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23 Multifamily Properties, 4,000+ Units, $300MM+ Portfolio.
As General Partners, we have $100MM+ in Assets Under Management
Blog April 1, 2023

Financing Options for Your Multifamily Investment. Part I – April 2023

If you’re considering investing in a multifamily property, financing is likely to be one of your top concerns. Multifamily properties are typically more expensive than single-family homes, and the financing options available to investors can be more complex. In Part I of this article, we’ll cover two common financing options: loans and equity financing. We’ll explain how they work and their pros and cons. Part II will explore advanced options like preferred equity and seller financing.

Blog April 15, 2021

A Group Of Investors Acquires 316 Unit The Gallery at Katy Apartment Community In Katy Submarket Of Houston, Texas – April 2021

HOUSTON, April 14, 2021 /PRNewswire/ — A group of investors, including Sunrise Capital Group, led by David Davidenko and Julia Bykhovskaia, and Merrill Kaliser, are pleased to announce their first acquisition in Katy/Houston submarket, The Gallery at Katy, a garden style 316 unit apartment complex built in 1983, located in an area with the average household income of $118K+ in a 3 mile radius.

Blog February 27, 2021

How to Keep More of What You Earn and Pay Less in Taxes – February 2021

Today, we would like to talk about one the main advantages of real estate investing: tax benefits. Full disclosure: I am not a CPA so please consult with your own CPA when making investment decisions. Everyone says real estate provides incredible tax benefits. Is it really true? If so, what are they? Real estate investments often generate a paper loss for tax purposes, as a result of depreciation. The “useful life” of residential rental property is 27.5 years, and annual depreciation expense of investment property often produces net loss for the investor. And let me tell you, property depreciation is an investor’s best friend! So what does it mean for you? You can shelter income from your real estate investments with depreciation If your adjusted gross income is less than $150K a year, you can deductup to $25K of your “passive losses” on your tax returns, assuming you actively participate in the management of the property If your adjusted gross income is more than $150K a year, you generally are not permitted to report a loss on your tax return. It does NOT mean you “lose” those losses, they just get “suspended” and can be carried over and be used in future years to offset passive income from other investments If you qualify as a “Real Estate Professional” AND materially participate in rental activity, then you CAN deduct your real estate losses against ordinary income, such as W2 income. This, my friends, is what I call“GOD’S GIFT” for at least some of you. Why? By way of example, if you are married and you generate W2 income and your spouse qualifies as a Real Estate Professional and materially participates in rental activity, then you CAN deduct ALL of those losses against your W2 income. How awesome is that?! You are welcome! 🙂 You can generate very substantial losses for tax purposes by using a so-called “bonus depreciation” which allows you to drastically boost the depreciation deductions in Year 1 of ownership. The idea is simple. When you buy multifamily real estate, the purchase price is allocated to land (not depreciable asset) and real property (depreciated over 27.5 years). If you do something called “cost segregation study” (hire a professional to allocate specific components of the purchase price for you) – the study will allow you to allocate a portion of the purchase price to “personal property” (can be electrical wire, window coverings, roofs, etc) with the useful life of 5, 7, 15 years. ALL of the value that allocated to such personal property can be expensed in Year 1!! Practically, it can mean that you invest $100K in a project and you immediately, the same year, generate $80K paper loss! For those of you who were wondering: No, you cannot use your passive real estate losses to offset Portfolio income (such as income from stocks and bonds) How do you qualify as a Real Estate Professional? There are two main criteria that you must meet: More than one-half of the personal services you performed in […]

Blog May 19, 2020

Multifamily Market Musings – May 2020 – May 2020

As we are going into a 3rd month of the global pandemic we wanted to offer some statistics and thoughts on what has been happening in the world of multifamily. Below are a few of our observations concerning the performance of multifamily as an asset class during COVID-19 crisis, current market activity and what the future holds. How to Get Started in Multifamily Real Estate Business Long story short, multifamily is proving itself, at least for now, as a very resilient asset class yet again. In the end of March, multifamily operators across the country were bracing for the worst and expecting painfully high delinquencies in April. Based on the many conversations that were had at the time, the expectation was that Class C properties could have delinquency rates as high as 40-50% (high exposure to service sector jobs, very low/non-existent savings and moral hazard resulting from many states halting evictions), Class B was expected to show 25-30% delinquency rate. Instead, things turned out way better than that. Most Class B properties collected 97%+ of the rents billed (in many cases 100%), Class C – depending on the location and other factors – mostly 85%-95%. See the National Multifamily Housing Council’s chart on April rent collections: May collections are similarly strong and better than April. Delinquencies are indeed materially higher (on a relative, not absolute basis), but not nearly as bad as market participants anticipated. Other trends we see: Lower turnover as less people are moving during COVID-19 Many operators have no rent increases on lease renewals (location dependent) Negative rent growth on new leases for many operators – location and property-Class dependent. Some data points from public REITs on April rent growth: Camden: -2.5%, MAA: -3.3%, Equity Residential: -4%, Nexpoint: -1.65% So far so good – the situation has not become a complete meltdown as many feared. However, is this sustainable? Rent collections have been strong, in large part, due to state and government programs providing unemployment benefits. Under the CARES act, those receiving state unemployment benefits are entitled to $600 per week in expanded unemployment compensation through July 31st. But what happens once federal benefits stop at the end of July? Below is the chart for 40 major metros showing how much in state benefits will be remaining per tenant, after rent payment, once (and if) $600 federal benefits stop (and you can click here for the link to the source): Tenants’ ability to pay rent will change materially after July. Will federal benefits be extended? Will we see a sharp drop in collections in August/September? It is too early to tell. But if I personally had to bet, I would bet on continued government support. Politically, it is too risky to pull the plug too early.   Market Activity Based on our observations and frequent conversations with commercial brokers, the transaction activity is currently on hold. In person property tours are not yet possible in many locations. There is very little inventory on the market. The sellers are […]

Blog May 29, 2019

Deal and Fee Structure of Multifamily Syndications – May 2019

What is the typical deal structure of a multifamily syndication?   Let me qualify what kind of deals we are going to talk about here: non-institutional, private investor value-add syndicated deals with the deal size less than $50mm. Institutionally financed deals are a totally different ball game and we are not going to focus on such deals in this article. Instead, we will talk about deals which are financed by a group of say 20-50 (the range is arbitrary) investors each investing $50-$200K in a deal.   First, let’s learn some important terminology:   Passive investors, who don’t do much apart from vetting the syndicator and the deal, writing a check and collecting the distributions are known as limited partners or LPs.   Those investors who sourced the deal, underwrote a deal, negotiated the purchase agreement, secured a loan, developed a business plan and will be overseeing all aspects of the deal management for the years to come are called general partners or GPs. They are also often called “sponsors” or “syndicators”. Usually, there are several GPs on each deal.   GPs are compensated by the fees they get in the syndication. What are those fees?   Promote: this is the most substantial part of the compensation in a deal. Promote is simply a share of profits that GPs get in a deal above some pre-determined return threshold (which could be 0). We have seen the promote range from 10% to 40%, but the most deals fall into 20%-30% range. Some deals have LPs receive preferred return (usually 6%-8%) which has to be paid first, before the GP entity receives any distributions. “Tiered” structures (or “IRR hurdles”) are also popular – when Promote/Profit Split changes after LPs receive a certain level of pre-determined returns. For instance, the GP/LP split is 30%/70% but once LP investors’ IRR reaches 15%, the split changes to 50%/50%.   Acquisition Fee:  this is an upfront fee paid to the sponsor team for bringing the investment opportunity to investors. The range is 1%-5% of the total purchase price, with the most commonly occurring number being 2%.   Asset Management Fee: this is a fee charged for managing a deal during the life of the investment. Sponsors must stay highly engaged in the deal – travel to the property, oversee renovations, keep in constant contact with the property manager. This fee is designed as a compensation for managing the asset. Usually, it is 1% or 2% of gross collected income.   Refinancing fee: This fee is usually 0.5% to 2% of the total loan amount and is paid for the work required to refinance a property.   Disposition fee: Typically 0.5%-2% of the sales price. We don’t see it very often, but did come across a few offerings that included it.   Investment Returns for passive investors are usually presented net of all fees and the target returns nowadays are ~6-8% a year (this return is called cash-on-cash, and sometimes annual ROI (return on investment)) and 14%+ IRR total. Most investors in multifamily deals want to see 80%+ […]

Blog March 21, 2019

Multifamily Performance During the Last Recession – March 2019

The question that we get from our investors often (and rightly so) is: “how did Multifamily, as an asset class, perform during the last recession in terms of the rent growth”?   The short answer: it outperformed.   More detailed answer: According to research recently published by CBRE, during the last recession of 2008-2009, Multifamily experienced negative rent growth for only five quarters, with cumulative rent decline during that period of 7.9%. Not bad! For comparison, rents in Industrial, Office and Retail sectors declined 17.5%m 17.7% and 14.1%, respectively, from trough to peak; with negative growth continuing for 13 months for Industrial, 9 months for Office and 21 months for Retail (see the chart below). As such, Multifamily sector is much more resilient than other types of commercial real estate and most properties in decent locations remained cash flow positive during the last recession which resulted in very low default rates on Multifamily loans (as was discussed in our previous piece).   In summary, we, as investors, should not be panicked by the prospect of upcoming recession. As long as we remain conservative in our underwriting, avoid short term debt and have sufficient cash reserves to last through a potential downturn, we should manage through the recession just fine. Yes, we will probably see some deteriorating occupancy and rent growth metrics but the duration of such period tends to be less than two years and most properties in the “good” markets (= population growth, job growth and job diversity with no industry representing more than 20% of the employment pool) should continue to generate cash even during the recession.

Multifamily Market Musings – May 2020
May 19, 2020
Deal and Fee Structure of Multifamily Syndications
May 19, 2020
Multifamily Performance During the Last Recession
May 19, 2020
The Rich Continue to Favor Real Estate as a Preferred Alternative Investment
May 19, 2020