065: The Real Discount in Real Estate
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Hello hello and welcome back to the Cashflow Multipliers podcast– the podcast dedicated to your financial freedom so you can start living the lifestyle you deserve.
That’s right! You only deserve the best this life has to offer, which is why today we’re diving in deep about one of the single best opportunities in real estate right now. 😘😘
Many people in real estate are happy investing in houses here and there, but that’s only going to get them so far. A lot of people invest in real estate as a side hustle. They buy a rental house and they stick with that house for 3-4 years. And a lot of people are happy with staying there!
They see a steady income rolling in, and over time, equity happens.
Each month, the owner of the home gets paid by the tenant and the loan amount decreases. That’s positive cash flow, and then the property is valued at a higher price. Again, this is a totally fine and honorable way to enter the world of real estate and build wealth over time.
But have you wondered 🤔🤔, even for a second, if there were better, bigger opportunities waiting for you? Being at your best requires knowing the best strategies and tactics to reach your goals. And here’s the biggest secret of them all: now is the most opportune time to chase those goals.
We’re so excited about today’s episode! If you’ve been wanting to step up your real estate game and secure your financial future with apartment syndication, this is the episode for you! 🤩🤩
Better yet, maybe you know someone who’s been on the fence about this whole apartment investing deal but is curious to know and learn more. Send them this episode so we can help break down why the world of real estate has more opportunities than most people can even imagine. We’re here to show people what’s possible and live freely.
Most Experts are Wrong
Don’t try to catch a falling knife. You gotta wait till it bottoms out and then start buying.
Facebook and Uber were formed in the year 2008– during the great recession! It was one of the hardest years we’ve endured as a nation. People were losing their homes and the job market was at its worst.
And just as we were coming out of that, 2020 enters like a freight train. During that year, we were thick in apartment syndication and passive investing and we had a choice to make. So during the Covid lockdown, we didn’t pump the brakes, we put our foot on the gas. 💪
At the time, this was a huge risk. We had a 3-month buying opportunity when the pandemic hit and nobody had any clue about what was going on. But we are so grateful for the way things turned out!
We, along with our passive investors acquired 100 units in Fort Worth Texas and within 20 months we returned 1.50X equity multiple vs. the projected 60 months at 1.70X equity multiple. We bought and sold apartments during one of the most chaotic times in history. As the world shut down, we were just getting started. 😍😍
If it wasn’t evident before, it sure was then– we had something big on our hands. But, not everyone was in our corner. There are a lot of so-called experts out there saying accumulate dry powder and just wait– and they’ve been singing that same tune since 2016.
We are here to tell you now is not the time to take a step back, but a step up. From 2018 until now we have been living out our best years. We have gone from 0 to 5,000+ units— through pandemics, elections, and recessions.
Step it Up!
So if you think we’re slowing down any time soon, think again. And we want you to join us! We’re in our season of stepping it up and the more, the merrier. Here’s why.
For sure not everybody wants to take a linear approach to become wealthy in real estate. Some people like to go bigger and faster– because as we’ve said many times before, wealth has a need for speed.
Absolutely. For many people, including us, when we think about the reasons why we invest in real estate, it’s because we want to find a way to grow our wealth faster than the pace of inflation. And right now inflation is a real consideration. 💡💡
Inflation is a real consideration because an investor’s net yield after inflation is sometimes not in the positive– it’s in the negative. However, there are investors out there who take the “conservative investment” and buy bonds or insurance annuity.
No doubt one of the most conservative ways to purchase a property is to pay for it in cash– which also means you have no leverage whatsoever. You take a big ol’ chunk of your money, buy a property, and take that as an alternative way to hold cash.
Okay, investing in that way brings up an automatic red lag– it’s not very liquid, right?
Exactly. But investing with cash is very secure against a lot of different types of economic systems and currency collapses.
But that’s not using wealth as its prime characteristic, speed. To speed things up you have to add other things into the mix and one of them is usually getting the tenant to bring you income and then leveraging that income into debt.
Income into debt? Stick with us for a second.
In other words, if you’re getting a loan and invest in an asset class that you won’t need to come up with 100% of the funding for, you get to enjoy all the benefits. As apartment syndicators and real estate investors, we know this all too well.
It’s true. When we think of investing in a new property our first thought is of course we’re going to purchase a property with debt. We’ll put 25% down and then get a loan that makes sense for all the reasons we love leverage.
Let’s take a look at this through a real-life example. Let’s say you invest in a property that grows by 10% on a $1,000,000 property. And if you live in LA or SoCal, you already know how true this is– it’s expensive out here!
That $100,000 adds to whatever down payment you made, in this example, it’s $250,000. So here’s where your elementary math skills come in handy, $100,000 adds to the $250,000 you put down originally, and that’s just your passive equity.
So you have your purchase equity of $250,000 that you put down, and then you get your passive equity of $100,000 that comes from the property– the debt collector gets none of that. So when you look at your return of investment all you’re seeing is “Gee, I made $100,000 on $250,000! That’s like, 40% or something return growth on my equity!”
And that’s why we love using leverage! ❤️️
At the same time, this by far outstrips inflation! So now you’ve got this inflation hedged investment by using debt to magnify the inflation of the property. This means your wealth is growing faster while the inflation rate is deteriorating the purchasing power of wealth.
So that’s one way to step it up, by feeding the need for speed fueled by inflation and leverage. Another way to invest to step up your investments is by purchasing more units.
And let’s clarify what we mean by more units. Here in the Kitti Kingdom, when we talk about bigger stuff, more units to us means any property with more than 65+ units as there’s an economy of scale in all areas including hiring a professional A-grade property management team.
If you’re going to invest in a piece of property and a market, investing in more units gives you a stronger foothold, and there are generally more loans available to those who invest in apartments. In fact, apartment loans tend to be some of the very best loans in terms of rates and flexibility and everything else!
Have you been listening and thinking to yourself “I need to get out of this little greenhouse business and step up to those red hotels!”
The challenge here is that at some point, most investors once they figure out the basics of making money in real estate run out of down payment options, they run out of money and the ability to borrow. Leaving many people who used up all their credit, down payment options, and loan qualifications out of options.
Sounds like those people are at a crossroads themselves. They can either sit back down and say “I’m good,” or they can step up to the challenge and keep going because they see more deals in the marketplace.
Before we move on we also want to note there is no right answer or choice here. Everyone’s situation and how they invest varies. However, if you’re thinking there must be a faster way to build wealth, dear listener, there is. There are more opportunities than buying a house and getting your tenant to make $300 monthly post cash flow. While it’s a start, that isn’t too much money compared to the dream, hope, and aspirations you have…maybe you can’t help but wonder how can I grow this wealth to be where I want to be?
Guess what, you’re not alone. There are a whole lot of other people out there who have the same exact problem. The solution is obvious. Get together and try to find a way to enjoy diversification by owning smaller pieces of a bigger portfolio.
Enter apartment syndication. You knew it was going to all come back to this, right?! We’re big fans of apartment syndication because it’s putting together these bigger deals by aggregating resources from different people. And everyone has a role.
Some people find the deals, some people have the land, and some people bring in the capital– that’s where passive investing comes in. Then, between all those players, you split not only the revenue from the cash flow, but the eventual growth of equity tax benefits, and all other types of things. It truly is an exciting area to invest in.
While there are folks out there who work hard, pay their taxes, save money, and live frugally so they can make it to their next downpayment, that’s not going to cut it long-term. These same people might even manage the property for profitability so that they can refinance and pull a little equity out. We don’t know about you, but that process can be a little too slow for us.
Again, if this is your current reality, we can empathize with how stressful this can be 😞. We’re seeing the current situation we’re living in as an opportunity to get out of this cycle. Maybe your loan is due. Maybe your interest-only is over.
Perhaps owners can’t make loans, foreclosures, all of the things that happened in 2008– only bigger now.
The truth is, there is a lot up in the air right now. Nobody celebrates when the tough times hit, but when there’s chaos, there’s an opportunity– only if you’re willing to see the bigger picture.
“Within crisis, are the seeds of opportunity.” – Marilyn Monroe
The Game-Winning Strategy
So where do you want to be when opportunity comes knocking? In the middle of the chaos. You see, to provide the economy with money, the Federal Government is printing trillions of dollars in unprecedented amounts. And if you’re a savvy entrepreneur– like all of our incredible listeners– you’re thinking to yourself “how do I get in on the action? How in the world do I put myself in the middle of the cash flow so those trillions of dollars don’t pass by me?”
Well, there are a couple of ways to get there. You can jump in head first and try your hand at the Wall Street casino and play against the sharks or apply for loans if you have decent credit. Buuuut those aren’t options we would pick– we want to go where the money grows and investing in assets classes that have been inflating is key.
We’ll make this as clear as possible. There is no better time to secure your financial future than now with apartment syndication.
Do you remember the Pareto Principle?
That’s the 80/20 rule, right? Named after economist Vilfredo Pareto.
Yep! He’s famous for his prophetic words that specify that 80% of the consequences come from 20% of the causes.
A practical example of that is how 80% of the money to be made in the next few years is going to 20% of the people. This isn’t to diss people who you know won’t be reaping that 20%, this is the nature of the world we live in.
People invest in apartment syndication for many reasons–like diversification. By doing this, they have the opportunity to go bigger to create market diversification, scale asset types, and work with an expert team along the way.
Passive investing through apartment syndication will make you realize that spending time and energy on investing in single-family homes and coming up with capital yourself isn’t worth it in the long run. With apartment syndication you’re not responsible for the whole pie– someone else does the work and you still live out the 80/20 principle.
People joke all the time that they want to make money without working. That can be your reality. As a passive investor, you’ll be making money people work their whole lives to achieve and you didn’t lift a paintbrush. That’s the power of passive income.
Sound too good to be true? Keep listening. 👂
Why Now is the Best Time to Secure Your Financial Future with Apartment Syndication
Okay, so let’s get into why now, more than ever, you need to consider becoming a passive investor through apartment syndication.
And for our friends who are already sold and know the power of what we’ve been preaching, this will be a great resource to remember why you’re in this business to begin with– especially if those news headlines have been getting you down recently.
Inflation is at a 40-year high
First and foremost, and as we’ve mentioned earlier, inflation is at a 40-year high. But this isn’t something to be scared of, especially if you’re investing in the right assets. Multifamily apartments are one of the best inflation hedges within commercial real estate because lease structures in multifamily apartments are far better positioned to benefit from an increase in inflation than any other asset type.
Other commercial real estate assets might have lease durations of five, seven, or even ten years. While multifamily leases can reset at 6, 9, or even 12 months. And when leases reset, that gives us the opportunity to reprice rents, as prices increase.
Which is huge. Think about how much rent has increased in the last two years alone, talk about putting yourself in the middle of the cash flow! You could be reaping some of those major returns.
Real Estate is on sale
Number two, if nothing else, right now there is a great opportunity in real estate overall. Real estate is that girl. She’s sizzling with opportunities and she knows it– people simply can’t get enough. ⏳⏳
Us included! We just closed on a $71 million deal, 312 units, class A, and the apartment was built in 2016 in the great state of Texas. Plus, the seller gave us a $3 million discount although the appraised value is $78 million.
Yep, the property value had already gone up by $10 million on day 1 of ownership.
She shoots– and she scores! When we talk about turning chaos into opportunity, this is it.
Also, there is far less competition as people are waiting for the market to hit the “bottom”. But no one has the crystal ball to tell you when that will be, right? So take advantage of what we have now, you are likely to get far better terms. Instead of putting all your money on day one, you might only need 100k!
The fundamentals are solid
Number three, keep the fundamentals solid. We have talked about this extensively in other episodes but as a refresher, there are specific criteria when it comes to apartment real estate that is a must.
You see, rent growth and occupancy are still at an all-time high. And so are rent-trade outs. Rent trade-outs are the difference in rent a new occupant of a unit is paying, compared to the rent the unit’s previous occupant was paying.
Sure Dallas, we’re at a 20% rent trade-out and in Houston, we’re between a 10-13% rent trade-out. No matter the economic cycle, we stick to our fundamentals which means investing in the right markets. And by ‘right markets’ we mean land-lord-friendly states where there is job growth. Plus you want to look for where there is a big gap between home affordability and the cost of rent in apartments. Another key thing to look for is a diversified economic base.
Lower loan-to-Cost
Number four is to have your LTVC (loan to cost) around 65%. Simply put, this means you borrow less the higher your downpayment, resulting in a lower LTC ratio. In the current interest rate environment when you borrow less, you take less of a risk, hence, you will also have a lower monthly mortgage.
Tax benefits aren’t going anywhere
Number five, your tax benefits aren’t going anywhere.
It’s no secret we love real estate investing… in case this dedicated podcast wasn’t a big enough hint for you. But investing in real estate can be so broad these days, our passion lies in multifamily apartments because not only is it wealth creation it’s also wealth preservation. It creates and protects your assets making it the perfect vehicle to provide extraordinary tax benefits investors love.
It’s all thanks to a little term called “bonus depreciation”. Your investment income is taxed at a much lower rate than other investments through multifamily apartment investing. Plus, you might be able to show off a taxable loss that can be used to offset the rest. It’s truly remarkable.
For all the tax goodies that come with apartment syndication make sure you tune in to EP011 Your Guide to Paying WAY Less in Taxes, we will link this episode in today’s show notes.
Okay, we told you, let’s show you. Let’s take a property we have in Fort Worth Texas that we purchased in May 2021. We got our cost segregation study done by a third-party engineering firm.
Instead of 94% projected bonus depreciation, we got back 112% bonus depreciation. What this means to our passive investors who invested $100K in this deal, is they are getting back a $112,000 K1 paper loss, meaning in the eyes of the IRS, they actually lost money, even though the deal has been cash flowing and that $112,000 can be used to offset their passive income gain. 😘😘
So you can see why we’re a liiiiitle obsessed with this, right?! So much goodness to be made in apartment investing.
Your team matters
Up next… choosing the right team is everything – find your Hogwart Squad 🪄 that is.
You may not have the expertise in apartment syndication, but your team does, if you choose the right one.We can’t overstate this enough but your team will either make or break you.
Tune in to EP007 – The Exact Strategy We Use When Vetting an Apartment Investment Deal to find the right apartment deal sponsors, vet them the right way, and make sure you’re all on the same page about the big stuff: investing in your dreams.
And by make or break we mean either make you money or deal with the consequences of broken 💔 relationships. Your team will either take advantage of the opportunistic times we are in because real estate is on major discount right now, or you could lose your money if their underwriting is not conservative and their business plan is too complicated to implement.
Be clear in your goals, and make sure their markers of success align with yours. Our best advice? These conversations pair best with a glass of wine or two.
It’s all passive
Rounding us out at number seven, it’s still all passive. We’ll be the first to admit it– real estate can be confusing! So many new terms, laws that vary by state, and don’t get us started on the many acronyms to remember.
The same is true for apartment investing– there is a steep learning curve! So joining syndication gives you access to truly learn from the experts and peers who have been around the apartment block once or twice. Plus, you can then leverage them to help you make more money. 😇😇
While some forms of apartment investing are super time-consuming, apartment syndications allow you to create a stream of passive income. For you, this means you get to take a backseat (for once) and still get rich while you sleep.
Investing with an experienced sponsor and choosing your investment amount, creates a ripple effect of trust in your and then watch the returns roll in.
Let’s Do This… Together
Soooo you might know where this is going, are you ready to get started on your journey to financial freedom? Luckily for you, we have created the perfect investor club to help. Join the Kitti Freedom Club– an investors club for people who want to bust out of the 9-5 monotony and create a life of freedom.
How great is it to know that you’re not alone?!
You do notttt want or need to take on all the things by yourself.
The Kitti Freedom Club offers the support, guidance, and resources to navigate the ups, downs, surprises, roadblocks, and WINS that you’ll find on your way to becoming the passive investing guru you were meant to be. 😉😉
Plus…we have soooo much fun while we’re at it!
So what are you waiting for?! Click the link in our show notes to read more about it, read testimonies from other Kitti Club members, and get started today.
That’s it for today’s episode but don’t forget to leave us a rate, review, and share this podcast! We are so thankful for you, Cashflow Multipliers! Talk soon! 🙌🙌
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