Recently, I had a conversation with another real estate investor about a purchase he made in the middle of the pandemic.  He was extremely optimistic because of its high return potential but started to notice that the property’s vacancy started to go up as soon as conditions in the pandemic started to improve. 

Why?

Tenants in that Class C apartments generally chose to live there because their relative incomes forced them to a lower rent apartment complex, and as employment prospects improved, their new income allowed for a large flight outwards.  This was accelerated by vacancies in other available, higher-class apartments. 

As he was walking through his case, explaining the numbers, and trying to figure out what went wrong, a light bulb went off in my head.  So I said to him, “It sounds like you had a lot of numbers that made the case compelling, but what qualities made it a great opportunity at the time?”

He paused and thought about it.  Then it hit him – he really did think too much about the qualities of the property.  He spent too much time focusing on the numbers. (see our post about following the numbers)

Blinded by the Numbers

Usually it comes down to being overly distracted by the compelling return numbers, so much so that the desire to get a “piece of it” overtakes the warning signs from other parts of the picture.

Either one chooses to completely ignore all other characteristics, or you choose to shrug off the potential red flags.

Being hyper-focused on the numbers and forgetting about the core drivers (or driving qualities) often leads to real estate investment failure. Getting to know the asset and the drivers of the community always impact the viability of the investment. At CF Capital, we look at multifamily communities as living, breathing entities. What’s it’s health and longevity? Is it plagued by something inherently that might cause adverse conditions relative to our projections?

The Downfalls of the Numbers Saga Continued…

The numbers are great at providing insight on the direction of the beginning of the investment story, by giving a sense of where the property has historically “been,” but will not always be accurate when it comes to anticipating about the “speed bumps” (big and small). This is where nuance insight comes into play as investors.

In other words, historical performance serves as an aid to short-term investment decisions, but those decisions may be detrimental for the long-term if investors are not careful to understand how the nuances of micro and macro economics are at play.

In fact, focusing on the numbers alone, often breeds short-term thinking and puts metaphorical blinders on many investors. It’s certainly paradoxical, because we often say “do the math and let the numbers tell you what to do,” and while that’s certainly true in many ways, as investors we must understand the probability of certain events playing out in the future of a particular real estate investment.

For example, let’s say an investor’s model and financial plan doesn’t account for enough  short-term repairs and maintenance.  When a pipe bursts and a replacement is required, the high expenses associated with the repair could deter the investor from making the right decision to buy a replacement, and instead put a proverbial bandaid on a problem that really needs surgery.  So instead the investor chooses the short-term solution and tries to cheaply fix the pipe.  This causes more and more maintenance requests over time, ending up costing the investor significantly more capital  than it would have to replace the pipe the first time.  These compounded decisions can have cascading effects on any property and ultimately severely negatively impact investment returns.

Specifically, this behavior puts a damper on cash-on-cash returns.  To say it another way, this is likely the same short-term-minded approach with many other expenses, and because of that, we already know what to expect when it comes to property performance.

Avoiding the Downfalls

This advice is really simple, and it is something that we have discussed before.

(see our posts on due diligence, underwriting, and asset management)

First, dive into the qualities of the submarket. 

Is this where you and enough other people would want to live long-term?  Is this a good location for a family?  Are there enough quality schools nearby?   Is this submarket in the path of progress of future development and growth?  

And finally, some questions that would have saved our friend, the real estate investor from earlier… what are the reasons and conditions that cause people to choose to live in the neighborhood?  How might future conditions, in various directions, impact that type of resident behavior?

Second, dive into the qualities of the property, including the physical characteristics and the renters. 

What are the current attractive property characteristics?  What tenants are attracted to the property now, and what tenants could be attracted in the future?  Will our target tenants be attracted to this property?  What potential property cost-effective characteristics could be added to attract and retain tenants? 

The list goes on and on. At CF Capital, we ask these questions and more on a daily basis when considering various prospective investments. We invite you to incorporate these considerations in your own investing, whether passively with our group or actively with your own team. 

Until next time, happy investing!

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Interested in partnering with us? Join our investors list here.

Day after day we come across other investment firms, real estate or not, providing the public and potential investors with information that seems a bit off.  

What do we mean when we say it “seems a bit off?”

For starters, I was inspired today to write this post because I felt I had seen enough of the stretched numbers, empty opinions, and sometimes misleading information related to investment offerings.  I was scrolling through instagram for a few minutes, and came across a public advertisement by a multifamily real estate firm with a value-add 506C offering to accredited investors.  The advertisement stated a return expectation that initially felt “too good to be true.”

After clicking on the link, I was presented with additional deal information, disclosing the following: 

• an entry and exit cap rate of 3.2% over a period of 5 years;

• a current vacancy rate of 0.5%;

• a rent growth projection of 6%;

• deal financing was from a permanent fixed loan with a 65% loan-to-value (“LTV”);

• and had an expected net IRR of 21% of a Class B property based in California.  

With that information alone and with my experience in real estate, it made me wonder how does that even make sense?

Our discussion today will review this investment and its metrics, using facts and reasoning.  Let us offer you some guidance and break it down:

Cap Rate 

The 3.2% cap rate at entry and exit is below average for this type of investment, and it indicates that there is no projected change in the market from the beginning of the investment to the end. (See our post on cap rates)

THE FACTS: 

→ One of most recent National Multifamily Cap Rate reports* revealed a national average cap rate of 5.04% for multifamily across all types of investments (core, value-add, and opportunistic).  The report also revealed that the Pacific West region (where the property is located) has the lowest cap rates in the country (4.29%) with a downward trend lasting over two years.  In other words, evidence is showing us that the investment conviction is more than likely not coming from the cap rate.

→ The formula for cap rate is Net Operating Income (“NOI”) divided by the property value.  If the cap rate does not change it means that, based on the formula alone, your: 

1) NOI (i.e. cash flow) and property will not change; or 

2) the NOI and property value increase or decrease just enough to offset each other; or 

3) the property value will decrease enough so that any increase in NOI is offset; or 

4) the NOI will decrease enough so that any increase in property value is offset. 

All of these scenarios are entirely possible, and does not necessarily need to be a cause for concern; it could even just reflect conservative underwriting. However, when you take into account the other factors and the stated expected return, it might be something you need to look deeper into.

Vacancy Rate

A current vacancy rate of 0.5% is lower than average.  So that’s good right?  It could be, especially for projected cash flow stability.  But when you are looking for factors to justify a higher-than-average expected return for a value-add property, you might want to see that some “value” is going to be added by improving key investment drivers, like vacancy.  (see our post on vacancy underwriting)

THE FACTS:

→  One of the most recent reports on US Multifamily Figures** and statistics showed the national average for vacancy rates was 4.0% across all multifamily property types.  Class B properties had a vacancy rate of 3.5% and the relevant submarket in California had a vacancy rate of 2.3%.  There was a very large drop in vacancy last quarter for the first time, which could indicate the beginning of a trending improvement, but with fluctuating rates and no real evidence of a continued trend, we will not assume that this is a return driver.  Besides, a path from 0.5% vacancy to an absolute best-case scenario of 0.0% would probably not be enough to drive the projected investment returns.

We could continue to talk about rent growth, financing and LTV, as well as the IRR number, but I think you get where we are going with this.

CF Capital Philosophy & Closing Thoughts

As investors, we do not speculate.  While there are always elements of the unknown in any investment, we focus on what we know, and what facts we can gather to build (or not build) a case.

We would also like to think that we know ourselves.  We are a firm driven by integrity, purpose, excellence, and leadership.  We know that we wouldn’t have started CF Capital with four core values if we knew we couldn’t look people in the eye everyday and tell them we are sticking to those values through thick and thin.  We burn the midnight oil regularly and even lose sleep at night because we want to make sure we do our absolute best to serve our current (and future) partners.

The CF Capital team will always aim to provide you with solid reasoning, backed by as many facts as possible, and will do everything in our power to make sure you are as fully informed as possible.  Among other reasons, that is why we write blog posts like this one - it feeds our purpose.

It might seem odd, but we would be quite happy (and feed our purpose) if just one of our readers approached us and started to interrogate us on our past and future deals, using discussion points reviewed in today’s post.

Before we bring the discussion to a close, we would like to reiterate that we are always here for you.  

We want to be your resource, even if you want to talk about an investment opportunity that is not offered by us.  We would gladly help you find clarity through the facts and the evidence out there in this world.  Let’s elevate communities together!

As always, feel free to reach out to us anytime.

Relevant ELEVATE podcasts:

• Episode 159 Barbara Oakley - Learning How to Learn Effectively

• Episode 148 - Elevate Exclusive with Tyler - The Resourcefulness Mindset

• Episode 123 - Leveraging the Drivers of Success with Renowned Wall Street Housing Analyst Ivy Zelman

• Episode 51 - Shifting Your Focus From Getting to Giving with Bestselling Co-Author Bob Burg

Recommended Books Related to this Post:

• How to Make Sense of Any Mess: Information Architecture for Everybody by Abby Covert

• Devil Take the Hindmost: a History of Financial Speculation by Edward Chancellor

• Streetlights and Shadows: Searching for the Keys to Adaptive Decision Making by Gary Klein

*https://www.cbre.com/united%20states/real-estate-services/directory/valuation-and-advisory-services/valuation-cap-rate-reports/articles/us-multifamily-cap-rate-report

**https://www.cbre.us/research-and-reports/US-Multifamily-Figures-Q2-2021

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Interested in partnering with us? Join our investors list here.

“Only when you combine sound intellect with emotional discipline do you get rational behavior.” – Warren Buffett

Have any of you let your emotions get in the way of making a better decision?

Whether the situation was big or small in significance, I imagine the answer is “yes” for everyone.

Regardless, our point is that emotions can affect the way we make decisions.  And when it comes to investing, the same concept applies.

For our discussion today, we would like to review the impacts of emotions on the investment process and our ability to effectively execute a strategy.

Strategy and Emotions

So how do emotions apply to strategy and what part do emotions play in determining a good strategy? 

First, a strategy at the most basic level, according to Richard Rumelt, is “a choice” related to the “application of strength against weakness, or strength applied to the most promising opportunity.”   

In order to execute, a strategy requires resources, processes, and people.  To successfully execute, you need a good strategy, which is made up of better information, better analysis, and better behaviors.   

That’s right, the last part of a good strategy is behaviors.  So, I think you all can probably guess where we are going with this.

You cannot have a good strategy without good behaviors, like emotional discipline.  For the sake of our argument, let’s focus on how emotions apply to the ability to execute an important requirement of our strategy, the real estate investment process.

Emotion as a Liability to the Investment Process

If you are not disciplined with your emotions, they become a liability to the investment process, and, in turn, a liability when attempting to successfully execute a strategy.   This is deemed a liability because without discipline, your decisions are guided by emotions rather than the objective nature of facts.

We are aware that emotions are natural.  We are humans after all.  Emotions in our everyday life are an expression of who we are and what we value. 

We are not saying that we aren’t supposed to feel emotions, and we certainly are not saying that CF Capital will never show emotions during our investment process.  However, we are saying emotional triggers can be recognized when circumstances arise, which gives us the chance to handle our behaviors accordingly.

The circumstances when emotions may become a liability come in a wide variety.  Also, every person handles emotions in their own way, so there are no perfect general rules of thumb. 

With that said, we believe the best way to discipline your emotions is to really understand the potential triggers that cause a case where you get lost in your own emotions.  In doing so, you can minimize how much negative impact your emotions have within your investment process.

Examples of Triggers

Lack Self-Awareness - Do you tend to be a negative person and find all the weaknesses in a deal or circumstances in general? Or does your positivity blind you from potential risks? How do you handle setbacks? Are you someone who has a low emotional boiling point?

Succumbing to the Forces of FOMO - Do you feel a need to immediately jump into real estate investing because you missed a “great opportunity?” Do you find yourself saying, “I’m not expanding my portfolio fast enough”?

Investing with Your Ego - Do you personally tie your self esteem to the value of your investments? Are you comparing your investment success to others? Do you find yourself saying you’re better than other investors and you can handle riskier investments?

Misunderstanding Growth - Do you understand the difference between controlled, steady growth and rampant growth? Steady growth can be maintained without destroying the integrity of your systems and allowing you to stow away enough cash for a rainy day, improve systems, and strike when a good deal appears. Or are you driven by the latest “game changing” fad and are you willing to risk it all for a short term gain?  

(check out related ELEVATE podcasts with Lisa Feldman Barrett, Marc Brackett, and Dr. Jud Brewer).

Looking Outward - Are you investing in a given market because Fred down the street recommends it? Do you know Fred’s investing goals? Is Fred down the street following the same investment criteria as you are?

Thinking Real Estate Investing Solves Everything - Do you believe investing in real estate will help you solve your personal problems? Are you telling yourself the grass is greener in real estate investing because you can run away from your problems? Do you think you won’t have to work anymore once you begin investing in real estate?   

Closing Thoughts

Keep in mind the things that we can control and the things we can.  We can’t control the market or everything that happens to an investment property, but we can control how we react to those situations. We can’t control that the human life is filled with a myriad of emotions, but we can control the way we behave based on being emotionally intelligent and separating perspective from raw emotions. We remain committed to making wise, long-term investment decisions based on data and principle, not how we feel in the moment. We encourage you to proceed with investing amongst your own sea of emotions wisely!

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Interested in partnering with us? Join our investors list here.

“No matter how hard you work, your money can work harder.” -Aya Laraya

At least once in your adult life, I am sure you all have heard someone say, “Don’t work for money, make money work for you,” (or some variation of that).  For those who have and even more for those who haven’t, we would like to discuss this topic in our post today.  Passive real estate investing.  

What does that have to do with “making money work for me?”  Let’s start with the basics.

What is Passive Investing?

Passive investing refers to having an income stream that seemingly comes to you automatically. First, you make an upfront investment with your cash.  Then you receive a stake (in the form of ownership) in that investment, from which you are paid dividends or other types of regular income distributions.

This is passive investing because you are not directly managing the investment. It’s exactly the type of opportunity we offer with our investments at CF Capital.

Passive Real Estate Investing

Taking into account the broader passive investing explanation, passive real estate investing happens when you invest your cash into a real estate venture; one that you won’t be managing directly. Again, it’s precisely what we do at CF Capital. If you want all the benefits of investing directly in real estate without all the hassle or the tremendous effort in coalescing the team to do so, we invite you to consider investing alongside our team. 

There are several ways you can passively invest in real estate: syndications (see our posts on syndications and accredited investors), equity funds or ETF’s focusing on publicly-traded companies whose primary business is real estate, direct investments in individual publicly-traded real estate business’ stock, REITs or real estate investment trusts (both private and public), fixed income securities, crowdfunding, private equity real estate funds, and derivatives with exposure to the real estate market (e.g. swaps on residential mortgage-backed securities or RMBS).  Each of these requires a specific level of “knowledge and sophistication,” so not all of these are available to everyone.

You can passively invest in real estate with different intentions; all of which have to do with your individual goals. For instance, you can invest for passive income.  Typically, this income is paid out to you as regular dividends (in an equity investment) or as fixed income translated from interest payments in a debt-related investment. 

Also, you can passively invest in real estate for growth purposes.  This just means you may or may not care about passive income, and the main focus is the appreciation on the property (or properties) within the investment, followed by the profit when they are resold (i.e. the investment is liquidated). Everyone’s goals are unique, and each unique goal matches a corresponding strategy. For us to be a good fit to partner together, we must understand your investing goals and intentions before making an “offer” to invest together.

Now that we have reviewed some of the basics, let’s review just how great passive real estate investing really is.

The Benefits of Passive Real Estate Investing

If you are looking for a passive income stream, real estate can be one of the best passive types of investment you can access.  To keep things simple, let’s just say that it is important to understand that passive real estate investing can be an excellent option for adding to your residual income.

Residual income refers to the income that remains for an individual or a business after all debts and expenses have been paid. In layman’s terms, cash flow. 

To determine if the benefits appeal to you, here are five specific examples: 

• Keep More Through Tax-Deferred Structures - In an equity-structured investment, passive real estate allows tax-deferred cash returns that can let you keep more of your earnings.  This is one reason we stated earlier that real estate can be a more powerful passive investment than other forms of passive investing. Unlike interest payments or stock dividends, which can be taxed at your highest income bracket, the pass-through potential benefit of real estate ownership allows your share of the depreciation expense to offset your income.

• Keep More Time with Less Pain - When you are a passive real estate investor, you do not deal directly with the hassles of day-to-day-management. Leaky faucet? You’re not getting a call at 2am. Broken gate? It’s not your responsibility to call the handyman.

• Keep Your Sanity: Less Lender Interaction - Working with lenders to obtain financing is difficult. Since the economy went south, banks have started to require even more documentation to get loans, and the process is both time-consuming and mind numbing.  When you are a passive real estate investor, your investment is tied to a professional private real estate investment company that already has relationships with select institutions. They navigate the lender financing waters on your behalf so you don’t have to.

• Keep Your Time and Let Experienced Experts Take Care of it -  You always have the option in any investment to go it alone, whether that means investing in stocks through an online brokerage or buying your own investment property. But there is something to be said for leveraging the intelligence of the people around you.  Some real estate investors devote their lives to learning the in’s and out’s of the market, and passive real estate investing gives you the chance to benefit from their deep education.

• Keep Your Bed Time: “Make Money While You Sleep” - Passive real estate investing can be quick. You do your due diligence, sign legal paperwork online and transfer funds almost immediately. And as soon as your investment is processed, you become an equity stakeholder in that real estate venture and can start possibly realizing passive income and/or a portion of that venture’s growth.  In other words, you have the potential to make money while you sleep. Primarily when investing in properties with existing tenants where there is existing cash-flow, your money is working for you 24/7.

But, What About the Risks?

Now that we talked to you about the benefits, how could we leave out the risks? All investments come with inherent risks, and passively investing in real estate is no different. To simplify this topic, here is the main point:

• There is a Chance that You Lose Some or All of Your Money -  We apologize if that sounds harsh, but the reality is that nothing in life is guaranteed, not even real estate investments.  In the case of real estate stock, REIT, syndication, derivative, or fund investment, you can lose money when the value of the investment goes down.  Sometimes it may be due to internal issues with the real estate management team.  Sometimes it might have to do with the underlying asset (e.g. the company whose shares you’ve purchased, or the real estate portfolio of the REIT or fund), or due to a real estate market downturn.  In any case, the value of your investment could decrease.  From our experience and based on the data that is publicly-available, losing all of your money is not extremely common, but it has happened.

With that said, we would like to stress how important it is for you to do your own research or consult other experts/advisors ahead of time.  No real estate investment can promise you a return or protection of your investment (i.e. the principal).

Your own due diligence can never hurt, it will only help.  In doing so, you may even find “safer” or even more lucrative investment opportunities out there in the marketplace.

Final Thoughts

Regardless of whether or not you choose to passively invest, even if it is not in real estate (with our team or with another operator who may be a better fit for you), we want to be here for you all as a guide and as a potential solution.  Our doors are always open and we welcome any and all discussions related to this topic.  Seriously, we love it… almost too much!Ultimately, our team provides asset management solutions and a team of experts that give people like you access to high quality passive investing real estate opportunities. We’re positioned to help investors maximize returns, and mitigate risk all while generating residual, and predictable cash flow. If that sounds like something you want more of, feel comfortable reaching out. 

Please feel free to contact us through our inquiry page or reach out to us directly via email.  We look forward to hearing from you! 

“Rich dad said that financial intelligence determines not so much how much money you make, but how much money you keep, how hard that money works for you, and how many generations you can keep it.” ― Robert T. Kiyosaki

Recommended & Related Elevate Podcasts

(PRO TIP: Scroll down on our Elevate Podcast page, hosted on the CF Capital website to find the section titled, “Search Episode Transcripts.”  Type in the keyword “passive” to see all podcasts that touch on passive investing)

• Listen to our Elevate Podcast Episode 180 Lisa Hylton - Cultivating a Resilience Mindset for Bold Real Estate Moves

• Listen to our Elevate Podcast Episode 173 Timothy Lyons - How to Transform Your Identity and Grow Your Multifamily Investing Portfolio Through Commitment and Mindset

• Listen to our Elevate Podcast Episode 160: John Fortes - Tips and Tactics for High-Level Passive Real Estate Investing

• Listen to our Elevate Podcast Episode 158 Dave Allred - How to Design Your Life & Live with Purpose Through Real Estate

• Listen to our Elevate Podcast Episode 149 - How to Use Your Professional Experience to Scale a Real Estate Portfolio & Make a Massive Impact with Megan Lamke

Recommended Books

• Atomic Habits by James Clear

• The Third Door by Alex Banayan 

• Bringing Value, Solving Problems, and Leaving a Legacy by Tom Ziglar

• Storybrand by Donald Miller

• Start with Why by Simon Sinek

• Rich Dad Poor Dad by Robert Kiyosaki

• Mindset by Carol Dweck

• Life’s Great Question by Tom Rath

• A New Alphabet for Humanity by Leesa McGregor

• Let Your Life Speak by Parker Palmer

• Storybrand by Donald Miller

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Interested in partnering with us? Join our investors list here. 

“Risk comes from not knowing what you are doing.” - Warren Buffett

As a continuation from our last post about real estate syndications, we would like to discuss what it means to be an accredited investor.  

Some of this discussion may be a review to many of you as you may already be familiar with the term accredited investor some of this discussion may be a review.  But, in August 2020, the SEC updated the what it means to be “accredited,” so our hope is to provide some clarity on this update and any other nuances to the definition.

(For the purposes of this discussion and our usage of private syndicates, you can assume that anything in this post is relevant to one’s eligibility to participate in CF Capital’s investment offerings.)

Defining “Accredited Investor”

An accredited investor is an individual or a business entity with a status that allows them to buy and sell securities not registered with financial authorities, like the SEC.  This privileged access is given to them by satisfying certain requirements from these same financial authorities.  It is worth mentioning that there is a status above accredited, called “qualified purchaser,” and these types of investors are given the same access (plus more). 

Let’s get straight to the important points and go through the requirements to be labeled an accredited investor (in the US set by the SEC):

1. Income* -  Exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.

   OR

2. Net Worth - An individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person.

   OR

3. Financial Knowledge (NEW) - Based on certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution, which the Commission may designate from time to time by order.  In conjunction with the adoption of the amendments, the Commission designated by order holders in good standing of the Series 7, Series 65, and Series 82 licenses as qualifying natural persons.

If you are curious to learn more about the definition directly from the SEC, click here to go to the relevant page on the SEC website.

Changes to Definition in August 2020 

Historically, individuals who do not meet specific income or net worth criteria, regardless of their financial sophistication, were not given the opportunity to invest in private markets.  However, as of August 2020, new amendments** to the definition of accredited investor have been improved, effectively identifying individuals with sufficient knowledge and expertise to participate in those private market investments. 

Essentially, individuals will be allowed to participate in private capital markets not only based on their income or net worth, but also based on established, clear measures of financial sophistication.  

Of course, all of these measures are based on defined criteria of professional knowledge, experience or certifications, such as being a holder of the Series 7, Series 65, and Series 82 licenses.

Understanding Accredited Investors

Many companies decide to offer non-SEC-registered securities to accredited investors directly, known as a private placement.  Because this decision allows companies exemption from registering securities with the SEC, it can save them a lot of money.  

The real privilege is accredited investors’ ability to invest in venture capital, hedge funds, private real estate, angel investments, and complex investments.  With that said, these private placements have the potential to be extremely risky and are often illiquid.  Therefore, it is imperative that financial authorities ensure that accredited investors are financially stable, experienced, and knowledgeable about their risky ventures (a topic that is discussed more in the next section). 

When companies go through with offering their shares to accredited investors, the role of the SEC is limited to verifying or providing the necessary guidelines for determining who qualifies as an accredited investor.

We would like our readers to know that there is no formal process for becoming an accredited investor.  Instead, it is on the seller of the securities to take the necessary steps in order to verify the status of investors who wish to be treated as accredited.  A seller may ask the investor to respond to a questionnaire that may include the following: financial statements; tax returns; W-2 forms; salary slips; and even letters from reviews by CPAs, tax attorneys, investment brokers, or advisors.

In our case, we would need to administer the verification process, which is relatively painless in our opinion.

Why does accredited investor designation exist?

As we alluded to in the previous section, any regulatory authority of a market must safeguard investors.  Although individual investors may receive a large return, private investments, including non-registered real estate securities, are risky, and may be focused on unproven concepts with a high chance of failure. 

For those reasons, we believe it is completely understandable for regulators to create a different class of more qualified investors.  The division exists to protect less knowledgeable individuals who may not have the financial cushion to absorb high losses or truly understand the risks associated with their investments. 

Simply stated, an accredited investor designation exists to protect everyday investors.

We won’t discuss it in this post, but there are new innovative options for non-accredited investors to access the private markets, like real estate.  For instance, the new crowdfunding regulation allows for most investors to access the private markets.  In many cases, these investments may offer a lower return profile, but sometimes with more extensive research you may find the right platform for you to invest in a private placement. 

Main Takeaways

• An accredited investor is one who meets certain criteria regarding income, net worth, and financial knowledge qualifications.  Often, they are wealthy individuals who are allowed access to investments that many people are not allowed.  Investments such as those offered by CF Capital.

• Pros of being an accredited investor include access to private and restricted investments, potential higher returns, and increased diversification to their investment portfolios.  However, these investments can be more risky and can be more illiquid.  Investors in CF Capital offerings will often have their investment capital committed for a (roughly) five-year period or greater, depending on the business plan strategically tailored for the specific offering. 

• The accredited investor exists so that financial authorities (i.e. the SEC) can protect everyday investors from the potentially great risks associated from private market investments.

• The obligation of proving an individual is an accredited investor falls on the seller of the securities rather than the investor.  That means, CF Capital needs to do the verification.

If you, our readers, would like to discuss this further, please feel free to contact us!

*for individuals the requirement is different (i.e. lower) than business entities
** The amendments revise Rule 501(a) of the Securities Act

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Interested in partnering with us? Join our investors list here. 

“For the strength of the pack is the wolf, and the strength of the wolf is the pack.” ― Rudyard Kipling

“How do I participate in your investments?” This question from one of our loyal readers was music to our ears.

Since one of our readers is asking, there must be others… right?  Absolutely!  

Our post today is dedicated to addressing this question for our entire audience to read.  Of course, our response has a bit more detail than one might think, so let’s start with describing with the means by which an investor accesses one of our real estate opportunities-- a syndication.

What is a syndication? 

A real estate syndication is a group of investors who combine (aka “pool”) their capital for the purposes of making a property investment. This allows individuals access to opportunities that they would not otherwise be able to access on their own, diversify their resources, and leverage a best in class team towards executing a specific business plan.

Why would investors want to participate in a syndication?

By combining capital resources, individuals and companies have more buying power than making an investment alone. Think of the analogy of buying a plane ticket to your next destination. Instead of purchasing the airplane, which could result in tens of millions of dollars plus insurance, a staff, and jet fuel, most people typically invest several hundred dollars in a ticket for one seat (or several, for a family). This easy-to-relate illustration is instructive to understand the power of a syndication; together we can go farther than we could by going alone. Bringing this back to real estate, we can invest in higher quality assets with scale and all enjoy the benefits to a greater capacity than by investing alone.

Understanding the Types of Syndications...

To help our audience understand this a bit further, let’s briefly discuss the history of syndications.  Pooling capital to acquire real estate has a long history, but for most of the 20th Century this type of investment tool was only leveraged by those who had exclusive access to opportunities.

It used to be that real estate investment firms (GPs or sponsors) could publicly advertise their investment ideas to any type of investor.  But the Securities Act of 1933 required all new offerings to be registered with the Securities Exchange Commission (“SEC’) in order to provide oversight and protect investors from fraud.  In turn, the tedious legal and registration process made syndication far less efficient.

With that said, the SEC did, in fact, create “safe harbor” rules, allowing sponsors to avoid registration if they met certain conditions.  Even so, the old days of public solicitation were over.

Now, investment firms and sponsors like CF Capital can either raise money without public solicitation in order to avoid registration or register with the SEC, wait for approval, and then try to raise investment capital from the public.  The former is almost always more efficient.  Hence the reason that many sponsors almost always choose private syndication.

So, how does it all work?

Syndications are commonly structured as limited partnerships (“LPs”) or limited liability companies (“LLCs”).  This is the method by which investors purchase a real estate asset, such as an apartment complex, or even a portfolio of properties.  

In many cases, there is a dedicated investment firm that is in charge of handling the property purchase and managing the investment (e.g. strategic decisions and/or operations).  This investment firm is called the general partner (“GP”) or sponsor.  Sometimes there are multiple sponsors, which are known as co-sponsors.  In our case, we would take on the role as the GP, and we would invest our capital as an LP alongside the other LPs (i.e. pool of investors).  Investment firms, like us at CF Capital, that want to align incentives with investors and have “skin in the game” often put their own capital to work in the real estate syndication.

After some legal paperwork an investor transfers their capital to the entity in exchange for a percentage of ownership in the “company.”  This entitles them to the benefits of capital appreciation and cash flow from the property investment, but limits their downside to the point where they can not lose any additional money beyond the point of their initial investment. After all, all real estate investments come with inherent risk, however investing in this capacity within a syndication does limit that downside for LPs in the event things don’t go as planned.

With the structure there is a profit split between the GP and LPs.  Often the split is 30% to the GP and 70% to the LPs, although every deal is unique based on it’s particulars.  CF Capital even takes things one step further by offering a preferred return to the LPs, meaning our team  only receives  a share of the profits after LPs meet a specific percentage return (e.g. 7%).

Yes, there are plenty of additional intricacies to a syndication, but that’s why our doors are always wide open to you, our friends, colleagues and partners.  Please feel free to reach out to us if you have any questions about real estate syndication or any of the opportunities offered by CF Capital.

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“Things are not always what they seem; the first appearance deceives many; the intelligence of a few perceives what has been carefully hidden.”  -Phaedrus

A regular reader reached out to us asking how we find the gems.  “How are you able to find hidden value in a multifamily investment that many people fail to discover?”

That question brought a smile to our faces.

We were content because we knew we already covered some of these topics in previous blog posts.  Even though the topics were not consolidated to address “hidden value” specifically, we believe pieces of those posts ultimately contribute to the whole “puzzle.”

Over the past months, we have written about some of the core elements of our investment process (e.g. Vacancy Rates, Rent Growth, Cap Rates, Tax Rates & CapEx).  We have also written about our value-add strategy and execution (e.g. Business Plan, Asset Repositioning, & Marketing an Asset) post-due diligence. 

When it comes down to discovering value, it is all about thinking outside-the-box.  By taking a creative approach, we are able to identify many ways to increase cash flow -- ultimately from both a revenue and a cost perspective.  (ask us about our new e-book, covering this topic)  

Our discussion below covers some of the ways we uncover hidden value in a property.

Ripe Markets

“What markets reveal strong potential for a value-add property investment?”

Before we think about individual property characteristics, we consider a market’s potential.  Part of CF Capital’s strategy is to maximize value creation.  We would evaluate if a market has room for rent growth with limited competition.  We also verify that a market has strong economic fundamentals and a solid demand for multifamily housing.  

How do we do this?

As we discussed in previous blog posts, we start by gathering historical and current data to establish baselines.  From there, we are able to analyze “what the market is telling us” through a cross-market comparison.

It is worth noting that part of CF Capital’s strategy is to maximize value creation.  If we are able to capture the benefits from positive secular trends, we will increase our return on investment even further (beyond any executable items to improve revenue and/or costs).

Below Market Rate

KEY QUESTION: “Are current rents priced to today’s market value?”

One of the simplest ways to find hidden value is determining if a property’s current rental prices are set “appropriately.”  We often run into cases where property managers fail to increase their rental prices to match what the rest of the market is willing to pay.  

Among other more sophisticated exercises and models that we work on to find this hidden value, we place a lot of our attention to market comparables -- what are similar properties charging for their rental units.  If the comparable properties are charging higher rents on average without their occupancy levels going down, this signals to us that we might have discovered hidden value.

Underutilized Space

KEY QUESTION: “Are there any underutilized spaces with the potential to convert to something that is revenue-generating?”

It is common to find a multifamily property inefficiently utilizing the space across the property, as well as in the buildings and individual units.  In order to increase our top-line, some potential improvements we might consider are: creating additional bedrooms in empty (non-revenue-generating) space; creating value and subsequently charging fees for storage units; transforming empty buildings into a revenue-generating clubhouse; or adding other amenities across the property that are designed to create more demand to reside at our community.

Separate Garage Parking

KEY QUESTION: “Can detached garages be rented out separately for a fee?”

If there is a parking garage on the property, we sometimes discover that property managers offer this free-of-charge.  Sometimes, we believe this type of “perk” makes sense.  However, depending on the case, it might be a poor management decision to do so.  

How can we tell?

If other comparable properties are charging a fee without any negative impact on their financial performance, the market is signalling to us that tenants are willing to pay for garage parking.  

By looking deeper into a property, we are able to discover the potential benefits from adding a garage parking fee.

Marketing/Advertising

KEY QUESTION: “Are there opportunities to improve marketing or perceptual positioning of the property?”

In under-the-radar properties, we often find that property managers have plenty of room for improvement on the marketing front.  However, poor marketing efforts would only be revealed after some investigative analysis and due diligence. In some circumstances, our intimate knowledge of the submarket and the demands of the consumers help us identify intangible aspects of the branding of an asset that would benefit the perceptual positioning of the asset in the minds of our target resident. 

In these situations, the hidden value lies within the opportunity to improve presence, awareness, and efficiency of marketing.  

With our trusted property management partners, we unlock this value by executing on a plan to rebrand the property, reposition the property, increase advertising in the proper channels, and/or streamline marketing operations. As we increase the awareness of the fresh brand in the submarket, we then solidify these repositions by ensuring our culture matches the essence of the brand. In other words, our properties truly “become” who we create them to be.

Utility Expenses

KEY QUESTION: “After due diligence, are there opportunities to improve utility charges?”

Occasionally, though not as common in current times, we come across a property manager that bears the costs of utilities.  If we discover this during our investment process, we keep in mind the potential value that we create by reducing the costs of utilities.  In such a case, we might bill utilities back to the tenant, in the event that doing so does not adversely impact tenant retention in excess of the effort.  This could mean making changes to a few areas:

1. The tenant directly pays the bills for all of their utilities with the energy or water provider.

2. Any building or outdoor utility expense is factored into the tenant’s rental prices.

3. Anything outside of individual units that cause a utility expense, can be switched to an alternative to lower total utility costs (e.g. switching outdoor lights to solar-powered lights).

By capturing the value from cost reduction measures in the utilities area, we are able to increase our total cash flow.

Although this is not even close to an exhaustive list, we thought it would be helpful to provide some specific examples of how we discover hidden value to clue you in on a part of our creative process for identifying and capturing hidden value in the assets we invest in. You might consider using these ideas to springboard you towards capturing more value in your portfolio and can further rest assured that the team at CF Capital is tirelessly creating capital appreciation and cash flow generating activities to secure and maximize your investment should you decide to passively invest in our next opportunity.

As the multifamily bull market continues, opportunities to acquire existing properties have become more and more competitive while the increased demand for value-add properties is beginning to lower return potential in many markets.  Finding the right value-add investing opportunity that generates value can be challenging, but can still offer the potential for healthy yield in certain markets.  CF Capital’s goal is to find these markets and unlock any hidden value from our property investments enabling us to offer superior risk-adjusted returns to our partners and investors..

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Leadership - we’re constantly asked about what that means to us and how we approach it in our business. We also consistently challenge our thought process and embodiment as to how we show up as leaders for our investors, our vendors, our employees and the communities we are involved in at large. It’s a topic we’re passionate about and thrilled to have the opportunity to share with you as the topic of today’s blog post. 

To us, leadership is the glue that makes our engine work for the long haul.

 “My own definition of leadership is this: The capacity and the will to rally men and women to a common purpose and the character which inspires confidence.” - General Bernard Montgomery

Another great definition is, “the act of motivating a group to act toward achieving a common goal.”  As you may  know, Leadership is one of our Core Values, which happens to tie to the other three.  An exceptional leader cannot successfully lead without Integrity, Excellence, and Purpose.

We believe  that in order to be an impactful leader, one should be accountable, reliable, have an empowering mindset, they should set the example by their actions, and set high standards for others as well as oneself.  A transformational leader creates bold transformation by setting a vision and inspiring possibilities within others they may not have thought possible themselves. An inspiring leader is empathetic and listens to truly understand. The greatest leaders empower others to be great.

Beyond simply observing and embodying the qualities of great leadership, we believe leadership is essential for our long term success in how we lead our team (whether at the company or property level), how we lead our industry with a bold vision for the future and innovative approaches, and how we lead ourselves by demanding excellence and a constant and never ending commitment for improvement.

Importance of Leadership

“Leadership is lifting a person's vision to high sights, the raising of a person's performance to a higher standard, the building of a personality beyond its normal limitations.”  - Peter Drucker

Fun fact for everyone:  83% of organizations acknowledge the importance of leadership development.  Yet, only 5% have actual leadership development training implemented at all levels.²

After reading that, it wasn’t shocking when we found another survey stating that 38% of new leaders fail within the first 18 months.¹  This is why we hold our ground on emphasizing the necessity to lead by example and prioritize leadership to lift up the people around us. We strive to embody the core value of leadership within all of our team, our vendors, and everyone else around us. Leadership is a way of life for CF Capital.

Leadership: Core to CF Capital’s Philosophy

“A genuine leader is not a searcher for consensus, but a moulder of consensus.”  -Martin Luther King Jr.

How do we lead differently?  We think the appropriate answer is not (entirely) about being different, it’s also about “standing on the shoulders of giants'' that came before us.  In other words, we learn from what other great leaders have done in the past so that we are using real life evidence when we lead ourselves.  

While we aren’t doing things drastically different, we are always continuously working to improve upon the work and philosophies of the successful colleagues who have come before us.  After all, success leaves clues.

With that said, we do believe that it is not always common for a leader to take the time to learn from our world’s most admired and effective leaders.  We also acknowledge that daring to “be different” is inherently the path less chosen, and we like being uncommon. 

But we, at CF Capital, choose “different.”  It wouldn’t be in our best interest to do otherwise, and it would be irrational for us to believe that extraordinary results come from fitting in with the crowd. (See our post about contrarianism).

Why do we spend so much time challenging, training , and inspiring  our colleagues?  Why are we transparent with the public in how we approach everything from due diligence to investor communications?

Because it matters. We believe in the spirit of giving and how embodying the spirit out extraordinary leadership elevates humanity. We know that this is not a zero sum game and that the more we give, the more the rising tide lifts our ships, too, in addition to it being the right thing to do.  

Every time we lead, and lead “right,” it gives us a great feeling of joy knowing that we will leave an impact in small or sometimes profoundly substantial ways. 

Standing on the shoulders of giants of the current and past, we are confident that the output of our leadership actions will bring us a positive future.

Now that’s the way we make real estate and business meaningful in more ways than simply financial.  

1 SOURCE: Compare Camp
2 SOURCE: Leaders Beacon

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