as planned until we were hit with Covid-19 and as of today, tens of millions of job losses across the United States.
These are the key reasons we believe we can survive anything Covid-19 throws at us in the coming months for these 2 investments:
Most of the above aspects were designed into our investment thesis at the outset. We invest with strategic goals in mind backed by detailed financial models. We analyze sensitivity to certain scenarios like modeling the 2008 downturn to ensure we don’t lose money on these investments. No we can't model every Black Swan event but we can build in downturn sensitivity to our investment deal financials.
There are a 2nd set of steps being taken by the Sponsor because we invest in the best teams in the best markets as much as possible:
Overall, the chances of our investment suffering a capital call during this Covid-19 crisis are pretty much close to zero. On a similar note, our loan provider said that as of this week, less than 2% of their loan holders have asked for interest payment forbearance. Again, this is because of the strength of the markets we invest in and the conservative nature of the Sponsor and lender underwriting for these loans.
Our 284-Unit Value-Add Multifamily Investment in Austin, Texas
Value-add Multifamily deals can take months, if not years in some cases, to come together. The key therefore is to be very data-driven and strategic in what you invest in to ensure you aren’t overpaying in any particular real estate market at the peak of the cycle. That is why we created the Global Investor Alliance, to teach others how we approach investing and to make sure we can minimize any investment losses and maximize the returns from our capital.
The reason I mention this is because we invested in a different project with a different Sponsor in March 2020, just before Covid-19 hit. Our Sponsor in Austin has actually been taking ownership and transitioning this property during this period of economic shutdown and social distancing.
In the case of Austin, ‘shelter-in-place’ as the governor is calling it, went into effect on March 24th. Therefore, our leasing centers remain closed to traffic. The team continues to do an amazing job of providing virtual tours and generating interest via Social Media. We have a couple of furnished model apartments on-site for showings and these are left unlocked for scheduled self-guided tours for potential tenants.
As expected, traffic is low and will go even lower if the shelter-in-place order is extended beyond April. The focus of the team has therefore gone to existing tenant renewals, especially for tenants who have previously submitted notice through the end of June. These tenants are now being offered renewals on 12-month leases with no rent increase. The priority now is keeping ‘heads in beds’ and tenants are less likely to move during a pandemic. Industry experts expect renewals to be as high as 75%, compared to the normal 50% levels we usually see.
To keep rent collections high and to assist existing tenants who have already been impacted by unemployment, the team has also expanded people’s options to pay their rent; this includes the ability to pay by credit card (with fees waived), waiving late fees generally and allowing partial payments throughout the month. Responding to each tenant as an individual is important as the Covid-19 impact is uneven across our tenant base.
To give an idea of asset performance as of today, 94% of April’s rents have been collected and we expect to obtain 97% of total rents based upon signed payment plans from tenants.
On reflection, we take great care in how and when we invest and which Sponsors we invest with. The Sponsor team and their track record is the most critical aspect of any Syndicate Investment. (feel free to Use our Cheat Sheet to Choose the Best Syndication Partners here) And we always Focus on Process over Investing Outcomes because when you follow a solid process supported by solid data analysis, you stay out of trouble over the longer-term.
Nobody can predict how this Pandemic will end, either from a human tragedy or economic perspective and we know that our investment techniques will be tested. But we are very confident about the projects and Sponsors we have invested in because our process ensures they are never over-leveraged and take a conservative approach to always having cash on hand.
Like many of our Alliance members, we have consistently built a stable portfolio of asset-backed cash-producing assets that can whether this downturn. And we'd like to invite you to learn how to invest in Real Estate and Agriculture so you can retain your wealth outside of the volatile stock market during future storms. If you are interested, please click here to schedule a call
All that remains is to wish everyone to stay safe and fingers crossed for a V-shaped recovery!
Peter & Karen