Real estate crowdfunding is a great way for new investors to begin their path to developing a passive income. It allows investors to earn rental income and profits from the sale of owned properties. With modern-day technology and easy access to the web, real estate crowdfunding is something that anyone can take advantage of if they are interested in increasing their income.
What is real estate crowdfunding?
Real estate crowdfunding uses social media and the internet to connect investors who may have a mutual interest in investing in a common project. It is very similar to equity crowdfunding in the sense that investors can buy a property and become shareholders. Investors don't have to buy the entire property but instead can earn a portion of the profits generated from the investment. Real estate crowdfunding was originally created by JOBS (Jumpstart Our Business Startups Act), which allowed crowdfunding to aid small businesses. The SEC (Securities and Exchange Commission) has since taken off the restrictions so that non-accredited investors can invest in crowdfunding projects. This has widened the pool of investors in the real estate industry.
Who is real estate crowdfunding for?
Investors of all ages can begin their path to a passive income. Whether a seasoned or first-time investor, the playing field is level. One of the most important components of successful investing is taking the time to research potential investments, giving each investor an equal opportunity for success. Conducting the appropriate amount of research determines the success that can come from each project. With easy access to the internet, research is something that any investor can perform within a matter of minutes. This makes real estate crowdfunding an easy market to dive into.
What are the benefits of real estate crowdfunding?
There are many benefits to crowdfunding. Due to the COVID-19 pandemic, lenders have been slower to supply funding because of sensitive financial stability. However, real estate crowdfunding gives investors a low-risk, high-reward opportunity. Platforms such as Holdfolio give both accredited and non-accredited shareholders the resources to gain more knowledge on investments. One advantage of crowdfunding is the ability to earn extra money from the dividends that are generated by the investment. Depending on the platform and the package that is selected, investors can choose to have dividends paid out quarterly or monthly. From there, investors are given the option to either reinvest their dividends back into projects or pull out the earnings as they go.Another attractive aspect of real estate crowdfunding is that many platforms allow individuals opportunities to invest as low as $500 to $1,000. This makes it relatively easy for new, young investors to enter the market. Finally, real estate crowdfunding platforms provide users with resources to learn about real estate and also browse multiple investment opportunities online. They provide a secure dashboard that allows investors to be able to manage their investments in a secure manner.
What are the cons of real estate crowdfunding?
Although real estate crowdfunding can be a great source of income, there are also factors to consider in making this decision. One of the cons of crowdfunding is investor risk. There are many circumstances that are out of the investor’s control. Market volatility is likely the biggest downfall for this type of investment. Real estate crowdfunding may not be the right choice for you if you prefer to have more control over investments. Crowdfunding can also be an illiquid investment, meaning that the investments cannot be easily sold for cash if necessary. In most cases, even if an emergency situation comes up, it is almost impossible to pull out the funds from that investment. This could be a problem for inexperienced investors who might need the flexibility to access their funds more quickly.It is important each investor evaluates the pros and cons before entering a new deal. However, crowdfunding is an opportunity for investors with any level of experience to try a new line of investing. With crowdfunding, the opportunities and benefits are endless, especially if paired with the appropriate due diligence.
Investing in multifamily real estate is a smart way to diversify your portfolio. Investors find multifamily real estate attractive because it lends itself to a slow and steady return on investment. Between Covid-19 and rapid changes in politics, today’s economic outlook is uncertain and rookie and seasoned investors alike are looking for investments that will grow their capital. Multifamily real estate is less complicated than other commercial real estate opportunities and can generate a strong cash flow. Keep reading to explore the key pros and cons of multifamily investing.
What is multifamily real estate?
A multifamily property contains more than one rentable unit - like an apartment complex or high-rise. Investing in rental properties, like multifamily units, is a preferred strategy for investors who want to generate an additional monthly income at a relatively low cost.
What are the pros of investing in multifamily real estate?
Investing in a multifamily property holds its fair share of advantages. Large demand = lower risk. Multifamily investing is considered a safer investment than other real estate assets. Even in the face of economic uncertainty and poor job markets, people need a place to live. During an economic downturn, rental properties may see a boom as people sell their homes, relocate, or move into a rental.
Grow your portfolio faster. Investing in multifamily real estate is a unique opportunity to expand your portfolio in a short period of time. It’s a lot easier and timelier to acquire 30 apartment units than to acquire 30 single-family homes. Avoid the headache of multiple loans, sellers, and inspections by investing in a multifamily property.
Streamline your property management. Investing in a multifamily property improves daily efficiencies in your property management. By managing one property with multiple units, you save time and money traveling between properties to perform maintenance duties. Also, it makes more financial sense to hire a property manager for a multifamily property rather than a string of single-family homes.
Increase your cash flow. One of the biggest advantages to investing in multifamily real estate is the ability to significantly increase your cash flow. Investors are attracted to multifamily properties because of the predictability of income each month. In both bull and bear markets, rents are collected each month, and units are easily turned over for new leases leading to a steady cash flow. From lower risk to higher rewards and increased efficiencies in your property management, put your investment capital to work with multifamily real estate. View open investments with Holdfolio.
What are the cons of investing in multifamily real estate?
Despite the strong advantages of investing in multifamily properties, we wouldn’t be doing our due diligence if we didn’t share some of the drawbacks of this investment strategy. Increased competition. The advantages of multifamily real estate draw attention from new and experienced investors alike, creating strong competition in the market. This can pave the way for more experienced investors to crowd out the market because they may be more likely to pay in cash or appeal to sellers. Newbie investors may find luck partnering with experienced investors or joining a real estate crowdfunding platform like Holdfolio.
Higher upfront cost. Depending on where you’re investing, multifamily properties can be extremely expensive, much more expensive than a single-family home. Cost tends to be the biggest barrier to new investors, even for seasoned investors. Most banks look for investors to put down at least 20% as a down payment. However, banks are more likely to grant loans for a multifamily property than a single-family because there is less risk involved. Despite the higher upfront costs and competition, avenues like real estate crowdfunding platforms have become attractive to multifamily investors. Crowdfunding platforms allow investors to put a small amount of capital into a property to become a shareholder. Diversify your portfolio and increase your cash flow with multifamily real estate in 2021. Assess the pros and cons and seek the best investment for your wallet. Start investing with Holdfolio today.
It’s been more than six months since COVID-19 hit the country, and ever since then millions of Americans have been affected by the financial, economic, and social implications of the pandemic. From national lockdowns to financial insecurity, the real estate industry has been dramatically impacted. But, what does real estate investing look like in 2021 as we begin to gain more certainty on the path forward? Keep reading to learn about investing in real estate in 2021. The Impact Of Coronavirus On Real EstateWhen the coronavirus shut down businesses and schools across the country in March, the effects of the pandemic on real estate and investing were felt almost immediately. Tenants fell behind on rent, mortgages went into forbearance, vacation rentals were canceled, and property sales decreased. Despite the effects of a national lockdown, the real estate market has seen a rebound in the second half of 2020. In fact, home prices were up 15% year over year at the start of November and Zillow predicts that home values will increase 4.1% in 2021 due to renewed market optimism and spikes in sales this summer and fall. While the long-term effects of the coronavirus on real estate are still uncertain, rebounds in the market this fall have given investors and buyers hope for 2021. Real Estate Investing Opportunities In 2021New and experienced real estate investors may be unsure where their best investing bet lies in 2021. While there are housing booms in cities across the country, many Americans still find themselves in precarious financial situations and may not be in a position to buy a home. This poses a unique opportunity for house flippers. With lower demand in some areas, prices are driven down and the opportunity to flip houses is valuable and lucrative. Access to capital and loans may be an issue for some investors with lenders slower to give out loans at a time when many people’s finances are in a sensitive position. This positions real estate crowdfunding platforms at the forefront of real estate investing in 2021. Crowdfunding platforms allow investors to invest in real estate in a low-risk high-reward model. The initial investment is low, it’s mainly passive, and is a simple way to diversify your real estate portfolio. Learn more about real estate crowdfunding platforms for accredited and non-accredited shareholders like Holdfolio. Vacation rentals also provide a way to make some extra cash on the side. With people in between jobs or considering relocation, the demand for short-term living arrangements is on the rise. Rental platforms like Airbnb and VRBO can also be more lucrative as you charge guests more for a short-term stay versus traditional renting. Lastly, the value of apartment complexes continues to rise. With cities converting office spaces into apartments and young people looking to rent instead of buy due to job insecurity, expect multi-family investing to be on the rise in 2021. Real estate investing in 2021 may seem uncertain. But, there are many unique opportunities to diversify your portfolio with real estate in the new year. Assess your options and seek the best investment for your wallet.
Have you got your real estate lingo down yet? Check out the commonly used real estate language to filter the deals you really want, and decipher real estate listings and ads.Motivated SellerA motivated seller is someone eager to sell their house in a hurry, and often at a discount. That is typically due to some form of distress. The seller could be deep in debt, and have liens and past due taxes piled up against the home. Or the property could have major flaws. It may need a new roof, septic tank, or foundation.CozyA small house or apartment. Probably very small. Could be a struggle getting your furniture in.Needs a Light CleaningPrepare to have to bring in a professional cleaning crew. You could be up to your knees in sewage, have to battle mold, or scrub away graffiti.Handyman SpecialGet ready for some serious rehab work. There is likely to be some major repairs to be made.Partial ViewIf you stand on a chair, on your tip toes and strain your neck, you might be able to see a sliver of something besides the neighbors’ brick wall.Starter HomeA small cheap home that probably needs some fixing up.UniqueA really special, quirky property which probably doesn’t fit in with the neighborhood. May have weird angles, be oddly colored, and have abstract landscaping.Rustic or VintageAn old out of date home. May need significant work to bring up to date.AiryCould have missing windows or doors. Maybe there are even holes in the floor or roof, or an entire wall could be missing.Good BonesThere may not be much to this home except for the bones. There may be some frame, but expect to have to replace everything else.Up and Coming AreaThis could be a rundown dangerous, in need of intervention and revitalization – move there if you dare. It may be trendy, and the prices may be better, but it could have a way to go before it really catches on.Credit ChallengedA prospective tenant with bad credit.No Closing Cost LoanLoans on which the mortgage lender may not charge their own closing costs. They may roll points, processing, and underwriting fees into a slightly higher interest rate. Note that there still will likely be third party closing costs including title insurance, closing fees, recording fees, taxes, and prorated property taxes and insurance.Get to know your real estate language to rapidly sift through the opportunities out there, and craft good listings and ads for your own properties you may be selling or renting.
Property management can be a major time drain if you do not find ways to manage your time. Doing so is a crucial part of the bigger picture, of building a highly profitable real estate portfolio. The more efficient you can be in this part of your investing, the better overall returns you can achieve while preserving time to actually enjoy the rewards of real estate investment.Check out these ten simple ways to streamline your managing your properties.....Accept Online Rental PaymentsOne of the ways to most dramatically streamline property management is to start accepting online rental payments. It will help cut down on time spent taking payments in-house or following up with bank statements and deposit slips. This can also make it easier for tenants to stay on track with their own rent payments.Get a BookkeeperUnless accounting was your major, and you love it, leave it to someone else. Having at least a part-time bookkeeper can really pay off in maximizing annual tax breaks, and countless hours in pulling together receipts and documents at tax filing time.Proactive Inspections & MaintenanceSlash the time involved in fielding complaints and repair requests, dealing with juggling vendors and additional bookkeeping by staying on top of regular property inspections, and tackling maintenance in advance. Small fixes done early can save many weeks and thousands of dollars.Freedom to make RepairsWhether you are a rental property owner with a property management company, or you are doing the DIY thing and are directly dealing with tenants, consider giving them more leeway to make repairs. Do you really need to personally handle every time a tenant locks themselves out, a toilet gets clogged, or a fuse blows? If it is going to cost less than $150 or $250, why not just give them the discretion to fix it?Renew Leases EarlyIdeally, you’ll know whether tenants are staying or leaving at least 60 days before their lease expires. This way you can work with tenants who are on the fence, which can save an enormous amount of time in turnover work. Or at least you know, and can minimize any vacancy periods.Release Deposits on TimeNot handling potentially explosive legal issues fast can quickly create a lot of work and expense. That inevitably snowballs and impacts your finances in many ways over time. Deposits are a great example. If you delay mailing deposits back to exiting renters, that can lead to all types of problems, versus just handing them a check on the day of your move out inspection.Deliver Default Notices on TimeThe same as above applies to late notices. Train your tenants that if they are late you will start the eviction process. If they can come up with the money, that’s great. It’s also less likely they’ll let it go that far, and create a new turnover situation.Pay Vendors FastWhen you drag your feet paying vendors, they drag their feet. It’s going to cost a whole lot more dealing with late penalties, digging up old invoices, and in time on the phone. You may even wind up being limited to only being able to work with the worst local vendors who can’t get employed by anyone else.Streamline Tenant Selection ProcessIn your tenant screening process, go beyond the credit score or background check and choose who you think will maintain your property the best. The tenant selection criteria and screening process have to be process oriented and very cut and dry with no gray areas. By treating all applicants the same and completing the same process for each person it will help avoid fair housing and/or discriminatory issues.Passive Income InvestmentsOne alternative to cut out the need for virtually all the above is simply choosing passive income options, like turnkey rental properties, or investment models like Holdfolio which come with full-service property management.When looking at the time expenditure for managing properties, it is wise to take into consideration all of the factors that eat up the most time for you. Where can you cut, who can you outsource, and how can you ensure that you aren’t a slave to your properties?
Who are the essential professionals you need in your camp before you start investing in real estate? It is important to keep up your momentum when getting started in real estate investing. Yet, you also want to make sure you are investing wisely and can enjoy a smooth process which delivers the best possible real estate success.Here are the first five professionals you need to connect with before you invest: CPA Your actual investment returns will depend a lot on taxes. There can easily be a double digit difference in what you get to keep, depending on how you set yourself up, and how you file taxes. A good tax professional can help you strategize and get it right before you wind up with a big income tax bill. Attorney Sooner or later you will want or need an attorney. It is just smart to have one already pre-screened and on call for when that time comes. You may want a specialist real estate attorney who can help negotiate contracts, and aid you in defending against lawsuits. It might also be helpful to have a family law or asset protection lawyer who can help you personally set up the right structures to grow and pass on your legacy. Insurance Agent Part of real estate success is the reduction of risk. Even if you don’t need direct property insurance to cover individual real estate assets, you will probably need an umbrella policy, life insurance, and other types of insurance to cover your assets in various areas. Capital Partners Even if you don’t plan on needing credit or extra cash to invest, it can be wise to have relationships with these sources in advance. It will help you avoid any cash crunches or missing out on any great opportunities. This may be private lenders, mortgage brokers, or angel investors. You will also want to build relationships with bankers to make your transactions go more smoothly. Experienced Mentor Having someone you can pick up the phone and call or shoot an email to for urgent help or an experienced second opinion can make all the difference in your business decision making. Find someone who is experienced in what you are doing and who shares your values. If you plan to be an active real estate investor, make this a full-time thing, or to start a real estate business, you will also want these five people in your camp before you get going. Contractor Having a trusted contractor on call can be invaluable for fast property inspections, repair estimates, timely turnovers and getting work done quickly. Real Estate Agent Whether or not you actually use a Realtor to help buy, sell, and rent real estate, investors can find them very useful for making sense of the market, and keeping on top of evolving trends. Marketing Expert You simply can’t do it all as an investor. Even if you have a strong marketing background, the most profitable use of your time is probably inking new deals. Still, with 90% of your success relying on your marketing to secure deals, fill them with renters, and resell them, make sure you have an expert on your team. Virtual Assistant An assistant can be used to protect and free up your time so that you are getting the best ROI on every hour of the day. A good assistant can handle a wide variety of time-consuming tasks, including finding the other people on this list. Project Manager As you grow your real estate business, taking on a big multifamily property, or are building new homes to rent out, a project manager can save you time, and help things go smoothly. This could be a true project manager for a specific mission, a property manager, or a general manager for your organization. Putting some thought into what and who you need to have in your camp to be savvy and efficient will help direct you towards the path of success!
How can you find real estate comps in your area to determine the potential appraised value of a property?Knowing your property value is essential to making smart and profitable investment choices. Investors can get a better handle on this by knowing their ‘comps’. Those are comparable property sales. So, where do you find them?3rd Party Online estimatorsZillow is one of the most commonly used online home value tools. It is fast and easy to use. It is also one of the most flawed. In fact, Zillow has finally been hit with a major class action lawsuit over its faulty Zestimate tool. Online home value estimators can help to give a fast, rough estimate of value, but are frequently wrong. Zillow or other sourcing websites can be a good first step in qualifying a potential property, but should not be relied on when actually putting your money on the line.RealtorsReal estate agents can be a great source of comparable information. They can save investors a lot of time, by pulling quality comps. Some brokers will provide ‘BPOs’ (Broker Price Opinion) for a few hundred dollars, or less. Agents will typically help by providing free CMAs (Comparative Market Analysis). Just note that they do this often in hopes of winning your business, and aren’t going to work for free forever. Their findings can also be biased.The MLSAnother option is to go right to the Realtors’ MLS (Multiple Listing Service) yourself. This can provide a lot of data on listed, sold, expired, and pending real estate comps. If you don’t have a real estate license and MLS membership, you can also use consumer-facing versions like Realtor.com.Title CompaniesOne of the most important things to remember in finding comps is that asking prices are almost irrelevant. Sellers and agents aggressively overprice properties for sale every day. What you want are actual sold comps. County public records can provide this data, and often online. Title companies will also have details on comps that have actually sold, and what concessions or special terms may be artificially influencing prices. They also know what transactions are in the pipeline to close soon.AppraisersProfessional real estate appraisers are go-to if you really want a solid figure you can bank on. You won’t typically want to splurge on the cost of a full appraisal for a property unless you are 100% sure you are buying it. However, appraisers and other data providers can also provide drive-by appraisals or an Automated Valuation Model (AVM). AVM’s usually include tax assessor's, sales history of a property and how other properties in the area are stacking up. Drive ByWhenever you can, you want to drive through the neighborhood for yourself. See what properties are for sale, and especially FSBOs (For Sale By Owner) which may not be on the MLS. This will also help in assessing rent comps as you can see how many properties are up for rent, and call on signs.SummaryRemember it is best not to rely on just one source for figuring comparables. Pooling many of these sources together can assist you in coming up with the best comps for your properties.
There are a variety real estate investment niches to choose from. Which is the right one for you?One of the key questions to ask yourself when it comes to investing in real estate is, which type of property is best for your individual portfolio growth? There are many to choose from. Some investors diversify themselves across multiple niches. Others are adamant fans of just one type of property and strategy.Here are some of the pros and cons of each, so you can decide for yourself…Single Family HousingSingle family housing is one of the most popular ways to invest in real estate today. It is easier to acquire and sometimes it is easier to purchase without the need for financing. It used to be primarily the domain of small individual investors, but has grown to be a top choice for some of the largest funds too.The Pros:Largest amount of inventory
Largest number of resale buyers
Easiest for individual investors to tackle by themselves
Most understood type of propertyThe Cons:Large amounts of competition
Vacancy can hit hard if you only own a couple units
High cost of improvements per unitMultifamily HousingMultifamily housing includes quads, and any type of property that includes more than one unit. There can by a wide divide in size and cost. It can range from a small 15 unit single apartment building to a 1000 unit apartment complex and everything in between.The Pros:Large demand for rental housing
Efficiency in property management
Lower cost per unit
Higher ROI on improvements madeThe Cons:Competition from capital-rich investors
Requires daily property management
May require more money or financing to buy and manage
Smaller resale market than single family homesCommercial Real EstateCommercial real estate encompasses a variety of sub-sectors and niches including; office, retail, medical, hospitality, industrial, and mixed-use.The Pros:Control over asset value through repositioning
Ability to obtain non-recourse financing
Prestige and pride of ownership
Benefits for personal use for your own businessThe Cons:Limited resale market
High level of professional management required
Least understood by most investors
Most likely to be impacted by economic changes and industry disruptionSummaryWhen you stack up and compare real estate investment niches like this, each has its pros and cons. Each also has a variety of deeper niches possible. In single family, you can focus on individual homes or condos, and in specific areas. Multi Family properties can range from local rentals to specialized lofts or apartments for vacation rentals or hi-tech professionals. Commercial property could include warehouses, local strip malls, or boutique hotels.What is important is that investors understand the differences. By selecting the optimal type based on your current circumstances and goals, you have a greater opportunity for success. Later you can add in other niches and diversify. Finally, recognize that there are various strategies for engaging in each of these niches too. You could go it alone, find a partner, be a private lender, flip them, or hold them for long term cash flow and capital gains.What will you invest in?
The sizzling hot summer rental market is kicking in. How can rental property owners be ready for it?Summer is traditionally the busiest time of the year in the real estate industry. The rental market can be flooded with renters who are motivated to secure new places before school starts again. This makes it a busy time for landlords, with a lot of additional competition. How can rental property owners get prepared and make the most of it?Market ResearchThe first step is to do some fresh market research. Do your homework on the market. What is your competition offering? What deals are being offered to potential renters out there? What are market trends? Is it a landlord or tenants’ market?VisibilityYou can’t expect to capture your share of renter leads unless they can see you. Be ramping up advertising, and reaching out to your connections and referral network to be sure they know you have units available.Provide the Right InfoIn your ads and rental listings make sure you provide enough detail for prospective tenants to make the decision to take action. This can include photos, video, property information, leasing details, and more. At this time of the year, many are specifically concerned with school districts, and the ability to move in fast.Offer Attractive DealsKnow what your competition is offering, so you can make sure you are offering competitive deals. Make sure the value is there. Know what is going to connect with tenants in terms of deposit, monthly rent, application process, and move-in money requirements.InfrastructureBy this point, you should already have scaled up your infrastructure to handle the surge in business and communications. You’ve got to be able to respond to inquiries instantly and deliver consistently good service. Be sure to have a good team and systems in place to make this happen.Don’t Neglect Current TenantsAll of the above is in addition to keeping your current tenants happy. With all the moving activity and the potential for attractive incentives being offered by other landlords and apartment owners, you want to take stock of your own inventory. Approach tenants early and find out if they plan to renew. Get those leases signed. Find out what you can do to keep good tenants. Or at least be aware of upcoming vacancies so that you can get marketing units early.
What exactly does passive income investing mean? How involved do you need to be to make passive real estate investing work?The Need & Desire for Passive Income InvestmentsThe need and desire for passive income is growing among investors. Individual investors, advisors, and economists have realized just how important it is to incorporate the cost of time and effort in an investment. Ongoing income or cash flow is a way to make the money you do have do the work. Some people win the lottery and then go broke by the very next year. What if they invested that money in working for them? There would be a different outcome.Passive income is vital for retirement. The truth is that we never know when we are going to have to retire. Some want to retire early. Others will be forced to quit work decades ahead of their expectations. Some are relying on social security or a pension to get them through their golden years and need more income than a low yield retirement account can offer. Many want to enjoy more financial surplus now. A surplus which can only be created by investing and generating passive income which is not based on how much work they can personally do.The Promise of ‘Passive Income’ in Real EstateWhile there are several options for generating passive income from real estate, buying and holding rental properties is easily the most common.Real estate is one of the most obvious choices of passive income investment because of the opportunity for cash flow. A good real estate investment from a reputable source can offer security, cash flow, and equity growth potential. For many real estate crowdfunding opportunities it is a low capital amount and ease of entry which really sets it apart, and makes it more accessible to the everyday investor.The Myth of Passive Income Real Estate InvestingSadly, despite all the hype and promises, most real estate isn’t really passive at all. Being a solo business owner, realtor or house flipper is not passive. Even the way most investors handle buy and hold rental properties is not really passive.For those who go out and find rentals, find tenants, and then hand the property off to a property manager they are still hands-on and in an overseeing role that takes time and effort. It is a lot of work and due diligence to find deals, negotiate and close them, manage property managers, and figure out the best times to exit. Multiply this by a whole portfolio of properties. It can be a full-time job. A good job, and often a well-paid one, but still a job, trading your hours and life for dollars.As Good as it GetsFortunately, there are other alternatives to invest. One which can provide truly passive income. Turnkey real estate investing provides investors with end-to-end service from vetting and securing properties, leasing and daily management, bookkeeping, and identifying smart times to exit or restructure. Crowdfunding opportunities can take this even further by providing allowing you to invest smaller amounts of capital in multiple deals. Do your due diligence and factor in the time needed to manage your portfolio of real estate. You may find that your time is worth the effort to look into a more passive way to invest in real estate so you can sit back and enjoy the cash flow!
THE PURCHASE OF LLC INTERESTS IS SPECULATIVE AND INVOLVES SIGNIFICANT RISK, INCLUDING THE RISK THAT YOU COULD LOSE YOUR ENTIRE INVESTMENT. THE PURCHASE OF LLC INTERESTS IS SUITABLE ONLY FOR INVESTORS WHO FULLY UNDERSTAND AND ARE CAPABLE OF BEARING THE RISKS. SOME OF THE RISKS ARE DESCRIBED BELOW. THE ORDER IN WHICH THESE RISKS ARE DISCUSSED IS NOT INTENDED TO SUGGEST THAT SOME RISKS ARE MORE IMPORTANT THAN OTHERS.
SPECULATIVE NATURE OF REAL ESTATE INVESTING:
Real estate can be risky and unpredictable. For example, many experienced, informed people lost money when the real estate market declined in 2007- 2008. Time has shown that the real estate market goes down without warning, sometimes resulting in significant losses. Some of the risks of investing in real estate include changing laws, including environmental laws; floods, fires, and other acts of God, some of which may not be insurable; changes in national or local economic conditions; changes in government policies, including changes in interest rates established by the Federal Reserve; and international crises. You should invest in real estate in general, and in the Company in particular, only if you can afford to lose your investment and are willing to live with the ups and downs of the real estate industry.
NO GUARANTY OF DISTRIBUTIONS:
When you buy a certificate of deposit from a bank, the Federal government (through the FDIC) guarantees you will get your money back. Buying an LLC Interest from the Company is not like that at all. The ability of the Company to make the distributions you expect, and ultimately to give you your money back, depends on a number of factors, including some beyond the control of the Company. Nobody guarantees that you will receive distributions.
INABILITY TO ATTRACT AND/OR RETAIN TENANTS:
Our success depends on our ability to attract and retain tenants in our Rental Properties. The risks we face include the following:
Competition from other landlords could keep us from raising rents.
Changes in economic conditions generally, or in the Indianapolis, IN and Dayton, OH areas in particular.
Existing tenants might not renew their leases.
Our Rental Properties could remain vacant for extended periods.
A tenant could default on its obligations, or go bankrupt.
Certain of our properties may be specifically suited to the needs of a certain type of tenant and we may have difficulty leasing such properties in the event of a vacancy.
Any of these circumstances would hurt the Company financially. If a vacancy continues for a long period of time, we may suffer reduced revenues resulting in less cash available to be distributed to shareholders. In addition, the resale value of a property with vacancies could be decreased because the value of a property may depend on the value of the leases of such property.
NEED TO RENOVATE PROPERTIES:
We might need to renovate our Rental Properties to make them competitive in the market. The more we have to spend to renovate our Rental Properties (assuming we can find the capital to do so), the lower the returns to our investors.
PROPERTY VALUES COULD DECREASE:
The value of the Rental Properties we own could decline, perhaps significantly. Factors that could cause the value of our Properties to decline include, but are not limited to:
Changes in interest rates
Competition from new construction
Changes in national or local economic conditions
Changes in zoning
Environmental contamination or liabilities
Changes in local market conditions
Fires, floods, and other casualties
Undisclosed defects in property
Incomplete or inaccurate due diligence
ILLIQUIDITY OF REAL ESTATE:
The Company might not be able to sell Rental Properties as quickly as or on the terms that it would like. For one thing, we cannot predict how long it will take to find a willing and able buyer. For another thing, we might be required to expend significant amounts of money to correct defects or make improvements before a property can be sold. The overall economic conditions that might cause the Company to want to sell Rental Properties are generally the same as those in which it would be most difficult to sell.
The costs of operating real estate – including taxes, insurance, utilities, and maintenance – tend to move up over time. We have limited control over some of our operating costs, and if our costs increase it may reduce the amount available for distribution to investors.
REGULATION AND ZONING:
Like all real estate, our Rental Properties are subject to extensive building and zoning ordinances and codes, which can change at any time. Changes in these laws and regulations could affect the Company adversely.
A fire, hurricane, mold infestation, or other casualty could materially and adversely affect the operation of the Company, even if the Company carries adequate insurance.
The Company will maintain insurance against certain kinds of losses, such as losses from fires. However, there are certain types of losses which either cannot be insured at all or cannot be insured for a reasonable cost.
LIMITED WARRANTIES FROM SELLERS:
In most cases, the Company will be required to purchase a property in “as is” condition, with few if any representations or warranties by Seller. If we learn that a property has defects after closing, we may not be able to look to the seller for reimbursement.
LIABILITY FOR PERSONAL INJURY:
As a landlord, we might be sued for injuries that occur in or outside our Properties, e.g., “slip and fall” injuries. Although we expect to carry insurance against potential liability in amounts we believe are adequate, it is possible that we could suffer a liability in excess of our insurance coverage.
We will conduct typical environmental testing on the properties we acquire to determine the existence of significant environmental hazards. However, it is impossible to be certain of all the ways that the properties have been used, raising the possibility that environmental hazards could exist despite our environmental investigations. Under Federal and State laws, moreover, a current or previous owner or operator of real estate may be required to remediate any hazardous conditions without regard to whether the owner knew about or caused the contamination. Similarly, the owner of real estate may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination. The cost of investigating and remediating environmental contamination can be substantial, even catastrophic.
The Americans with Disabilities Act of 1990 (the “ADA”) requires certain buildings to meet certain standards for accessibility by disabled persons, and we may be required to comply with its terms. If our Rental Properties are not compliant with all requirements of the ADA or if additional requirements are imposed in the future, whether pursuant to the ADA or otherwise, we would need to make modifications to those Properties, potentially at significant expense.
THE COMPANY IS A NEW BUSINESS WITH A LIMITED TRACK RECORD:
The Company is a new business with a limited track record, making it difficult for Investors to gauge our investment strategy. Like any new business, we face challenges on a number of fronts, including:
Developing a reputation and brand identity
Attracting, retaining, and motivating qualified executives and personnel
Implementing business systems, including technology systems
Responding effectively to the offerings of existing and future competitors
Managing growth and expansion
Implementing adequate accounting and financial systems and controls
There is no assurance that we will be successful on all (or any) of these fronts.
INCOMPLETE DUE DILIGENCE:
We intend to perform “due diligence” on each Rental Property we buy, meaning we will seek out and review information about the property. However, due diligence is as much an art as a science. As a practical matter, it is simply impossible to review all of the information about a given piece of real estate and there is no assurance that all of the information we will review will be accurate or complete in all respects. For example, sometimes important information is hidden or simply unavailable, or a third party might have an incentive to conceal information or provide inaccurate information, and we cannot verify all the information we receive independently. It is also possible that we will reach inaccurate conclusions about the information we review.
LACK OF DIVERSIFICATION:
We will own a limited number of Rental Properties in a select market and in a concentrated geographic location, or to put it another way, our portfolio of real estate will not be “diversified.” The diversification of a portfolio reduces both volatility and risk, which means that our portfolio is likely to be more volatile and more risky than if we had purchased a greater number of properties, purchased properties in geographic locations outside of Indianapolis, IN and Dayton, OH, or invested in properties outside of residential market (e.g.,commercial properties).
UNRELIABLE FINANCIAL PROJECTIONS:
We have prepared financial projections reflecting what we believe are reasonable assumptions concerning the conduct of our business. However, the nature of real estate development and investment is such that at least some of our assumptions are likely to be mistaken, either for better or for worse, so that the actual results of investing in the Rental Properties are likely to be different than the results reflected in the projections, possibly by a wide amount. Investors should be skeptical of financial projections in the real estate industry, not because developers intend to be misleading but because the industry is so volatile and difficult to predict.
PRICING OF ASSETS:
The success of the Company and its ability to make distributions to Investors depends on its ability to gauge the value of real estate assets. Although the Manager will rely on various objective criteria to select properties for investment, ultimately the value of these assets is as much an art as a science, and there is no guaranty that the Company and its advisors will be successful.
RISKS ASSOCIATED WITH DEVELOPMENT AND CONSTRUCTION:
We might renovate or repair our Rental Properties from time to time, as needed and if consistent with our overall investment strategy. Development and construction can be time-consuming and are fraught with risk, including the risk that projects will be delayed or cost more than budgeted.
RELIANCE ON MANAGEMENT
: You will not have a right to vote or otherwise participate in managing the Company, except on very limited matters. Instead, the Manager, along with its affiliate Sonder Homes (our property manager), will have full control over the business and management of the Company. As a result, the success of the Company – and its ability to make payments with respect to your LLC Interests – will depend almost exclusively on the skills of our Manager and its principals. Therefore, you should purchase an LLC Interest only if you are willing to rely on the ability and judgment of management and these third-party operators. If the principals of our Manager resign, die, or become ill, the Company and its Investors could suffer.
RISKS ASSOCIATED WITH LEVERAGE:
The Company may borrow money from banks or other lenders to refinance Rental Properties, purchase assets, or to finance development costs or other expenses. Borrowing money to purchase assets is sometimes referred to as “leverage.” While using leverage can increase the total return on the borrower’s equity, it also increases risk because the amount borrowed has to be repaid in accordance with a schedule. To repay its loans, the Company might have to sell assets at a time when values are low, for example.
BREACHES OF SECURITY: It is possible that our systems would be “hacked,” leading to the theft or disclosure of confidential information you have provided to us. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target, we and our vendors may be unable to anticipate these techniques or to implement adequate preventive measures.
NO MARKET FOR THE LLC INTERESTS; LIMITS ON TRANSFERABILITY:
There are at least three obstacles to selling or otherwise transferring your LLC Interest:
There will be no public market for your LLC Interest, meaning you could have a hard time finding a buyer.
The Operating Agreement prohibits you from transferring your LLC Interest without the consent of the Manager.
By law, you may not sell your LLC Interest unless it is registered under applicable securities laws or the transfer is eligible for an exemption from registration.
Taking all that into account, you should plan to own your LLC Interest indefinitely.
NEED FOR ADDITIONAL CAPITAL:
The Company might need more capital, whether to renovate one or more Rental Properties, to acquire additional properties, to carry the Company through periods when our rental income is insufficient to cover our operating expenses, to pay for uninsured losses, or otherwise. We might seek to raise additional capital through debt (borrowing money) or through equity (selling interests in the Company) or both. However, there is no assurance that additional capital will be available at the time it is needed, and if the Company needs but cannot obtain additional capital it is possible that the Company could fail. Even if additional capital is available, it could be on terms that are adverse to the interests of the Investors. A loan, for example, could bear a high interest rate or other onerous terms, while raising additional capital in the form of equity could dilute the interests of the Investors.
SUBORDINATION TO RIGHTS OF LENDERS:
The right of Investors to receive distributions from the Company is subordinate to the rights of the Company’s lender(s). In the event the Company were to default in its obligations to the lender(s), the Company might be prohibited from making further distributions to the Investors until the default had been cured.
LACK OF CASH TO PAY TAX LIABILITY:
The Company will be treated as a partnership for tax purposes. Consequently, your share of the taxable income from the Company (if any) will be reported on your personal income tax return. We will try to distribute enough money for you to pay your personal tax liability on your share of the income, but we might not have enough money to do so. In that case, you could have a net cash deficit from owning an LLC Interest.
NO REGISTRATION UNDER SECURITIES LAWS:
The Company and the LLC Interests will not be registered with the Securities and Exchange Commission (“SEC”) or the securities regulator of any State. Hence, neither the Company nor your LLC Interest is subject to the same degree of regulation, scrutiny and disclosure as if this offering were registered.
INCOMPLETE OFFERING INFORMATION:
The LLC Interests are being offered pursuant to Rule 506(b) issued by the SEC. Rule 506 does not require us to provide you with all the information that would be required in some other kinds of securities offerings, such as a public offering of shares. Although we have tried to provide all the information we believe is necessary for you to make an informed decision and we are ready to answer any questions you might have, it is possible that you would make a different decision if you had more information.
LACK OF ONGOING INFORMATION:
The Company will provide you with periodic statements concerning the Company, but it will not provide audited financial statements or other detailed information that you might receive in a securities offering registered with the SEC.
CONFLICTS OF INTEREST:
Your interests as an Investor could conflict with our interests in a number of important ways, including these:
Your interests might be better served if our management devoted its full attention to the Company. Instead, the principals of our Manager will be managing a number of different projects concurrently with the Company.
The principals of our Manager are also the principals of Sonder Homes, our property manager, which will receive fees from the Company. Although we will always seek to establish terms that are fair to the Company, the terms of any compensation or other agreements with Sonder Homes were negotiated between related parties, and therefore may not be as favorable to us as if they had been negotiated at arm’s length.
The principals of our Manager may be involved from time to time in other real estate ventures outside of the Company, and may be involved in purchasing and managing residential real estate projects in the vicinity of the Company. Therefore, they may be competing directly with the Company.
The lawyers who prepared this Confidential Investor Disclosure Document, the Operating Agreement, the Purchase and Investment Agreement, and the other documents related to your investment in the Company represent JB Holding Company LLC – our Manager – not Investors or even the Company. You must hire your own lawyer (at your own cost) if you want your interests to be separately represented.
DETERMINATION OF FEES:
The Manager and its affiliates may receive significant fees and distributions from the Company. Although we believe that the fees are consistent with the types and amounts of fees for other real estate development funds, the fees were not determined through arm’s-length negotiations with the Investors, but were established by our Manager.
LIMITATION ON RIGHTS UNDER OPERATING AGREEMENT:
The Operating Agreement limits your rights in several important respects, including these:
With a few exceptions, the Operating Agreement may be amended without your consent.
The Operating Agreement significantly curtails the right of Investors to bring legal claims against the Manager and its principals. Among other things, the Operating Agreement eliminates (to the extent allowed by law) the fiduciary obligations that the Manager would otherwise have to the Members.
The Operating Agreement limits your right to obtain information about the Company and to inspect its books and records.
The Operating Agreement restricts your right to sell or otherwise transfer your LLC Interest.
LIMITATIONS ON RIGHTS ON INVESTMENT AGREEMENT:
To purchase an LLC Interest, you are required to sign our Investment Agreement. The Investment Agreement would limit your rights in several important ways if you believe you have claims against us arising from the purchase of your LLC Interest:
In general, any legal claims brought against the Company or its principals must be brought in State or Federal Court in Indiana, which might not be convenient for you.
You would not be entitled to a jury trial on your claims.
THE FOREGOING ARE NOT NECESSARILY THE ONLY RISKS OF INVESTING.