4 Ways to Measure Your Investment Returns in Apartment Syndications

One of the first questions syndication investors should ask is “what’s my return on investment?”  The most accurate answer, unfortunately, is not a short answer.   That’s because there are several methods of measuring or describing potential returns for your investment in apartment syndications.   Taking one of these measurements by itself may be misleading.   In isolation, one return metric may not give you accurate information unless it’s given in the context of other metrics. Also, your investment objectives may prioritize one or more of these measurements.  Here’s the 4 investment return metrics that every investor should evaluate for each offering.

Cash-on-Cash Return

Cash flow is a primary motivator for many investors in apartment syndications.  This is for good reason.   Cash flow from apartment syndications is the very definition of a passive investment.  The investor contributes capital to become a limited partner in a syndication, leaves all the work up to the general partners, and he or she gets paid quarterly cash returns.   Cash-on-cash return is defined as the amount of cash distributions relative to the amount of initial investment.   Mathematically, it is the amount of distributions in a year divided by the initial investment.   If you invest $50,0000 and get a total of $5,000 in distributions over the course of a year, that’s a 10% cash-on-cash return.  

Cash-on-cash returns in apartment syndications may vary.   You could see cash-on-cash return as low as 5% or as high as 12% projected in an offering.   An investor may be tempted to focus solely on this metric and choose to invest in syndications that project 10% or more.   However, this metric has some disadvantages.  First, it’s simply a measure of how much cash distributions your investment will produce.   This metric completely ignores the overall growth in value your initial investment could realize over the hold period of the investment.   For example, if you achieve 10% cash-on-cash but the value of the property doesn’t increase and you are simply returned your $50,000 investment after 5 years, then they may not be a wise investment.  Compare that to an offering that pays 8% cash-on-cash returns but grows the value of that $50,000 to $75,000 at the 5 year exit.  This is the perfect example of why one metric should not be evaluated in a vacuum. 

Total Return (and Equity Multiple)

As the above example illustrates, it’s wise to consider more than just cash flow if wealth growth is also an objective.   That’s where Total Return comes into play.   Total Return is the total amount of money returned to an investor.   This includes yearly cash flow, return of initial capital, and profit from the sale of the property.   For example, you invest $50,000 initially.   The syndication pays you 8% cash-on-cash each year–which is $4,000 for 5 years.  That’s $20,000.  At the end of the year 5, the property is sold and you are given back your initial $50,000 plus $30,000 as your share in the sale profits.  That was a total profit of $50,000 off a $50,000 investment or a 100% return.   In this market, a 90-95% total return on a 5 or 6 year hold is very good.

A slightly different way to express the same metric is Equity Multiple.   This is really to say what factor of growth does your initial investment experience over the course of the syndication.   Basically, how many times does your money grow?  Using the example above, what’s the total amount of money this put out by the end of the investment cycle?   It’s $20,000 (cash payouts over 5 years) + $50,000 (returned investment) + $30,000 (profit from sale) = $100,000.    We divide that by the initial investment of $50,000 to get an Equity Multiple of 2.0x.  Essentially, if you take into consideration cash flow and profits, the initial investment increased by a multiple of 2.0x over the 5 years.   An Equity Multiple of 1.9x to 2.0x is considered favorable by many investors over a 5 or 6 year hold period.

Average Return or Annual Rate of Return (ARR)

This is a common metric investors use to compare apartment syndication returns to other types of investments, like the stock market or mutual funds, etc.   It’s really using the same information as Total Return but it annualizes the result to show you what growth of your money is achieved on an annual basis.   Let’s return to the example above.  We’ve already calculated the investor has an initial investment of $50,000 returned plus a cumulative profit of another $50,000 (cash distributions plus sale profit).   We take that $50,000 profit and divide by the number of years of the investment (5 years) = $10,000.   That’s the average annualized amount of return.   As a percentage, that’s 20% of the initial investment.  In essence, this investment grew by 20% each year when you consider all cash distributions and net sale profit.  Now, compare that to stock market index funds, individual stock returns, or bonds.

Internal Rate of Return (IRR)

When you look at an apartment syndication offering, you’ll most likely see an Internal Rate of Return.  In simple terms, IRR is very similar to ARR with one key difference:   IRR takes into account the time value of money.    Let’s take a look at the example above one more time.   In the first few years, the investor’s return consisted solely of cash dividends of 8%.  But, in the final year there is returned capital plus profit from sale proceeds.  The average annualized return may be 20%, but the bulk of that return was on the backend of the 5 year hold period.    IRR, however, seeks to weigh the velocity of returns because it defines money as having more value today than in the future.  IRR is a complex algebraic calculation.  For the example above, the calculated IRR is 16.6%.  Again, that’s not your actual annualized return, but it’s a formulaic way of describing your return by placing a higher value on money today than in 5 years.  IRR can vary considerably among syndication offerings, depending on how much of the return is paid out in the earlier years of the investment cycle.

Which investment return measurement is best for you? That really depends on your investment objectives. If you are targeting higher cash flow, then cash-on-cash returns may be a higher priority. Yet, that metric should also be evaluated within the context of other factors, such as risk of the investment. If an investor is seeking higher stability investments with significant equity growth, then total return and equity multiple may be a priority. That investor would also want to consider the IRR of the deal and evaluate their comfort in realizing higher returns on the back end of the hold period vs more front-loaded returns. Again, there’s a lot to consider when investing in apartment syndications. If you have questions about these metrics, feel free to reach out to us at russ@newsightcapital.com. Also, be sure to register with us so that we can connect regarding current and upcoming investment offerings.

5 Forced Appreciation Strategies to Increase the Value of Your Investment

One of the biggest benefits of apartment syndications is the consistent cash flow for investors.  However, cash flow alone will not increase investor wealth.   For you to increase your personal wealth, you’ll need to see your invested capital grow over time.  When you invest in an apartment syndication, the ultimate goal is to have your initial investment returned plus profit from the sale of the property. In order to produce a profit at the time of sale, the value of the property must have increased.

But how does an apartment syndication grow the value of the property?   The answer is something called Forced Appreciation.  Ultimately, the value of apartment properties are dependent on their profit or “Net Operating Income” (NOI).   While the average house appreciates based on the sales of comparable homes around it, apartments are different.   The price that a buyer is willing to pay for an apartment complex is greatly dependent on profitability.   When profitability increases, so does the value of the property.

Forced appreciation is the strategy of taking key profit-improving actions to increase the value of the property.  Every apartment syndication with New Sight Capital is built around a forced appreciation business model.   These typically focus on two categories:  increasing rents and decreasing expenses. 

Here are the 5 most common forced appreciation strategies we use to increase the value of an apartment property and your investment:

Refreshing Individual Units

One of the most common methods of successfully raising rents is the refreshing of individual units within an apartment complex.  This is the main force behind the value-add strategy, which seeks to purchase properties that are slightly aged or outdated, modernizing individual units, and then raising rents to the higher end of the competing market place.  A light value-add refresh may be as simple as fresh paint and appliances and flooring.   Heavy value-add changes may involve new kitchen cabinets and countertops or modifying floor plan layouts.   When we evaluate a value-add strategy for a property, we identify what is the amount of investment needed per unit in order to realize a meaningful increase in rent.  From there, we model the return on that investment within the context of investor returns.

Adding/Improving Amenities

If you’ve ever lived in an apartment complex, you’ll know that apartment life is more than just the condition of the individual apartment.   Amenities are typically a strong way to differentiate one apartment community from its competitors in the local market.   Better amenities often attract more demand from potential renters and allow the apartment complex to charge a higher rental rate.  Pools are the most common amenity offered in apartments, but today’s apartments need to offer more than that.   Clubhouses, fitness centers, picnic areas are other common amenities that can help with higher rental rates.   Dog parks are also becoming a popular way to attract more owners.  Smart thermostats, smart lighting, and wi-fi enabled door locks are other amenities valued by today’s apartment renter.   

Charging Renters for Utilities & Other Expenses

Depending on the area or period in which the apartment complex is constructed, utilities may actually be billed to the complex owner and not the individual renter.    This could be water, sewer, electric, gas, or trash.   When the owner of the complex is paying for all or a portion of these renter utilities, it directly reduces profit or net operating income.  Many value-add strategists will target properties like this because shifting those expenses back to the individual renter will reduce costs and increase profit.  There may be laws in certain areas that govern how an owner can execute chargebacks to renters for these costs.  However, when executed properly, this shifting of utility responsibility back to the tenant is an excellent way to improve profit and, hence, the value of the property.

Implementing Market Appropriate Fees

While “other income” fees are a small portion of an apartment complex’s overall revenue, they can be an excellent way to improve the profit and value of a property.  In many markets, it’s the norm that tenants are charged certain one-time or recurring fees.  For example, one-time fees include application fees, processing fees, initial pet fees, etc.   Ongoing fees may include pet fees or month-to-month lease fees.    Clever apartment operators are also finding additional services that can generate ongoing fees.  These may include trash concierge and dry cleaning services.  In the end, the operator wants to make sure it’s charging the maximum fee when appropriate as a way to support the “other income” category of revenue.

Reduce Wasteful Expenses

After evaluating income opportunities, the apartment operator takes a close look at expenses.  When they can be reduced, profit and value increase.  Some apartments are not well managed in terms of operational costs.  Perhaps, a property is spending too much on marketing or administration fees.  Some properties are being overcharged for staffing and property management by third party companies.   Older properties may be spending considerable amounts on repairs and maintenance that could be reduced by rehabbing units.   Either way, reducing costs provides supplemental benefits in the overall value-add strategy of improving the value of the property.  

While there are other ways to force appreciation of the value of an apartment property for its investors, these are some of the most common means.   Research, planning, and execution are the key to each of these forced appreciation strategies.   When evaluating whether or not to invest in an apartment syndication as a limited partner, these are areas that should be addressed in every offering.  With intentional strategy, apartment syndications are truly a unique opportunity to grow the value of your invested capital.

If you’d like to learn more about apartment syndications with New Sight Capital, be sure to register through the link at the top or email russ@newsightcapital.com

5 Reasons why Doctors Should Invest in Apartment Syndications

As long as I’ve been a doctor, I’ve been investing my earned income into assets that I thought would serve my long term financial benefit. Like me, you’ve probably been taught the stock market is where smart investors put their money. And while there is definite benefit to investing in the market, I’ve learned that most of the wealthy in this country focus their capital towards real estate as a way to grow their wealth and establish stable cash flow.

I cringed when someone first told me that.  When I think of real estate investing, the first thing that comes to mind is “flipping” houses—buy a house in distress, add some degree of improvements quickly, and sell it to another buyer. While that is one aspect of real estate, history has shown flipping to be cyclical and full of risk.

The area of real estate, rather, that creates stable cash flow and growth of capital is multifamily investing. Multifamily housing can be something as small as a duplex or it can be as big as a several hundred unit apartment complex. There are certainly those investors who do well in the smaller multifamily space, but those are typically more hands-on investments. For the sake of this article, we’ll be talking about the benefits of investing in large apartment syndications–like the ones we offer here at New Sight Capital.

Here’s 5 Reasons why we think doctors should be investing in apartment syndications:

1.  CAPITAL PRESERVATION

I used to think the number one goal of investing was to make money. As the years go by and my personal wealth increases, I found preserving my capital is of great importance. Each trip around the sun is one less year of income potential. I’m 43 and I don’t have as many income earning years in the tank as I did when I was 33. It’s just a fact. While I’ve increased my wealth through the stock market, it comes with significant risks. No one can deny the market returns over the last 10, 20, or 30 years.   But there have been considerable and violent downside corrections along the way. Volatility can be sickening when you have significant money invested in the market.

However, one asset class that has not suffered violent corrections over the last half century is multifamily housing—specifically apartments. While 2008 saw a housing market crash, the rental housing market did not. The data shows that, while home prices fell like a rock, the value of apartments held their ground. Why? One word: rents! Apartments are essentially valued based on the profit they generate from rent, and rent prices are determined by the supply and demand of the marketplace.  In a housing recession there is oversupply of homes and undersupply of qualified and willing buyers. However, in any recession, people still need a place to live, and the demand for rental housing does not go down. Actually, the long term trend has been increased demand for rental housing. Increasingly, more of the population seeks to rent rather than own.  

That’s especially good for apartment values, since supply is very limited.  Historically, most areas of the country have not built rental housing at a rate fast enough to keep up with demand. Given the costs of construction, this will not be a trend that is broken anytime soon. The result is limited supply and strong, increasing rental demand.     Rents rise in response and apartments grow in value. As a result, investors in apartments are given a stable place to put their money no matter the greater economic cycle.  For doctors who are concerned about preserving their wealth for their families and the future, apartment syndications provide a proven opportunity.

2.  CONSISTENT CASH FLOW

As with many investors, reading “Rich Dad, Poor Dad” by Robert Kiyosaki forever altered how I define and seek assets. The premise of the argument is that for something to be considered an asset it must generate a net positive cash flow. Anything else you buy that does not give you a net positive cash flow is a liability.  

This is important because cash flow gives financial freedom. For many doctors, like myself, seeing patients is very enjoyable. Yet, the burdens of insurances, staffing, regulations, etc., dilute professional satisfaction over time. The more cash flowing assets you acquire, the less dependent you and your family are on your work–allowing you more flexibility in how you choose to invest your time and expertise.

Apartment syndications offer doctors an excellent opportunity to invest in stable cash flow returns.  When you invest in an apartment syndication with New Sight Capital, you are given an equity position as a Limited Partner in the apartment property. That entitles you to a pro rata share in the profits that property generates.  Syndications typically pay out cash distributions quarterly to their investors. Apartment syndications can have hold periods of anywhere from 2 to 7 years, but the industry average hovers around 5 years. That means the investor has 5 years worth of stable, consistent cash flow payouts from their investment. This gets even better when you consider the next two advantages: it’s passive and holds significant tax benefits!

3.  TRULY PASSIVE INVESTMENT

Part of what makes apartment syndications so attractive is that they are passive investments.  People throw that term around a lot. Most often they apply it to situations that still require a certain level of involvement, time, or effort. But, New Sight Capital apartment syndications are entirely worry free for our investors. We find the properties, secure funding, close on the property, hire professional managers to run the property, source accounting and legal work from licensed professionals, and return profits to our investors in the form of quarterly payments. It’s really that simple for our investors.

You don’t have to deal with leaky toilets or after hours calls.  No worrying about managing the staff or service vendors. New Sight Capital and our professional property management partners take care of every aspect. For doctors who already have limited time, apartment syndications provide the perfect opportunity to receive stable cash flow without having to invest time or energy.

4.  CASH FLOW WITH TAX BENEFITS

Many wealthy investors already understand the tax benefits of investing in rental real estate.  The power of depreciation is the big driver of these benefits. Before we touch on depreciation, let’s first discuss operating and non-operating expenses. Let’s say an apartment has $2 million in gross revenue. All expenses related to the operation of that property are called operating expenses. These would include utilities, repairs, maintenance, property management payroll, etc. When you subtract operating expenses from gross revenue, you get net profit or Net Operating Income. If taxes were based on just net operating income, investors would have significant tax burdens. However, the business can also deduct non-operating expenses such as loan interest and amortizations, as well as depreciation.   

Some doctors reading this article own or have owned their own practice, so you already understand the tax reducing benefits of depreciation. When you have physical property you can deduct the value of that property over a certain number of years as an expense–which is used to offset the tax burden of the actual profit generated.   However, commercial real estate allows for accelerated depreciation through something called “cost segregation.” This is an analysis by a 3rd party that determines how much of the property can be depreciated over 5 or 7 years rather than the normal 27 years. Theoretically, the result is that investors receive cash flow from Net Operating Income, but have greatly reduced or eliminated tax burden on that money due to the benefits of depreciation.

By no means is this tax advice, and we encourage every investor to consult with a certified tax professional. But, it points to one of the very unique attributes of cash flow with multifamily investing. As doctors are most often near the top of the tax brackets, tax efficient investments in apartments are a meaningful way to increase income.

5.   GROWTH OF CAPITAL

Besides the stable, passive, and tax-efficient cash flow benefits of apartment syndications, growth of investor capital is a very important outcome. Most apartment syndications spell out their projected hold periods to their investors ahead of time. Each investment opportunity will vary, but most New Sight Capital syndications project 5 year holds. That means, once target objectives are met, the property is sold and the syndication dissolves. The goal of the exit is to return the investors’ original investment plus a portion of the profit leftover after every investment is returned. As with any investment, there are risks and no guarantees–but the goal in apartment syndications is for each investor to get stable cash flow over the hold period, plus their original investment and a healthy profit from the sale of the property. This growth of capital allows for accelerated wealth creation for the investors who continue this process over time.

If you would like to learn more about investment opportunities with New Sight Capital, please click here for next steps or email russ@newsightcapital.com