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and thoughts on multifamily investing
23 Multifamily Properties, 4,000+ Units, $300MM+ Portfolio.
As General Partners, we have $100MM+ in Assets Under Management
Blog August 24, 2021

Why Do We Love Houston – August 2021

Sunrise Capital, as our readers will know, is actively pursuing acquisitions in Houston. Why do we love Houston? Multiple reasons – the mains ones are outlined below: With over 7.2 million people, Houston is the fifth largest metro in the country (after NYC, LA, Chicago and Dallas) and ranks second in population growth and net migration when comparing 2020 to 2010 (22.19% population growth) Strong Job Growth – prior to the pandemic, Houston consistently ranked among the top metros for job growth in the country. Houston is still expected to remain in top 10 in terms of future employment growth Houston is home to 21 Fortune 500 companies, ranking it as one of the leading MSAs in the country for Fortune 500 headquarters Diversified economy – Houston is no longer solely driven by oil and gas industry. It has diversified in other areas, especially commercial life sciences (it’s home to the world’s largest medical center) and tech Single family home prices are rising faster than incomes, making purchases less affordable and causing multifamily households to stay in apartments longer Apartment rents in Houston area rise at the fastest pace in years – demand is returning to the market as people started to return to the city and the supply of new apartments has been the lowest in years

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. “We are thrilled to add another solid property to our portfolio and further expand our presence in the Texas market”, David Davidenko said. The acquisition marks Sunrise’s first property in Houston and its eighth property under management in Texas. Julia Bykhovskaia added: “the property is ideally located in close proximity to Houston and is well-aligned with our strategy of identifying well maintained stabilized institutional quality assets in desirable suburban locations”. Merril Kaliser commented: “The Gallery at Katy presented an exciting opportunity to acquire a high-quality multifamily asset in a very desirable submarket. The property has excellent ‘bones,’ new roofs and very limited deferred maintenance”. Gallery at Katy is a recently renovated and well-maintained asset located in the high growth Katy/Cinco Ranch/Waterside submarket of Houston. Community amenities include a 24-hour state-of-the-art fitness center, two resort-style swimming pools with new designer lounge furniture, an exterior multipurpose sport court, a summer kitchen with a grilling station, a playground and an indoor sports court. Interior features include designer cabinetry with brushed nickel pulls, newly refinished countertops, upgraded stainless appliances, upgraded plumbing and lighting fixtures, spacious walk-in closets, and ceiling fans throughout. The Katy/Cinco Ranch/Waterside submarket has favorable submarket fundamentals with the highest absorption rate and occupancy among all Houston submarkets. There is just one conventional multifamily property under construction within a 3-mile radius of the Property. In addition, the Property is zoned to highly acclaimed Katy Independent School District and benefits from strong surrounding demographics. The property was 94% occupied at the time of the sale. Brett Benton of Newmark Knight Frank brokered the transaction. About Sunrise Capital Group: Sunrise Capital Group invests in workforce housing multifamily assets in Texas. The company targets institutional quality Class B apartment complexes with 200 units or above and focuses primarily on performing stabilized properties with a value-add component with a deal size of $25-$50mm. For more information, please visit SOURCE Sunrise Capital Group

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.

Blog January 11, 2019

The Rich Continue to Favor Real Estate as a Preferred Alternative Investment – January 2019

In the latest issue of National Real Estate Investor there was an article discussing where the rich people (a.k.a. High Net Worth Individuals, “HNWIs”) invest their money.   According to the survey conducted by Capgemini, real estate is the third largest asset class for HNWIs, accounting for 16.8% of their assets. Interestingly, only 15.4% of that “pie” is allocated to commercial real estate – the rest is in other types of real estate assets – residential, hotels, land, REITs, etc.   Also, not surprisingly, Multifamily was named by 76% of the respondents as the #1 preferred property type in the commercial real estate category (followed by Industrial at ~47%).   Why is Multifamily favored by so many?   First, on a relative basis, it is a winner in terms of returns. Even though the return expectations have come down over the last year, value-add multifamily deals still often generate 7-8% cash-on-cash returns (with great tax benefits too) and 15%+ IRR over the life of a deal. As compared to the other assets classes, multifamily offers materially higher return.   The cover story of the latest Barron’s magazine talked about best income investments for 2019. Return-wise, none of them come close to what a multifamily investment can deliver, especially considering embedded tax advantages that real estate provides. 3% dividend stocks, 6% preferreds, treasuries. Come on… How exciting is that?! Some MLPs with 8-9% yields are probably the only comparable instrument return-wise, but still come short. And MLPs are correlated to oil/gas prices when the times are bad. Do you want that risk? Anyway… I digress.  Of course, we are not saying one should completely avoid stocks and bonds. They are obviously more liquid and have a place in an investment portfolio. What we ARE saying though, that multifamily is probably a better investment on a risk-reward basis. Real estate in general as an industry is much more predictable than most others. You have historical data available at your fingerprints and there’s much more visibility and cash flow predictability.   Second, historically multifamily loans have demonstrated solid performance with low default rates.   As you can see from the charts below, the default rates on Fannie and Freddie multifamily loans (and they finance ~55% of them) were very low in the last recession (less than 1%). Banks, which comprise about 25% more of the multifamily loan volume, had default rates that peaked at about 4.5%. For comparison, US leveraged loans had about 11% peak default rate in the last recession. Thus, multifamily real estate still a very compelling investment on a risk-reward basis and certainly is one of the most predictable ways for long term wealth accumulation.   As always, feel free to reach out with any questions, comments, thoughts!   Cheers,   Julia

Blog November 20, 2018

Current State of Multifamily Market – 3Q2018 – November 2018

We love following real estate industry news and believe it or not, we love reading 10Ks and earnings transcripts in our spare time. It is a great way to get a good sense of what is happening in the multifamily arena and helps answer some questions we get asked frequently by our investors. In this post, we provide excerpts from the earnings transcripts of three publicly traded multifamily REITs: Camden Property Trust (“Camden”), Mid-America Apartment Communities (“MAA”) and UDR Apartments (“UDR”). Enjoy!   STATE OF THE MARKET ­UDR “…the underlying macroeconomic backdrop for the apartment industry remains positive. This when combined with solid fundamentals will continue to support future growth. As such, we expect the apartments will remain a consistent short-term and long-term performer in a very volatile global economic landscape”.   Camden “…But overall, as you just kind of think about the drivers in our business, if you look at employment growth and supply, there’s really not a huge difference between the outlook of what’s happening in 2018 and what the outlook is for 2019, job growth comes down a little bit across our platform, new completion stay relatively flat, but the change in the ratio of new jobs to completions doesn’t really move that much, we’re a little bit above five times for 2018 that drops to a little bit below five times for 2019. So overall just looking at the macro data and not drilling down to each individual market which is the whole purpose of our budget process, you would just look at the macro data and say 2019 this should look a lot like 2018 maybe some slight improvements. So we’ll have to see how it plays out…”   “…The thing that’s interesting when you think about the 10-year treasuries obviously has gone up from the beginning of the year and people think about why haven’t cap rates gone up as fast as the 10-year. And therefore thinking that prices have to come down and cap rates have to go up. But there is a massive wall of capital today that continues to flow into real estate and multifamily specifically sort of the darlings are multifamily and industrial with Amazon effect with industrial.   We had a board meeting this week and we had HFF come in and update our board on current market conditions and they had a slide that showed $182 billion of unfunded real estate capital that needed to find a home and when you start thinking about apartments, when you think about cap rates, the 10-year is probably the last thing that influences cap rates, the first thing is liquidity and that’s how much money is in the market trades and deals, the second is market fundamentals or operating fundamentals, supply and demand, the third is inflation expectations, and the fourth is 10-years. And when you look at the relationship of cap rates today, we have massive liquidity, we have pretty decent supply fundamentals and demand fundamentals and if the Fed […]

Blog September 25, 2018

Investment Lessons from Seth Klarman and How They Apply to Real Estate – September 2018

I recently came across the excerpt from Seth Klarman’s annual letter to his investors. Seth Klarman is one of my favorite investors who unfortunately does not write much – the only book on value investing he has ever written, “Margin of Safety”, is out of print and its used version is available for purchase on Amazon for only $14,950 – which is a great value. NOT!   (But don’t worry…you can find a free PDF version online these days).   Anyway. When Seth speaks, the whole investment community listens – the Baupost Group which Klarman founded in 1982, is one of the most successful hedge funds and has generated an average annual return of 19% since inception (phenomenal).   When I was reading the excerpt from his letter, naturally I was thinking of how it applies to real estate in general and multifamily investing in particular and I wanted to share my thoughts with you. Below is my comments on some of the lessons, but I of course highly recommend you read the original for yourself – it’s only two pages.   7. The latest trade of a security creates a dangerous illusion that its market price approximates its true value. This mirage is especially dangerous during periods of market exuberance. The concept of “private market value” as an anchor to the proper valuation of a business can also be greatly skewed during ebullient times and should always be considered with a healthy degree of skepticism.   Same applies to the latest sales of houses OR apartment complexes in the particular area – so called “sales comps” which are traditionally stated in multifamily investing using a “price per unit” metric. Often, commercial real estate brokers would insist that the recent per unit comps are a true of reflection of a property value when in fact it only shows how exuberant other investors have become. A conservative investor would look to the cash flow the property generates first and derive the value range based on that cash flow. Yes, valuation is always a range and not a single number. As Warren Buffet likes to say “It is better to be approximately right than precisely wrong”.   9. You must buy on the way down. There is far more volume on the way down than on the way back up, and far less competition among buyers. It is almost always better to be too early than too late, but you must be prepared for price markdowns on what you buy.   I want to buy on the way down! But then – who doesn’t. In my frequent conversations with other real estate investors this topic comes up often – how we all need to be prepared when eventual downturn comes. The question here is – are we going to be mentally and emotionally prepared to pull the trigger when everyone around us thinks we are crazy, the mood is gloomy, the headlines are depressing and everyone around us is telling […]

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