- Your investment is backed by a hard asset
You know that there is a tangible asset behind the investment. Many investors feel more secure about their principal sitting in an asset you can see, touch and feel. The reality is that it’s more than just a piece of paper or a ticker on a screen, and our investors like that.
- Expect Cash flow
Landlords make money in their sleep via passive income. We call this Cash flow. We only buy assets that cash flow from Day 1, which creates an immediate income stream for our investors. Our investors also like that we are able to increase the cash flow as they own it, by forcing appreciation and finding creative ways to add value. Compared to a stock with an announced target dividend, investors appreciate knowing the cash flow is going to get better as time wears on and the value add plans are executed.
- Understand and are comfortable with leverage
The investors who are attracted to Real Estate like, and understand leverage. Again, we compare it with buying a stock. Imagine you have $100 to invest. You could log onto your stock brokerage and buy $100 of stock. Or you could use that $100 as a down payment to purchase $400 worth of real estate. It multiples the power of your investment dollar–and all the investors we talked with understand and enjoy that. Now, don’t get us wrong, you need to remain conservative on your leverage, and your underwriting so as not to get over-leveraged and add undue risk to the investment. In our case, we pursue low leverage debt (usually 65%-70%) and use fixed-rate non-recourse government backed loans.
- Understand tax advantages via depreciation
Depreciation is one of those secret weapons that we love. While there are multiple ways to evaluate annual depreciation we like to run a cost segregation study on every property we own. This amounts to depreciation being higher up front and lets investors see a paper loss for the first several years, even though regular distributions are hitting their bank accounts. The tax advantages of owning real estate is a key reason our investors are attracted to this space.
- The “Rinse and Repeat” Investor
This group of investors are looking for higher overall returns, and shorter-term projects. Typically they tend to be a little more risk tolerant, and they usually prefer anything offering the promise of higher returns–knowing that a higher return is usually tied to a higher amount of risk. They target 16%-20% IRR where their money will grow 2.5 to 3+ times faster than it could in the stock market. These folks are equity multiple oriented. I tend to think of this group like I think of house flippers. They are less concerned with getting regular distributions and more concerned with the overall project timeline– knowing in 24-48 months they are going to exit with a chance to take all that earned money and put it back into a new project. Typically we see this group working to create wealth via real estate.
- The “Set it and Forget It” Investor
This group of investors are looking for cash-flow and regular distributions. “Mailbox money” matters to them above all else. Often times they value putting their money into higher quality, newer buildings with less chance of unforeseen expenditures (aka risk). They are focused on cash on cash returns and amortizing the loan over 8-10 years, knowing that every month or quarter they are going to get a distribution check for all their efforts. We’ve typically seen many members of this group working with the goal to try and preserve wealth, creating multiple income streams that they can count on. Whereas the other group wants a 16%+ IRR, this group is happy with a 10%-12% return– if they can securely count on regular cash distributions totaling ~8% each year. In this group we actually have an investor who told us “let’s buy something together today and you can call me when I’m 70!”. Obviously this is a joke, but it speaks to the longer-term mindset of of this group.