Owning an apartment building will always seem like a big deal regardless of where you live. It could be due to concerns with cost or the magnanimity of the project. While that may seem like a justifiable concern, the reality remains that purchasing an apartment building is not so different from buying a smaller rental property.
The most significant flex that apartment owners enjoy is the protection of cash flow by the many tenants, even when there are a couple of vacant units in the complex. Investors like yourself may find this real estate investment interesting. However, expanding your commercial real estate portfolio through apartment buildings may still be challenging as many of these complexes require you to make a down payment of at least $100,000.However, the good news is that not all apartment complexes are that expensive, and there are several financial options you could explore to buy your apartment building. It is even possible to purchase commercial real estate with no money.You will find in this guide how you can go about owning an apartment building and how to recognize good deals. Let's get right into it.
Should you Consider Owning an apartment building?All good investors consider the risk-adjusted return of any investment before putting their money in it. Apartment buildings generally have a substantial risk-adjusted return, implying that apartment buildings are a good investment. But it is not uniform across the board. Different apartment buildings have unique risk-adjusted returns, often based on the purchase price.
In other words, buying apartment complexes could be good or bad business depending on many factors. As a good investor, you must take time to evaluate properties before buying, taking into consideration several aspects like the state of the apartment building, rental/ownership demand in the location, the relative price of the property to other similar properties, and local real estate trends.The big takeaway from real estate investments is that people will always need a place to live. It is even a more significant win considering that apartment buildings are often the most affordable option. There's currently a shortage of affordable housing in many American cities, which plays well into the hands of mid-level housing apartment owners.Furthermore, there are several luxury apartment buildings currently in construction. These same rental properties are the first to reduce rent or face massive evacuation whenever the economy nosedives.
Advantages and Disadvantages of Owning an apartment building
As mentioned earlier, buying apartment complexes can make you profits or losses. This caveat leaves full responsibility to the investor to make an informed decision when considering apartment ownership.
Cash FlowThe most notable advantage with apartment complexes is the cash flow, which is almost incomparable to what you can get from other investments like stocks and annuities. Apartment buildings afford investors stability and cash flow protection even when there are some vacant units in the complex. Rental income is steady, thus making it a massive reason to own an apartment building.Tax Benefits
Apartment buildings fall under commercial real estate even though these properties are often for residential use. This dualism makes an apartment complex attractive from a tax benefits perspective, implying that investors enjoy depreciation deductions and huge mortgage interest. This depreciation schedule is often much faster than other commercial assets.
Apartment buildings are great for risk management. While you may need more money to maintain your apartment complex, these rental properties provide less risk than other typical real estate assets while increasing potential profits. Owning an apartment building differs from a single-family home as an investor is still sure of their rental income from occupied units even when tenants vacate some units.
It becomes a massive advantage for property owners when they can spread operation, maintenance, and renovation costs among individual units in the apartment complex. Depending on the utilities and miscellaneous expenses, apartment buildings offer investors lower per-unit operating expenses than other investment properties.Take, for instance, the all-too-common roof replacement. The cost of this operation being spread between the units drastically reduces the burden on the property owner. Simple as that!Although this is not a direct function of an apartment building, the cost of renovations can also be less expensive if considered on a per-unit basis. After all, buying materials in bulk saves you money.
Inflation is a situation where the purchasing power of people deplete due to the rising cost of goods and services. The effect of inflation can take different forms depending on the particular business. While it could spell doom for some, it may not hinder some firms in the same breathe. An apartment building is one of such real estate investments that fall under the latter category.An apartment building generally has a one-year lease term compared to other commercial real estate leases, typically locked for about 3 to 5 years or have an annual 1% increase. This model affords the apartment ownership ample time to study comparable rents in the present market. The implication is that with the right strategy and timing, an apartment complex owner can adjust the rent to rise with inflation, thus maintaining rental income flow.
Auxillary Income Stream
An apartment complex has the potential to generate extra income separate from the rental income from tenants but through amenities. Apartment building ownership can create new passive income streams by setting up and monetizing laundry rooms, pools, vending machines, extra parking lots, gym, or office spaces.Even more interesting is that cost of these amenities doesn't have to be paid out of the owner's pocket, as the investor can quickly spread such expenses between all units in the apartment complex, making it easy to recoup everything put into said amenities. Good apartment investing is being able to recognize and reduce recurring costs to maximize net operating income.
Potential PartnershipPurchasing one apartment building alone might seem too massive a project to undertake on your own. The positive is that there is no reason to do it solo. Unlike stocks and bonds, investors can work as a group in apartment investing. You need to link with other investors interested in the same type of real estate investing. This way, you can purchase an even bigger and better investment property, thus maximizing your potential profit.Cons
Suppose you want to enjoy fast returns from your apartment complex investment. Apartments may not be the best form of investment property to consider. Unlike stocks and mutual funds that you can quickly sell for more liquidity, it would take longer to sell off your apartment building for the same.
ManagementManaging a multifamily property is much work, and it spans several aspects that would naturally compel you to consider hiring a reliable property management company. A good property management company will help you handle aspects like:rent collection
background checks for new occupants
advertising for vacancies
landscapingOutsourcing these tasks allows the investors to focus on their daily job and other things of interest. What about when you are unable to outsource these tasks? You'll have to do everything independently, which means much more work.You may think that hiring a good property management company is all you would need to be confident in management, but that is only one-half of the job. You also need to supervise the management company to ensure things are going in the direction you require.
Huge Down Payment
A hefty down payment continues to be a significant challenge in owning an apartment building. An apartment complex is a massive property, and the down payment at the point of sale is always higher than what you would have to pay for a single-family home.Although there are financing options to curtail the humongous down payment an investor must pay for an apartment complex, these vast sums make it difficult for new investors to buy lots of apartment buildings. This situation further makes it challenging to diversify your portfolio in different market classes.
Occupants' Problems and Vacancies
Every apartment owner's goal is to fill the multiple units in their complexes with tenants, as the bulk of returns will come from them. But managing human beings can be complicated if you do not have the grace for that kind of thing. You may have tenants who fail to pay their rents on time, those who would rather face eviction than pay, those who damage amenities, and those who commit to long-term leases but leave unexpectedly. All of these situations could become a real headache to handle.
Good apartment investors often protect their commercial real estate with a robust insurance policy. But sometimes, even this measure proves inadequate in certain situations. Property owners are liable to face the law for accidents or crimes perpetuated from or on their property. However, investments like stocks, mutual funds, and bonds do not have this risk.
Changing Market Factors
You never can predict how the market will look a few years from today. You can only project, and projections fail. You may buy an apartment complex in a fantastic area with all checkpoints of a great neighborhood and then witness a spike in crime over time, thus driving tenants out in troves. The real estate market is unstable, and you must prepare to mitigate its effects on your cash flow and tenant base.First, you must make room for rental price adjustments and then lower the rent if needed. This margin allows you room to meet the debt service on your apartment building.Reducing rents when the market takes a dip is sometimes inevitable, but good investors compensate for this loss by boosting their income. The positive is that there are many ways to boost your apartment complex income independent of the typical rents. Remarkable ways to achieve this goal include increasing fees for laundry facilities, reserved parking, or any other amenities in the complex.You can also utilize the ratio utility billing system (RUBS) to generate more income from your property. RUBS calculates utilities based on square footage, occupancy, number of bedrooms, or a combination of all or some of these. RUBS transfers utilities and their financial burden from the property owner to the occupant.
Time FactorYou must dedicate enough time to your apartment investment to make the most of it. It is a long journey from when you choose a suitable apartment to the financing stage and finally to completing the purchase. It could take several months to wrap up this process, which is only one phase. In a situation where you cannot afford to hire a property management company, you take on those responsibilities yourself. That screams more work!
But does transferring these day-to-day responsibilities to a syndicator mean you do not have any other role to play? Of course, not! You still need to supervise the syndicator to ensure that your investment is still on track to raise profits.
Pathway to Owning an Apartment building
Define your Goal
Investing with a goal is always the right thing to do. Because without a plan, it only feels like you're heading somewhere but without an actual destination in mind. Make it clear where you are heading and why. Ask yourself what you want from owning an apartment building, and then study how much income you need to generate from your complex.
Define your Budget
Defining your budget is crucial as it helps to keep your finances on track. Budgeting is where you determine how much you're willing to invest in an apartment. You must leave some money for repairs and portfolio diversification. Good investors know better not to overload their portfolio with one investment.
Study Cash Flow Forecasting
To make the best deal, you must be ready to commit to extensive study. Forecasting is where you must determine where to focus your time and energy. You will achieve this by modeling prospective deals to determine how much profit you can expect from buying a particular apartment complex.
Select MarketIndeed, you have to start looking from somewhere. For many reasons, it is always better to begin from the local market. It is easier to manage an investment within a driveable distance, plus the advantage of understanding the workings of the neighborhood. Model a few deals and see if it is attainable before spreading your tentacles to other states.Obtain Financial Pre-approval
Scout for different lenders to compare their rates and products to choose the most suitable. Push to get pre-approval from at least 2 of the lenders. Getting this pre-approval is crucial as it gives you comprehensive quotes to compare and contrast after finding your suitable apartment complex.
Begin Search for Suitable Properties
The next step is to start scouting properties. Several popular real estate apps and websites facilitate a seamless connection between investors and owners. Another option is to link with brokers with off-market properties.
It would help if you summoned your full negotiation prowess. Everyone at the table is there to negotiate the best possible deal. There's no reason to be emotional about presenting your offer, even if it is lower than the listing price. Owning an apartment building is an investment, so you must only offer an amount that seems reasonable to you.
Go on InspectionsYou want a quality assurance check to ensure you get what you saw in the advertisement. The property's condition needs to be intact as it could lead to extra expenses for repairs. Carefully assess the electrical, roof, plumbing, and airconditioner as these can be pretty expensive if they need repairs.Hire a Reliable Syndicator
You will need a reliable property management company to manage many aspects of your investments. It is crucial that you interview different companies, compare their reviews, and carry out a thorough assessment of their background and achievements before committing to a syndicator. The role of this company is too crucial to fumble this choice. Your decision here will make or break your investment.
Lock in Financing
Return to where you got pre-approval with the deal you found, compare their rates and get full approval from the most suitable lender.
Finalize the purchase by signing the paperwork. Then never forget to celebrate your win. Hurray!
Buying an apartment complex can be good and bad, depending on several factors. It certainly is not suitable for every investor as investment goals differ. Spend time considering all the points in this guide to enable you to make an informed choice. Guard against uninformed decisions as they can drive you out of the market.
Most times when the question of how much an apartment complex costs comes up, the first thought that comes to mind is the monetary cost; how much does it cost to buy, build, rent or lease one. The other side to the story is the ongoing costs of maintenance, repairs, rehabbing, and countless other expenses tied into the asset. Getting into the real estate business as an investor or a developer can be a lucrative venture, though it carries significant risk and extensive upfront and ongoing cash injections.Even the cost to build an apartment is not a straightforward question. It involves many factors and questions that have to be considered, which we're going to explore in this article. We'll also look at how you can tap into the profitability of an apartment complex without the ludicrous upfront expenses in a way that's more palatable to individual investors.
Apartment Complex vs Apartment Building
According to the Collins dictionary, an apartment complex is a group of buildings that contains apartments and is managed by a company. Apartment complexes are set up with property managers who ensure the proper running of the apartments.Apartment buildings, on the other hand, refer to a single building with apartment units. They are independent buildings, rather than multiple structures under common management comprising shared facilities such as a swimming pool, gym, or convenience store.
Types of Apartment Complex
Despite apartment complexes containing several units of housing alongside other facilities, they are generally categorized into high, mid, and low rise.
Just as the name depicts, high-rise apartment complexes are characterized by up to 50 floors of apartment units. These high-rise buildings often contain luxury units like penthouses and condos.Due to their structure, they are located in larger and more urban cities like New York, Los Angeles, and Chicago.
These are apartment complexes with about 5-20 floors. Mid-rise buildings are usually the most common complexes, present in cities, suburbs, and even in schools.
Predominately residential with floors ranging from 2 to 15 apartment units. They are common in suburbs and less populated towns.
Apartment Construction Costs BreakdownIt has previously been mentioned that the costs of an apartment complex go beyond the money. The costs involved in building a multifamily apartment complex are divided into different aspects.
These are expenses that go into the physical aspect of apartment construction. This aspect of the cost accounts for materials, labor, equipment, utilities, and other physical activities that are involved in the construction process. The hard costs usually make up more than 60% of the entire construction budget.
These expenses are responsible for taking care of the technical and non-mechanical aspects of apartment building construction. They involve things like taxes, permits, legal fees, architectural fees and development fees, and other service charges.
In some instances, real estate developers do not have all the funds required for apartment complex construction. When this happens, they are provided with the option of seeking investments or loans from financial organizations. These investments come with interests and financing charges, all of which are added to the total cost of construction.
Long Term Costs
This aspect of the budget is as important as the apartment construction cost. Although it is not part of the construction cost, it includes the expenses that are needed to maintain the building systems and utilities. Altogether, in the breakdown of the development budget that includes the land purchase. Hard costs make up about 40% of the entire project costs; soft costs about 25% and 20% for land costs, and in instances where investors are involved the remaining 15% to equity returns.
Of course, if you want to make money from a multifamily housing or apartment complex investment, you don't need to be positioned to sign up to a multiple-million dollar debt, or ongoing risky cash injections. With Holdfolio, you can own equity in a highly-profitable apartment complex, receiving regular dividends and capital appreciation with as little as $20k in the bank.Simply create an account, select the apartment building you want to invest in, and deposit your money to start passively investing in multifamily today. Get in touch with Holdfolio to learn how to get started.
What is the Construction Cost of an Apartment Building?
In the United States real estate and construction industry, the construction cost of building an apartment complex is calculated per square foot. This construction cost does not include many things, and should not be mistaken for total building costs. Due to variations in the price of building materials and other charges like sales tax, construction costs vary by location. They also vary based on the type of apartment; for example, the construction cost of a high-rise complex is considerably 'higher' than that of a mid-rise building.Similarly, the construction costs of a luxury apartment building are more than that of a regular apartment. Typically, in the United States, a mid-class apartment complex with 4 to 5 stories costs about $170 to $300 per square foot and varies greatly in total costs between about $5 million - $14 million. This is quite small in comparison to prices as high as $120 million for a luxury high-rise apartment complex containing up to 100 apartment units.
Costs of Apartment Complexes by Type
As previously mentioned, there are three types of apartment complexes; which are different in the number of floors they have, and how high they 'tower'. The higher a building is, the more complex the construction of the same building becomes. Complexity in building an apartment equals more money per square foot. Building high-rise real estate involves more equipment, expertise, precision, and higher quality materials, all of which are considered in the cost estimates.
We will start with the big guns, the towers, the skyscrapers, the 25 to 50-story apartments, or as we generally call them, the high-rise apartment buildings. The price to build one of these ranges from $235 to about $500 per square foot. These types of complexes are subject to zoning laws that dictate exactly how high they can be. Also, developers make up for the presence of non-residential spaces such as corridors, gyms, laundry rooms, lobbies, and apartment managers' offices by increasing the price per unit cost..
Mid Rise apartments
Mid-rise apartments are more common and the average building costs are slightly lower than the high-rise buildings, at prices ranging from $190 to $280 per square foot.
The construction costs required to build a low-rise apartment are not far off from the costs of a mid-rise building. Lower but fairly the same, with prices ranging from $160 to $250 per square foot.
How Much Does an Apartment Cost Per Unit?
Another way to look at construction costs is to estimate how much an apartment complex costs per unit to be built. This better fits the needs of some investors or real estate companies rather than the per square foot billing. As of 2020, building a multi-family apartment complex would cost prices ranging from $64,000 to about $86,000 per unit. The flaw that arises with this technique of estimation is that in some apartment complexes there are different unit types. For example, you can have a combination of studio, one-bedroom, and two-bedroom apartments, all of which may not be the same size. Therefore, it can present a serious miscalculation in the budget and financing costs of the apartment complex.
What Affects the Cost of Building an Apartment Complex?Now that you have a fair understanding of what an apartment building might cost you, it is also important to note the factors that influence the variability of these costs.Interestingly, these factors relate to one another, meaning that one factor can influence another, and they do not only affect the cost of construction but also that of maintenance and the returns from the investment (how much and how often rent is paid).
Location and Land Costs
Location is arguably the most important factor affecting project costs. Just as with anything else, location determines the value of the real estate. For example, eating at a middle-tier restaurant in Upper Manhattan or New York would be more expensive than even a 5-star restaurant in parts of Ohio or Delaware. The same thing applies to the real estate and construction industries. Location affects land purchases, which usually make up about 10-20% of the proposed budget for the project.Areas with high demand and reputation would have land scarcer and be more expensive, both of which translate to higher rent prices. There would also be opportunities for rentals, a great means of real estate income.
Compliance and Development Fees
Compliance and development fees could quickly whisk away most of the building budget. The amounts to be spent on these depend strongly on the proposed location of the apartment complex. Location in terms of local, state, and federal laws and regulations guiding multifamily housing and real estate construction in general. These laws have provisions for charges, dues, and taxes to be paid by a developer before, during, and after construction. Getting building permits falls under this category and again, getting this is dependent on the location and type of building to be built. Building permits are easier to get in developing areas of the country, where commercial real estate is needed. While for already densely populated regions where land isn't readily available, and the purchase and demolition of buildings have to take place to create space for construction, getting approval to build in such areas might be strenuous.
Another important factor that determines the total cost of a project is the type of units to be built in that apartment complex. Are there going to be affordable units or high-end luxurious apartments, or maybe both?Although the building costs per square foot of any of them are relatively similar, how much you spend on a luxury apartment largely depends on how luxurious you need it to be. This is why the costs for site improvements have to be included in the initial budget. As much as many real estate developers would like to build an apartment complex with only luxury apartments, many states have inclusionary zoning laws.
What Are Inclusionary Zoning Laws?
These laws regulate housing costs and provide affordable housing to those who cannot afford a regular apartment. Different states have different zoning laws that state the number of affordable housing units to be included in an apartment complex. While the rent of these affordable apartment units does not correlate with construction costs, the government offers incentives such as tax breaks and subsidies to developers.During the planning stages of construction, it is important for every developer to do the necessary research regarding the zoning laws of the state and city, where they intend to construct their apartment building, and how these laws would affect their investment and eventual returns.
Construction Materials and Labor
In a way, the type of material you use in construction is dependent on the type of units you want to build. This falls under the hard costs and it includes expenses for construction materials such as steel, concrete pipes, and so many others. The tricky part about these materials is the high tendency for fluctuation in price, which can be a burden if adequate preparations are not made. Therefore, it is advisable to make provisions in the budget and give room for eventual price increases, considering inflation and all that is going on with the supply chain.Labor costs include the fees for hiring any personnel involved in the construction project, including structural engineers, architects, contractors and subcontractors, and others.
This is dependent on the type of apartments in the complex. How many affordable units are therein? How many studio units, 3- bedroom, 2-bedroom, or even penthouse apartments are to be built? All of these are important to note because they would determine what the rent and income from the apartment would be and ultimately affect equity and the financing costs of the building.
Who is Involved in Building an Apartment ComplexGetting an apartment complex to translate from an idea to the actual building involves an elaborate amount of processes. However, amid these events, it is important to take note of the people who make them happen.
The architect has the first major responsibility in apartment building construction. Their job is to design and draw plans for the proposed building. They even go as far as creating small models of the building. During this stage, the architect might be required to make adjustments to the model or the design of the building until the final plan is agreed upon. This building plan is created to give the contractor a picture of what the developers have in mind, and because most architecture firms want their design to be executed properly, they have contractors that they recommend to the developers. Usually, the architect acts as the project manager alongside the general contractor.
We have two types of contractors based on their level of responsibility. The first type is the general contractor - the architect and the developer employ the general contractor, who is responsible for hiring and finding all the other subcontractors. They also handle and supervise the entire project. The general contractor is in charge of technicalities such as permits and compliance. It is important to carefully select a competent general contractor because they are in charge of everything and the success of the project depends largely on them. General contractor fees can be as high as 10% - 20% of the entire project cost.The subcontractors, on the other hand, are responsible for the different aspects of building an apartment complex, according to their specialty. From the carpenters to the engineers, masons, and others.Contractor fees differ from state to state because of differences in real estate sales tax laws in respective states.
Real Estate Attorneys
Apartment complex costs run into millions of dollars, and investments such as these require formal and legal backing. Legal processes such as acquiring necessary permits, understanding zoning laws, and land acquisition documentation usually require the services and input of a legal officer.
The amount of cash flow and exchanges that occur during apartment building construction is a lot, and all of these funds have to be accounted for during and after the completion of the project.Also, things such as payroll and disbursement of funds are the responsibilities of an accountant.
Apartment Complex Cost Calculator
Some resources are available to support people in estimating project costs. Whether it is per unit cost or per square foot cost, or even the total cost of an apartment complex. These resources make use of algorithms that consider market costs of materials, the state and national average land price, the average contractor fees, architectural fees, and other construction costs; essentially all the factors listed above, and run the maths to give you an estimate.
Finding out the cost of an apartment building complex might seem like an arduous task, but proper preparation takes away all the worries. As a developer or an investor looking to get into this space, it is important to make adequate consultations and ask all the necessary questions to get clarity on whatever you need to know. Building an apartment complex as an investment project requires a significant amount of capital, and that money should be put to efficient and good use. If you're an investor who is syndicating the deal or undertaking the project alone, it also entails a high level of risk. It's wise to ensure you have the skills, experience, and ability to do the project justice with due diligence before you more forward with the venture.If you're interested in investing in profitable multifamily real estate found in prime location without the risk, high capital investment, and managerial responsibilities, become a passive partner with Holdfolio today. Through your investment, you will receive quarterly dividends and capital appreciation without having to life a finger. Plus, you can invest with as little as $20k in the bank. Give Holdfolio a call today to learn how to get started.
A rental property's prospective revenue differs from one house to another. Investors that have unreasonable earnings expectations might be in for a rude awakening. Investors who evaluate cash flow and precisely determine the possible return from an investment home, on the other hand, are more likely to be effective in the long term.We'll show you how to assess the possible revenue from leasing and address questions about what a decent return on a rental home may be for you in this post.Contact us and check out Holdfolio's exclusive deals to get started on your rental property investments.
What is the profit from a rental property?
The revenue from a rental home is the amount of money left over at the end of every month.It's crucial to understand that investment property revenue differs from taxable net earnings. This is because property investors employ non-cash deductions like depreciation to lower their pre-tax earnings.Property tax exemptions are also one of the reasons why certain rental landlords might pay relatively little in taxation while yet having a large amount of cash on hand.
How to Calculate a Rental Property's Profits
The cash flow that an investment property creates is what most property investors benefit from. Among the elements that influence cash flow are:The cost of buying a home
Payment on a house (principal and interest)
Rental revenue, gross
Number of vacancies
Managing real estate
Costs of operation (such as repairs, maintenance, CapEx, and landscaping)
Taxes on your homeMake a statement of cash flows for your business.
A very basic statement of cash flow for calculating prospective cash return from an investment home looks like this:The purchasing price of the property is $100,000.$25,000 as a down payment.Gross rental income is expected to be $900.
Vacancy loss of 5% is $45
Gross income effective = $855
Repairs at a rate of 5% = $45
At 8%, property management equals $72.
Other costs (property tax, insurance, HOA dues, and so on) = $180
Mortgage payment = $320 (principal and interest alone)
Monthly cash profit (pre-tax) projection = $238How to Calculate the Profits from a Rental Property
There are four primary methods for calculating rental property profitability. Regularly monitoring every one of these measures will assist keep your rental property's financial performance on track and guarantee that your lengthy economic targets are accomplished:
Upon covering all of your operational expenditures, including the mortgage, cash flow is the amount of cash you have left over as income on a monthly basis.It's crucial to remember that cash flow isn't always consistent from month to month. Repair costs may be more or lower in some months over others, or the building may be empty for longer than intended as you hunt for a suitable renter.
The capitalization rate (cap rate) is a rate that equates the annual net operating income (NOI) of a property to the purchase price. Because various investors utilize varying degrees of leverage, NOI does not include the monthly mortgage payment (resulting in higher or lower mortgage payments).Generally speaking, the greater the cap rate, the more beneficial an investment may be since more revenue is created relative to the purchase price of the property. Because cap rates vary by market, the cap rate estimate is only used to compare properties within the same market or submarket.The cap rate is determined using the information from the financial statement above:NOI = $238 monthly cash return + $320 mortgage payment (included again in to estimate NOI) = $558 each month x twelve months = $6,696 yearly NOI
NOI = $238 regular income profit + $320 loan payment (added later in to determine NOI) = $558 per month x twelve months = $6,696 yearly NOI Property price = 0.067, implying a cap rate of 6.7 percentReturn on Investment in Cash
The yearly cash return from an investment is comparison to the number of cash invested in a cash on cash returns ratio. The mortgage payment debt service is included in the cash on cash return calculation, unlike the cap rate.The cash on cash return is 11.4 percent if an investor puts in $25,000 and makes a cash profit of $2,856 annually:2.856% yearly cash return / $25,000 down payment = 0.114 percent annual cash return.
Return on Investment (ROI)
Return on investment (ROI) is a metric that compares the total amount of money gained to the entire amount of money invested.Let's have a peek at how to figure out your return on investment. In the real world, gross rental revenue and running expenditures might fluctuate from year to year, but for the sake of our example, we'll suppose they stay constant.The home is sold for $150,000 five years after it was purchased for $100,000 with a $25,000 down payment. The cash returned throughout the 5-year holding period was $14,280, which included the net cash gains from leasing ($238 each month x 12 months x 5 years) plus the $50,000 gain realized when the residence was sold.The return on investment is as follows:(20.79 percent annualized ROI) = ($14,280 lease net cash income + $50,000 gain on selling) / $25,000 down payment.
The 1% Rule
This is a simple and quick tool for investors to assess a property's potential. According to the one percent guideline, monthly rent should equal at least one percent of the total property purchase price.A $300,000 house, for example, should lease for at least $3,000 per month. If this doesn't seem realistic or doesn't match market values, the investment is probably not worth it. Again, issues such as property location and size must be considered.What is a Profitable Rental Property?
Because a good return for one property investor may be awful for another, there is no single right answer to this question. Nevertheless, there's a few factors to consider in determining what a decent residential property income could be for you.How much profit should you make on a rental property? Well the answer to that is profoundly personal and you are the only person competent enough to answer it. Consider the following questions to help yourself figure out how much profit you should make on a rental property.What kind of return can I anticipate from a different type of investment? Historically, the stock market has returned 7-8 percent every year.
Alternative investments: How safe are they?
What level of authority do you have above them?So, if you can somehow make 8% in the stock market, which many consider volatile and difficult to control or manipulate, and 3% in the government bond market, which is frequently hailed as one of the best investments available, what kind of return should you anticipate or require from a property investment?Real property is not quite as passive as stock or bond trading in the beginning. As a result, you may want a bigger return than they can provide.However, because there are so many various investing techniques that are out, there are assets that may suit everyone's needs.If you're willing to accept lower cash-on-cash returns than the share market because you trust in the market's long-term gains, go ahead and invest in those assets.
The amount of money you earn from property investment is only as significant as how much money you make. If you're dead set on maximizing your cash-on-cash returns, go out and buy properties that fit your requirements.If you prefer appreciation, concentrate your efforts on industries that are receiving, or are expected to experience, maximum appreciation soon. It's crucial to remember that a year in property investment is like a single glance — it goes by quickly and has no impact on you as an investor or your property.Real estate investment is a journey, not a sprint, so set a strategy, adhere to it, and don't get frustrated if your target cap rate is 8% but your properties only achieve a 7% cap rate.Things don't always go as planned in real estate investing so investing alongside a knowledgeable and experienced investment company, like Holdfolio, can help you.Here at Holdfolio our tactics focus on generating high profits without relying on guesswork. This suggests that we don't need a fast-appreciating real estate market to get above-average profits. The income-producing homes we buy create cash flow month by month and perform well throughout the real estate cycle. We place a premium on long-term wealth while enabling our business to succeed in any market environment.Contact us today and start making a profit with our exclusive real estate investment deals!
The Benefits of a Property Management Company
A property management company could be a beneficial component to your rental's success. A property management company, otherwise known as a PMC, deals directly with prospects and tenants, saving you time and worry over marketing your rentals, collecting rent, handling maintenance and repair issues, responding to tenant complaints, and even pursuing evictions. This allows you to outsource some of the tasks you don't want to deal with for a small fee. Below are five reasons that will encourage you to look into hiring a property management company for your rentals. 1. Property management companies are full of industry experience.
Hiring a property management company provides many benefits to both new real estate and veteran investors. PMCs give you a support team full of individuals who have many years of experience in the industry and can assist you in making the best decisions for your rental. A majority of property managers are licensed real estate agents, meaning that they have a good understanding of the industry. This allows you to have a group of professionals that know how to price your rentals accordingly. Property managers also have in-depth knowledge of the fair housing laws and local laws that affect both landlords and tenants. These laws are very specific, and without a deep understanding of their complexities, one could easily break them.
2. A PMC is an established point of contact for tenants.
One benefit to having a property management company at hand is the fact that it relieves you of having to constantly keep in contact with your tenants. A PMC can also prevent you from losing money because he or she will work diligently to place new tenants in your property so it doesn't sit idle. An experienced PMS can make life easier for your tenants with someone available at all times, especially if you happen to be busy or out of town. This is very convenient for addressing problems like noise complaints, parking issues, etc. It also is beneficial when tenants need to make maintenance requests for things such as replacing fire alarms or lights. Allowing someone else to handle many day-to-day responsibilities saves you valuable time.
3. Property management companies will handle tenant issues.
One of the biggest benefits of property management is that the property manager will handle tenant screening. Having experience with hundreds of applications, property managers tend to be able to spot the red flags that a potential tenant may possess. This could include not being able to pay rent, or having a history of causing damage to the property over time. Property managers can also save you the trouble of having to evict people who can't pay rent on time, and ensure that the process of paying rent is simple. Additionally, a PMC can handle any lawyer fees that may be associated with evictions, and damages made to the property.
4. A PMC can market your rental for you.
Another upside to hiring a property management company is that they can take over all of the marketing responsibilities. A PMC will typically develop a marketing strategy for each property that is dedicated to targeting your market segment to get the best results possible, from messaging to the platforms your audience is active on. These professionals have a deep understanding of needing to fill your property with great tenants so that you can turn over the property quickly. A valuable tenant could mean the difference between having to replace carpets or simply having them cleaned.
5. Working with a property management company saves you money on maintenance & repairs.
A property management team saves you time. You won’t have to go to the property to fix every problem that may come up such as clogged toilets, broken appliances, and dealing with locked out tenants. The team will handle problems as soon as possible, which will keep tenants happy. It is also a great way to save money because an experienced management team is better equipped to find a cost-effective solution to a common problem.Hiring a PMC is a simple way to save time managing your property. With a PMC, experienced professionals deal with time-consuming tasks, at a relatively low cost, allowing you to scale your rental properties and increase your cash flow.
One of the biggest questions real estate investors have (or at least should have), is how many finishing touches and add ons they should give a remodel. There are many factors which play into this. Some standard finishes will differ based on your particular market. Others should be different based on what the tradition and market history is locally, and the price point of your property and surrounding properties. All of these factors can be make or break when you are trying to turn a profit on your properties. The Danger of Over-Improving PropertyOne of the biggest dangers of investing in real estate is over-improving your investment properties. It is the number one pitfall for first time investors. First timers often sink way too much money to over improve a rental property, and often times, they never get any return on the investment. Unfortunately, many investors just don’t know what really adds tangible value to their properties. Being smart and sensible with your value adds can be major when it comes to turning a profit. When it comes to buy and hold rental properties, it should be attractive to your level of prospective renters. Keep in mind the type of perspective tenant you are looking to attract, and what kind of amenities they need and do not need. Listen to what the market is telling you. But many times landlords must remember that tenants are going to put some wear and tear on the property, and chances are a lot of updates are going to have to be done every time you turn tenants. It could be in 6 months, or 24 months. You just don’t know. So, instead of going all out, especially on items which are easily dirtied or worn, go for slightly more affordable options, and more durable finishes. For example; carpet which can be cleaned, instead of tile which may need to be completely replaced if it is cracked. Or stainless steel sinks, versus custom materials which can stain.This approach applies to flips as well. You’ve got to know what really adds value, and not do any more than that. You’ve also got to know your buyers. Will they be renting the place out? Then stick to the above principles. In most cases, end buyers are going to have different tastes to you. That means no matter how nice you make it, they are likely to redo a lot of your work. Why put in unique, over the top finishes, if they are going to be pulled out and thrown on the curb a week after closing? They also aren’t going to pay you more, just because you think the design is nicer. Many tenants have a set range for the rent they are wiling to pay, and special add ons do not always help move that needle. Just because you spent a few dollars more per square foot on counter tops and flooring, doesn’t mean you’ll get an extra dollar on the sales price.What’s Your MVP?What investors need to know is what their MVP is. That is the Minimum Viable Product. That doesn’t mean be cheap. Do it right, make it look nice, but don’t throw away money. Otherwise you may have to sell at a loss, may not be able to sell at all, or are going to be making a lot less than you thought. You need floors, a roof, countertops, cabinets, bathroom fixtures, and freshly painted walls, but you don’t have to try and win any design awards. Basic countertops will work in most rentals. If you are doing a luxury renovation, you might get away with poured concrete or granite, instead of quartz. You can let the next buyer or renter get their own fridge, or stage it with a basic model, versus spending thousands on a smart fridge which may not be the right model your buyer wants.Know what the minimum standard expected by local buyers and renters is. You can go a little bit above that if you want to move it faster, if you can get a good deal on the materials. But don’t overdo it.There is a lot of confusion around what standard rentals and house flips should be finished too. It is also an area which can make or break investors fast. Know your values, and consult an actual appraiser, not just a Realtor to find out. Then set your own standard minimums based on your area, while looking out for deals on slightly higher quality, but neutral materials.
Rental Property Investing: Vacation Rentals vs. Long-Term Rentals
Short term, Airbnb-style rentals have been gaining a lot of attention lately, especially in major metropolitan cities. The question is, how do they stack up as an investment strategy for long-term income property investors? Are they more profitable? Or are long-term annual rentals still the best way to go?
Vacation Rental Property Investing
Many real estate investors and entrepreneurs have discovered that there are very juicy rental rates to be found by leasing their units to short-term renters for a day, week, or month. A whole new crowd has jumped into this industry to capitalize on this. It is a trend we are seeing more and more each day. When rented as a hotel, property owners can often get far higher average rates than as annual rentals. What may rent for $1,000 a month to a regular long-term tenant, may rent for the equivalent $3,000 per month on Airbnb. There is clearly a lot of value in this short-term rental strategy, but there can be some drawbacks. These rough figures can be very misleading. They don’t account for higher vacancy rates, taxes, wear and tear, and property management costs. All of which can take a big bite out of those anticipated rents.More importantly; experienced investors know that short-term and vacation rentals can be highly volatile. Short-term rental rates can fall just as fast as they rise, due to demand. There are many causes including the economy, new lists of top vacation spots, storms, gas prices, and other factors. All of which can catch short-term rental property owners by surprise. Those who have paid high prices for these assets, assuming they’ll be able to rent at these high rates, can be caught short, and find themselves in tough financial situations if they are not careful.If the numbers won’t work on a deal as an annual rental, be very, very wary. Research around popular message boards and forums frequented by users of Airbnb, VRBO, and more.
Long-Term Rental Property Investing
In contrast, long-term rentals offer real estate investors more consistency, stability, and reliability for their investment portfolios. Good long-term tenants can also save a lot on property management, maintenance, and marketing. That can even out the spreads a lot. Even more so when investors are purchasing homes at far lower prices. It doesn’t take a genius to figure out that the yields on an $80,000 home that rents for $1,000 a month in the Midwest, may produce better yields than a condo on the coast that rents for $3,000 a month, but costs $500,000 or more. It is important to run these numbers before deciding on a short term or long term strategy Both vacation rentals and long-term annual rentals can produce income and attractive returns for investors. It’s all about the numbers. Unfortunately, many are not doing the full math, or are looking far enough forward when trying to jump on the Airbnb bandwagon. Do your math well. Get a second opinion from an expert. Make sure your choice matches your personal financial goals and timeline.
Rent to own deals appear to be becoming more popular again. What are the real pros and cons for investment property owners?As home prices keep growing, and rent remain high, but mortgage lenders keep underwriting tight, renting to own, lease options, and seller held mortgages all appear to be getting more common again. They are highly desired by tenant-buyers, and can be highly profitable for real estate investors. What should you consider before making the leap?The Pros of Offering Rent to Own DealsThere are a variety of benefits of this strategy, including the following.Easy Exit in Tough MarketsOffering a rent to own option can provide landlords an easy exit, even in tough or declining housing markets. Just make sure it is priced in a way that is appealing and the right prospects can afford.Higher Sales PricesRent to own tenants are mostly concerned about move-in costs and monthly payments. They care little about the actual sales price. This can help you get far more for your property.Passive IncomeCreating a seller financed mortgage note can deliver passive income with a lot less headaches. You no longer need to worry about tenants, maintenance, and all the time and risk involved. You just get monthly payments. The note created is also a new asset which can be sold and cashed in on whenever you like.Providing a Valuable ServiceThere is a huge need for this service. Millennials and families are having a tough time in the rental market. They will find many benefits in homeownership. They may have good credit and incomes, but just fail to qualify for a conventional bank loan due to paperwork quirks. Give them a chance.The Cons of Offering Rent to Own DealsThere are some potential downsides to these arrangements to. Make sure you know them.DefaultsIt may be a little more expensive and time consuming to fix a default situation under these deals than with just a straight tenant.Locked InYou’ll be bound by your agreement for a while. This could be 6 to 24 months or more. You will have to stick it out, even if the market changes.Less Cash NowYou’ll be getting less cash now than in a traditional sale. However, you’ll probably get a lot more over time.LegalitySeller financing is still a bit of a cloudy space due to Dodd-Frank and other regulations. It is legal. Just consult an attorney so that you structure it right, with the right paperwork, and stay protected.There are both pros and cons to providing rent to own deals as a property owner. Do the math. Remember your big goals. Is it worth it to you?
Experienced landlords know that the housing market goes through different phases and cycles each year. Spring and summer can be hot months for leasing units fast and for top dollar. This can change quite a bit once kids are back in school in fall. Most people have locked down in a new lease for the year. People get busy focusing on the holidays, and the weather may put a damper on showings. How can rental property owners ace it, and still keep their units full at this time of year?Move-In SpecialsConsider offering move-in specials. Take a look at your competition and see what you need to do to stay competitive. Can you offer a free month of rent, lower security deposits, or a discount on monthly rent? Test some out. Track the performance of these deals and tenants over time and reevaluate if they are worth doing again.Make Open Houses More AttractiveReal estate in general slows down in fall and winter due to the weather. It is just generally less appealing to go out and view properties. Change that dynamic. Give potential tenants more motivation to come out, and come in to your open houses. How about hosting Santa, or giving away hot chocolate and other freebies?Themed MarketingBuild up your inbound marketing and keep in front of potential movers with themed content. Use hashtags, relevant keyword phrases, and seasonal titles to get noticed and build SEO. This includes blogs, social media posts, and email newsletters. There are tons to choose from starting with Halloween through New Year’s Eve.Pump Up Your TeamYou can’t have your leasing team getting down or considering a new career. Keep them pumped and loyal with holiday dinners, seasonal gifts, bonus plans, and a little extra time to spend with family or holiday shopping.Get Financially PreparedThousands of new real estate investors and landlords get crushed during this season each year. They just don’t see it coming. Maybe they got into the game in the buzz of summer, and made plans based on that market. Those who aren’t prepared can go broke, get discouraged, and quit fast. Anticipate the need for reserves. Be financially prepared with cash flow to get through the months tenants are most likely to be late on their rent. Late August through December can be a little more challenging for landlords. Especially for those who aren’t prepared. Get ahead of the game and make this the season you stand out and excel.
Virtual reality continues to be one of the most exciting frontiers in tech, commerce, and real estate. If current trends continue, more real estate buyers, sellers, and investors could find it a necessity in navigating the market, and getting what they want.The Rise of VRVirtual reality (VR) technology has been in development for years. It really began gaining traction with the media coverage of Google’s glasses. Then QR codes morphed into augmented reality apps which enable people to interact with virtual items in the real world, via their phones.Then came virtual reality headsets which are now available in numerous stores, and pretty inexpensively. More recently, leaders like charity: water, and top NYC commercial real estate firms have begun using VR to create new experiences and ways to engage with far off, or future places.One VR company alone has created over half a million real estate related virtual tours in the last few years.Uses of VR in Real EstateVR tours can be used to view homes and rentals online and from a distance. VR goggles are one of the most immersive ways to engage with this material. Though consumers can also often view this material in regular video format through real estate websites and YouTube on their phones as well.Exploring New DestinationsWe may be more mobile, have more location freedom, and need to move or invest in new areas today, but most don’t want to take the time out and spend the money on flights unless they are really sold on the location and product already. VR is the best way to experience somewhere new from a distance so far. It can be used to explore new neighborhoods, views from a property, and local attractions. The ChallengesLike with any new tech, one of the major challenges today is the limited number of users. Not everyone has compatible devices for the best experience. You can spend a lot to produce and deliver this content. Yet, may not be able to connect with enough of the right leads, yet. The solutions are to make sure there is alignment between your product and those already actively using VR. For a few hundred dollars you can get to Best Buy and get your own 360 degree filming equipment and record your own video to save on costs at the beginning.What are your thoughts on VR for real estate?
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.
PLEASE CONSULT WITH YOUR PROFESSIONAL ADVISORS.
Get Priority Access Exclusive Investment
Diversify income streams with income-producing multifamily deals
Get exclusive access to 100% passive investment opportunities
Build profitable partnerships with full time professional real estate investors
Be the first to know about lucrative multifamily real estate deals through our online platform. Growing your capital couldn’t be easier!