After bringing half a dozen offerings in the first 4 months of 2022, the careful observer may notice one theme:  we don’t publicly advertise upcoming/current offerings.   In fact, we won’t publicly announce investment opportunities until they’ve closed.   Many investors encourage us to advertise our offerings on platforms–especially those that are optometric focused.   However, there are several key reasons why we keep our investment opportunities private–and they center around our desire to include a wide diversity of investors.

When Walt Whitley, O.D. and I created New Sight Capital, our goal was to bring about a pathway for other optometrists to achieve wealth growth that did not depend on patients or insurances.  While we are both passionate about the modern evolution of optometry, we understand its unique challenges and want to help other ODs find alternatives for financial growth.  Our second intention was to include as many ODs as we could in our investments.  There’s a great diversity in stages of personal wealth among ODs.   We didn’t want our offerings to be reserved just to OD colleagues that had millions of dollars of net worth or those in the later years of their careers.   Walt and I wanted to find a way to get younger ODs involved—and ODs who perhaps were in the earlier stages of their financial growth.

In order to accomplish these objectives, we decided to take the pathway of 506b offerings.  To provide a little more context, most apartment syndication opportunities these days fall under two categories:  506b and 506c.   They are actually two exemptions to SEC law under which lead sponsors can offer syndication investments to private investors.   There are very key differences between the two exemptions.  In 506b offerings, the investments are open to accredited AND non-accredited investors.   Accredited investors are those who either have:  $1m net worth excl primary residence, $300k joint salary, or $200k single salary.  Non-accredited investors, also called ‘sophisticated’ investors are those that do not meet those criteria but have other qualifying experience:  investing in real estate or investing in other areas (including stocks) or extensive business or financial-related experience.  Also, in 506b opportunities, accredited investors do not have to be verified by a 3rd party.   They simply self-attest their  status.

What’s the major restriction of 506b offerings?   They cannot be advertised publicly!  The 506b exemption legally prohibits the public advertising or announcing of these investment opportunities.    You should never see live or upcoming 506b offerings on facebook or twitter, etc.   For this reason, they are often called the “friends and family” offerings.  By that, it means 506b offerings can be shown to investors that are previously known by the lead sponsor or the entity bringing the offering.  That’s why we go through a qualifying process with our investors.  Part of our registration on our website asks extensive questions about investing experience.  We also schedule qualifying calls with potential investors so that we can learn about their experience and whether our offerings are appropriate for them.   Only once a person has been qualified as an investor are they permitted to invest in our offerings.

How is a 506c offering different from a 506b offering?  A key difference is that 506c offerings can be advertised and announced publicly.   They are often advertised on social media and other websites so that any person can see them without being first qualified by the sponsor.   What’s the downside?   506c offerings are only open to accredited investors!   And, the accredited status needs to be verified by a 3rd party in some shape or fashion.  Non-accredited (sophisticated) investors are not allowed to invest in 506c (publicly advertised) apartment syndication offerings.

While we believe we could reach a much broader audience by publicly advertising our investment opportunities on social media or at optometric conferences, we know it would automatically exclude a certain portion of ODs.   There could be a scenario someday where we bring about a 506c offering, but our desire to bring apartment investments to all ODs will always have us firmly rooted in 506b (inclusive but private) offerings.  And, that keeps us from publicly announcing current and upcoming offerings.

If you’ve not registered with us already, please do so here.   As this whole article points out, the only way to be qualified to view our offerings is to go through our registration process.

Happy Investing!

Russ.

Having helped optometrists acquire equity in over $200m in large multifamily assets over just the last few months, we thought it was important to provide some technical guidance on how one may invest in an apartment syndication.    While the most common way that people invest in our syndications is as an individual, there are actually several different vehicles through which one can invest.   Actually, we’ll touch on 6 different ways in this article

Before we break these down, let us first mention we encourage every investor to consult their legal, tax, and financial counselors to help make the decision that best aligns with the particular circumstances and state laws.

Individual Investor

Again, this is the most common way in which investors enter an apartment syndication.  And, this is perfectly ok because one very important benefit of syndications:  liability protections.   All investors in apartment syndications are buying equity as “limited partners.”  As such, the limited partners are given contractual/structural protections against liabilities at the property.  While an investor’s original capital has risk exposure, there is no further risk.   Lenders, vendors, or tenants cannot sue and hold limited partners to extract capital beyond what’s invested in the deal.  It’s the “general partners,” or syndication sponsors, that assume that level of risks.  

Joint Tenants with Rights of Survivorship

Many married couples believe they must invest in this type of distinction in order to invest as a couple.   That’s not necessarily true.  A spouse can invest and have their other spouse sign the investment documents as a joint investor.   If the one spouse were to pass away, most states’ laws would dictate that equity be passed to the surviving spouse.  However, it most often would have to pass through probate.  At the end of that process, the full equity is passed to the spouse.  However, if a couple were to invest as “joint tenants with rights of survivorship,” once the first spouse dies, all of the equity in the syndication transfers to the survivor without having to pass through probate.

Limited Liability Company (LLC)

You can also invest in an apartment syndication as a corporate entity, like an LLC.  Some investors believe they must use an LLC to provide additional protections against liabilities arising from the syndication/property operations.  As we touched on earlier, that’s not true.  Investors are limited partners that are afforded liability protections.  Some investors may choose to use LLCs to invest in syndications, rather, to protect their investment against liabilities arising in other areas of their personal/professional lives.   Could investing a large sum through a distinct LLC into a syndication protect that money from lawsuits seeking damages from that investor elsewhere?  Potentially.  Best to consult an attorney if that is the goal.  Still, others form an LLC specifically to invest in numerous real estate opportunities and then expense the appropriate costs of running/coordinating the activities/operations of that LLC.  We would still encourage investors to consult with their accounting professional in that situation.

Self Directed IRA (SDIRA)

One of the most surprising ways to invest in an apartment syndication with New Sight Capital is through a “Self-Directed IRA” (SDIRA).   Most people think they must invest in stocks and mutual funds with their IRAs.  However, that is not always the case.  The key is to understand who is the custodian for your IRA.  When going the more common route of IRAs, the custodian is a large financial institution that allows you to buy and sell securities.  These institutions do not allow inventors to put their money into alternative assets.  However, you can transfer the funds from these types of IRAs into a SDIRA where the investor makes the decisions on what types of investments are secured.  There are two primary modes of SDIRA:  custodian-based and “check-book”  SDIRAs.   There are many platforms that allow you to run your SDIRA through custodian to ensure all the appropriate regulatory and documentation requirements are being met.  The investor still decides when, where, and how much they want to invest in a syndication but communicates through the custodian to release the funds and ensure compliance.  The custodian typically charges a small fee for the service.  The checkbook SDIRA is a little different in that the IRA sets up its own LLC and the investor “manages” the LLC and can write checks from the IRA-LLC to invest in syndications.   It’s more streamlined but doesn’t come with custodial supervision so investors would want to make sure they are following the rules.   In either case, all of the proceeds from the syndication flow back to the SDIRA and not to the individual investor.

Family Trust

Over the past few months, we have seen more investors using personal or family trusts to invest in our syndications.  The benefits, structure, and execution of trusts are well beyond our scope of expertise.  We would encourage all investors interested in this route to consult with tax, legal and financial planning professionals.  

1031 Exchange

Technically, this is not actually an investor entity as much as a way to utilize funds.  Real estate investors understand that, while there is considerable tax efficiencies on distributions due to the power of depreciation, eventually there will be a capital gains tax bill when the asset is sold.  The good thing is that, as of now, the capital gains tax rate is well below most investor’s regular income tax rate.  However, no one really likes to pay taxes.   In real estate, investors can take the capital gains from one sold property and invest it in another property and defer capital gains taxes.  This is called a “1031 Exchange.”  It does not eliminate the capital gains, but it defers it till the 2nd asset is sold (or deferred again if doing another 1031 and so on).  The key with 1031s is preparation, following the rules, and timing.  There are plenty of guidelines and requirements for doing a 1031 exchange and professional assistance should be consulted—plus one will have to go through a “qualified intermediary.”   So, can anyone 1031 their capital gains into an apartment syndication?   Not exactly.  A 1031 into a syndication is more layered.   The 1031 investor will be established as a Tenant-in-Common (TIC) in the syndication.  The lender would need to approve the TIC.  There is also considerable legal work done in the process.  As such, most syndications will only accept 1031 exchange funds if over a certain amount.   This will also depend on each syndication and we can help investors establish whether or not it’s a viable option.

Hopefully, you’ve found value in this article. Have you registered with us yet? If not, please register by clicking here and we’ll send you our “Intro to Syndications” video, as well a give you access to our upcoming offerings.

People are often surprised to learn that it takes us evaluating 75 or more deals in order to bring a single apartment syndication offering to our investors.   Some of the 75 deals won’t pass our screener tool.  The deals that pass the screener are then run through a more extensive underwriting, which will filter out a considerable number of unfavorable opportunities.  The ones that pass through underwriting then undergo exhaustive due diligence.   The 20 or so that pass through that due diligence then trigger offers to be made.   And from that 20, maybe only one deal is secured and becomes a syndication offering for investors.   While success in syndicating apartments is predicated on “winning” deals, we believe the fundamentals of screening and underwriting is where the principles of capital preservation best serve the interests of our investors.   When we make protection of investor equity a priority, we are bound to identify more red flags that tell us to walk away.

Here 9 potential red flags that will instantly kill our interest in a deal:

Unreliable seller financials

It would seem reasonable that a multimillion dollar business, like an apartment complex, would maintain accurate and reliable financial reports.   It would also seem reasonable that the seller of an apartment complex would be willing to share accurate and reliable financials with potential buyers.  However, this is not always the case.   When we identify a potential property in a target market, one of our first steps is to request annual Profit & Loss statements, rent rolls, list of concessions, etc.   The best properties and sellers will already have this available to share instantly with us.  However, sometimes we’ll come across financials that may be incomplete.  That is a red flag.  If we cannot have access to accurate and complete data, we won’t even proceed to underwriting.

Historically poor occupancy

One simple element of our property screener is occupancy.  While we believe in value-add properties, we avoid “distressed” properties.   If occupancy is below 80%, it does not align with our objectives and business model.   Still, if occupancy is below 90%, we would want to dig deeper to see how that compares to the “comp set” and identify any reasons (or potential problems) that are creating subpar occupancy.  Also, we look at the longer term trendline for occupancy at the property.  Is it flat, up, or down?  Our goal, in these situations, is to determine very early in the process if the current occupancy is an opportunity or an insurmountable headwind.

Local market with poor or declining employment

The viability of an apartment asset is directly linked to the health of the local job market.  The nicest looking property can make for a poor syndication if it’s located in an area with unemployment that is either below the national average or on a historical decline.  With value add properties, investor returns are predicated on the increase of rental revenue.  If employment is unstable, it threatens the rent growth needed to make a syndication successful.  When we notice a property that meets other screening criteria but it’s local job market is in decline, we move on to the next property.  Another point of caution for us in this focus is to be weary of a job market that is mostly dependent on one employer or industry.  While there is great benefit to having large employers who are in expansion mode, there’s also caution to be exercised when there is a lack of employer/industry diversity in the supporting market.

Violent crime at the property

As we dig deeper into the characteristics of a property, we will pull a crime report on the location and the surrounding area.  While many value-add properties may reside in larger cities that have overall crime, we are looking specifically at the history of violent crimes at the property and in the nearby neighborhood.  First, a pattern of violent crimes at a property raises potential liability concerns for potential owners.   Secondly, crime incidences and local crime rates may affect loan terms from lenders.  

Low Income-to-Rent Ratio

As mentioned earlier, employment rates in the surrounding market are important.  Also, the wage and income quality of that employment is critical.  Specifically, we look at the average income-to-rent ratio.   How does the average monthly income compare to the rent of the target property and relevant comp set?   If the ratio is low, the market is telling us there is very little headroom for rent growth–which is our key driver of investor returns.  

Comp set with declining rent growth

As we start to evaluate a property, we also seek to identify a relevant set of comparable properties (comp set).  The key is to make sure the comp set is truly relevant or similar to our target property.  Then, we look at the historical rent growth statistics for that comp set.  Is rent growth positive or negative for this relevant comp set?   A red flag for us would be to see a comp set that has declining rent growth.  The local market is telling us it would be a hard fight to execute our business model.

Underwriting that relies on unrealistic rent growth

At New Sight Capital, we are often invited to join as General Partners (GP) in a syndication that has already made an offer.  While we weren’t involved in the original underwriting, we will always do our own underwriting of the deal before we decide to join as a GP and bring the offering to our investors.   Not every syndication sponsor shares our conservative underwriting principles, which is often evident in how they project rent growth.  While the value-add business model can produce significant rent growth, we prefer a conservatively realistic modeling of rent growth.  While the relevant comp set may show there is ample head room for rent growth, we will not join as a GP in a syndication that bases its investor returns on unachievable growth in rents.

Underwriting too aggressive with economic vacancy

Economic vacancy is another underwriting projection we closely evaluate when deciding to join as a GP in an apartment syndication.   Economic vacancy is the sum total of losses from physical vacancy, loss to lease, concessions, non-revenue units, and bad debt/collections.  It’s a very important factor for revenue.  We ask:  how does the underwritten economic vacancy compare to the property’s historical financials?  How does the underwriting model project economic vacancy over the lifetime of the hold period?  What assumptions are being made to reach these projections?   If the assumptions and projections are too aggressive, the economic vacancy may be unrealistically too low–which would artificially elevate investor returns.  With an eye towards investor capital preservation, we’ll decline to join syndications that are too aggressive with this line item.

Investor Returns based on overly favorable assumptions for interest rates and cap rates

Interest rates and capitalization rates are at historical lows.   However, with our conservative underwriting approach we believe it protects our investors’ interests to assume they will worsen over time.  If we are asked to join as a GP in a deal already in motion, this is one key area we scrutinize.  While it’s impossible to predict how high interest rates and cap rates will be in 4 to 5 years, we prefer underwriting models that project them to be noticeably higher.  Considering these two rates significantly impact the resale value of the property, we will not join a syndication that doesn’t incorporate rising rates as potential headwinds.  

Is a REIT the same thing as an apartment syndication?  Should I invest in a REIT or an apartment syndication?   Does it really even matter which one I invest in?

If you are like most of the optometrists we speak with about apartment investing, you may have these same questions.  A REIT is a pretty common term used in the investing world, whereas apartment syndications are less commonly discussed.  We’ll get to the reason why in a bit, but before we do that it may be good to define REIT.   A REIT is a Real Estate Investment Trust.  Essentially, it operates like a company that owns and operates multiple real estate assets across multiple markets.   The REIT sells shares of itself to investors, who then are paid a portion of operational profits.

While that may sound a lot like a syndication, let’s review 7 key differences between REITs and apartment syndications

Asset Specificity

REITs typically hold multiple assets across multiple markets.  When you invest in a REIT, you will not get control over the specific market or asset in which you are purchasing equity.  While this type of blended exposure may be appealing for some investors, other individuals may want more control to pick and choose the exact property and market in which they invest their money.   As a contrast, an apartment syndication is an investment in a single property.  Investors will know everything about the asset, market and return projections prior to making the investment.  If an investor wants to have equity in a Class A property in the southeastern U.S., they can find a syndication that meets that objective.  Most of our investors like this level of control over where their money is placed.

Investor Access

REITs are most often publicly traded, whereas apartment syndications are private access only.  In general, any investor can purchase shares of a REIT via the stock market.  As such, they are more accessible.  Due to federal restrictions, apartment syndications are much more private in nature.  In fact, many apartment syndications cannot publicly advertise their offerings (with some exceptions).   Essentially, investors must be invited to invest in a syndication by way of some existing relationship with the operator of that syndication.   Most of our investors come to us through our articles or our efforts to educate optometrists about the benefits of syndications. Only once they register, are we able to evaluate and determine whether to invite them to invest in our offerings.  While the regulatory hurdles can be a nuisance, in some ways it’s a good thing to build ongoing relationships with a smaller group of individuals—making syndications more of a bespoke real estate investment.

Ownership

When you invest in a REIT, you are buying shares in the REIT or company itself.  There are advantages to that type of ownership, which I’ll address in the next section.  When you invest your money in an apartment syndication, you are actually purchasing equity in a specific property.   Beyond the intentionality of ownership, there are tax advantages which I’ll touch on below.

Liquidity

REIT investments are liquid.  Because you are buying publicly traded shares in the REIT, you will always have the ability to sell those shares if you need the personal liquidity.  For those investors who have general liquidity issues, REITs hold a clear advantage in this regard.  That is because apartment syndications are illiquid.  When you invest in a syndication, you receive equity that is not tradeable.  There is no secondary market on which to sell your syndication equity.  Most often you cannot redeem, or get a refund for, your equity before the end of the syndication.  Investors in apartment syndications must be comfortable with knowing their investment is illiquid over the life cycle of the syndication.

Investment Minimum

Point of entry to a REIT can be very low.  Given that shares in REITs are publicly traded, investors can choose to invest small amounts of capital if they wish.  However, the minimum investment into an apartment syndication is higher.   While there are syndications that have $25k minimums, it’s far more common to see $50-100k as the smallest allowable investment.  

Tax Advantages

One of the most attractive aspects of real estate investing is the tax advantage.  Operating rental real estate allows the owner to expense depreciation of the asset in such a way that oftentimes offsets the tax burden that would have accrued due to the cash flow distributions.  With REITs, it’s the REIT itself that gets that benefit.  That allows the REIT to pass along those benefits to the investor in the form of distributions.  However, dividends and distributions are most likely going to be taxed at normal income tax rates.  Apartment syndications are much different in this key area.   Because investors in a syndication are directly buying equity in a specific property, they will receive schedule K’s in which the depreciation is directly applied.  This means each investor in a syndication is reaping the direct tax benefits of depreciation.  In many syndications, investors could receive paper losses even though they received cash distributions because of the power of accelerated depreciation.  (As always, please consult your CPA and tax advisor on your particular tax situation).

Returns

Over the last 40 years, historical data shows that exchange-traded REITs have an average annual return of 12.8%.   To compare, stocks in that same period returned an average of 11.6%.   If you invested $100k, this would mean returns of $12,800 and $11,600, respectively.  However, the average apartment syndication on a five year hold returns around 20% annually (when you consider the cumulative returns of distributions plus profit from the sale of the property).

At the end of the day, however, investing is not one-size-fits-all.  Each investor should evaluate these differences within the context of their overall investment strategy.  We obviously are passionate about bringing apartment syndications to all of our optometric colleagues.  But, we encourage every investor to consult their advisors and come to the decision that is best for them.  When you are ready to learn more about apartment syndications, we are here to help.  Be sure to register with us by clicking here and we can set up a 20 minute consultation call to see if your objectives align with our opportunities.

We love patient care.  Can we please just get that out of the way before moving much further? When people find out about our passion for sharing apartment investment opportunities, they sometimes take it as a sign we are optometrists who don’t like spending time in the exam room.  Nothing could be further from the truth, and it’s that narrow mindset that has spurred us to blaze our own path–to change the optometrist’s perceptions of financial wellness.   On a more granular level,  here’s 3 key reasons why we started New Sight Capital.

We didn’t want 100% of our income to be dependent on insurances and patients

Again, we love patients–not all of them, but most of them.   We don’t love insurance, but we understand that, without it, patient access to care would be severely limited.  Yet, if you’ve been doing eye exams long enough you are well aware of the tension that exists between optometrist, insurance, and patient.  You’ve  encountered many patients who have the warmest and most humbling things to say about your care and practice, but if they change to an insurance plan that you don’t take, you’ll never see them again.   

Further tension results when insurances, especially vision plans, give the perception to patients that their small monthly premium means they have the best benefits with absolutely no copays.  Patients accept the misleading advertising and sign up for the plans without reading the fine print.  When they face the reality of their true out-of-pocket expenses, they blame you.  When they call the insurance company, the reps will also blame you and your greedy fees.  Meanwhile, insurances find a way to consistently reduce reimbursements to you even though every single expense related to delivering services in your office increases significantly every year. 

We reached a point in our professional careers where we just didn’t want to have all of our income dependent on the above scenario.   You may be at that point as well.  While it’s a shame the insurance-patient-optometrist relationship has been made to be so contentious, it will only get worse.  That may mean further degradation of patient relationships or operational profitability or both.   Either way, we made a firm decision that we wanted a significant portion of our income to come outside of this arena–somewhere far removed from these disruptive influences.

We needed to find another source of income for our respective families, and, ultimately, that flourished into investments in apartment real estate.  Not only did it establish reliable streams of cash flow outside of eye care, it also met a few other key criteria.

We wanted tax-efficient (even tax free) cash flow

I don’t think optometrists love paying taxes–especially when the earned income lands them in the top one or two tax brackets.   It’s frustrating to be paying back $200k in student loans while also getting saddled with 35% to 50% in combined income tax rates.  Like most people who’ve ever read Rich Dad, Poor Dad by Robert Kiyosaki, we realized we were missing out on what the wealthy already knew:  real estate is the best way to generate income with greatly reduced taxes—or even no taxes!

In doing research, we quickly found that larger multifamily (apartment) investments had the best tax efficiencies.  Why?  Accelerated depreciation!   Commercial assets allow the owner to depreciate the value of the assets over a long period of time.   The owner can use that yearly depreciation as a non-operating expense which helps reduce the taxable income–and reduce the tax burden.  However, apartment real estate allows for a process by which you can segregate certain assets and depreciate them faster.  Depending on the property, the front-loaded depreciation may reduce or even eliminate the tax liability of the cash flow from the property.  Yes, there are scenarios where you pay no tax on cash flow from apartment investments.

Given the amount of taxes most optometrists pay on their regular income, we knew this was something we had to share with other eye doctors in the trenches.  When we did start to have these conversations, many optometrists were surprised to learn that real estate investments had cash flow tax benefits they couldn’t find anywhere else–including stocks. 

We wanted our investments to be stable and passive

It seems, as of late, everyone talks about investing in stocks.  In much of the pre-COVID bull market and the post-COVID rebound, it’s not been hard to pick a few stocks and see considerable appreciation.  The questions we’ve been asking are:  When does this run breakdown?  Do I really want most of my investments in such a volatile environment?  While stock returns can be significant (and subject to capital gains tax), we wanted much more stability and predictability.  What we found was apartment real estate has been one of the most stable asset classes over the long term.  Even when the housing crash happened in 2008, apartment housing kept steady.  The reasons are pretty simple:   people need housing even in recessions, many people cannot or will not buy a house, and there are too many roadblocks to building new apartments which means supply never outpaces demand.   We found rent prices are key to driving valuations of apartment real estate, and rent prices historically go up over time.  We just couldn’t find other asset classes that had that kind of stability–both in cash flow and valuation.

But, here was a big issue:   we were busy seeing patients and didn’t want to be busy taking care of clogged toilets, broken refrigerators, or noisy and disruptive renters.  We wanted all of the above benefits but we wanted passive involvement.  That is what led us to apartment syndications, which is really the pooling of collective capital from small investors to acquire an apartment complex.  The investors just simply invest money and receive distributions, as well as profit from the eventual sale of the asset.  That’s it.  No other work required by the investors.  There’s just not any other investments like apartment complexes:  steady cash flow, stable and resistant in down economies, tax efficient cash flow, and no work required by the investors.

There was just one more problem:  who do we trust with our money?  There are plenty of apartment syndicators, but we never felt fully assured of their integrity–and they certainly couldn’t relate to our professional challenges as optometrists.  We felt that was important.  This was also our light bulb moment.  We had to start our own apartment investment firm.

So, New Sight Capital was born with the purpose of giving our colleagues an opportunity to join us in apartment real estate investing.  We wanted to build a company that understood the unique challenges of the investors (optometrists)–not in a general sense, but through a shared experience.   We’ve felt the pain and frustration that comes with our incomes depending 100% on the patient-insurance predicament.   We’ve got student loans.  We’ve seen our take home pay reduced by being taxed near the top of the brackets.   And, we didn’t always have time to seek out more active investments.   

If these are your pain points as well, then New Sight Capital is the perfect place for you.  We can relate.  We can help. Register with us here to learn more about syndications and our current and upcoming offerings.