I have experienced great success operating as a general partner and investor in over 35 commercial real estate syndications across several niches. I also have invested for over 30 years in all types of investments including the stock market to esoteric investments like hemp farms, litigation financing funds, and restaurants. I ran a stock investment club that finished top 1% of the country one year, am a licensed securities broker/dealer, and even have a college degree in financial planning. I’ve been fascinated by investing since a teenager. I’m speaking to you here from years of experience with my own investing.
I am going to disclose an investment that I believe many folks should seriously consider as a core holding that is extremely durable (think no to low volatility) and the closest thing to a sure thing besides a guarantee. It allows you to sleep at night. Pays out 10% annually, distributed monthly or quarterly, and tax benefits to boot. If I were limited to just two investments to choose from, it would be passively investing in:
- Broad based stock index fund – set, forget, low cost, low taxes, but can be volatile.
- Class A shares in Large value add class B multifamily apartments in growth markets – income, tax efficiencies, safety, low volatility.
My favorite asset class is in large, class B value add apartments in growing markets in the sun belt for income and safety.
A few years ago, we started providing two classes of investments that would enable investors to choose to make an investment based on their risk tolerance, market outlook, and investment objective. In a nutshell, if you want income and less volatility with no upside, you choose Class A. That provides a 10% preferred return. Class B is for growth investors, provided some yield, a 7% preferred return, but all the upsides. Most investors would choose B, since it is a small difference in yield, but the average annual return over a 5-year hold including the 7% preferred return targeted 15% + annually.
I personally invested in both classes. I would do a hybrid approach, putting say 50% in A and 50% in B. But I also saw several investors who had larger sums of money to invest, wanting to be more conservative, wanting income that was consistent, yielding 10% and in some instances depending on the operator, paid out monthly. Here is what that creates for them in consistent, monthly income without any worries or need to manage anything.
- $100,000 investment creates $833 monthly income.
- $250,000 investment creates $2,083 monthly income.
- $500,000 investment creates $4,167 monthly income.
- $1,000,000 investment creates $8,333 monthly income.
Now, let’s talk risk. Over 25 years, apartments have outperformed the stock market almost 2 to 1 with far less volatility, while providing tax benefits and income. Most people do not know that. Better yet, in the 2007 to 2009 financial crisis, government data for 2009 (worst year) reveals that only 1 in 200 apartment owners were over 60 days delinquent in paying their debt (less than .5%) while 4.5% of single-family homeowners across the country were challenged to make payments on their house. The fact that apartments can scale with 200 to 300 families, loss of income from an extreme case of 25% of your renters would be rare but to lose a single-family home if 100% of the income is derived from one or two incomes, is more common.
On a personal experience, we just got through the worst of COVID in 2020 and with over 6,000 units invested, we have not seen any properties not able to make their payments. Now, I work with experienced operators that are conservative in their business plan and financial modeling, operate in some of the top growth markets and best submarkets in these cities. So, if I take a look at the .5% again, if that includes all good and bad operators, in all good and bad markets, my thinking is the delinquency rate is practically nil. The fact that it performed so well even amidst a global pandemic, investing in MF is really low risk and may provide the best risk-adjusted returns available in the market. In fact, during COVID 2020, only one operator delayed paying Class A for one quarter, then caught up our investors two quarters later, only because they didn’t know how bad this could get last March, and like most smart operators, wanted to conserve cash until we gained clarity.
Class A is structurally safer than Class B. Class A investors get paid distributions and principal back before Class B investor or Class C (General Partner). It is a safer play in how the Class A investor is prioritized in the distribution and capital event (Sale or Refinance).
Want to get a little safer, you could invest in Class A 10% preferred return opportunities, maybe $50,000 minimum per deal and invest across experienced operators and growth markets in the sun belt who use a value-add class B approach. Creating a nice, diversified portfolio lowers your risk further. For example, you could buy one or two per year and build up a nice $250,00 to $500,000 portfolio and generate a steady $2,000 to $4,000 monthly income. Or there are some operators that do a Fund approach, and you can diversify right away and often add over time so you get instant diversification in 5 to 7 MF deals in 3 to 5 markets. Either way, these are options you should be aware of.
What about the tax benefits? Yes, you get the same flow-through tax benefits as a limited partner in an MF syndication deal, that is, gains/losses (from depreciation, property taxes, and loan interest) are deducted and impact you positively based on your percentage ownership in the deal. Annually, operators are required to provide you with a K1 tax partnership form. In over 6,000 apartment unit investments, I’ve yet to see a K1 where I do not have tax losses even though I got 10% cash flow in my pocket. You can use passive losses to offset passive gains in other areas of your portfolio. At sale, you get your principal return, say 5 years and there should be negligible long-term tax implications since you are not getting any of the profit from sale.
So, if you are nervous about the markets, tired of volatility, do not want to manage your investment, want steady monthly income, tax benefits, and be the hero in your family as your spouse sees checks rolling in without the emotional roller coaster, take a serious look at these types of opportunities. Want a little more juice, for example, you could always add 25% class B shares to your 75% class A to tilt get high income with a chance of some of the profit upside. The beauty of this is, it’s your choice. You just need to know your choices and that Class A checks the box for a lot of investors. Knowledge is power. Now you have it!
Hey Dave – Great blog! I really enjoyed reading it as it gave me great comfort to feel that I am doing the right thing with my strategy. I invest in several syndications where I take the Class A – Class B hybrid
approach. And, you’re right, I sleep better! Thank you, Bob Daniels