Blog Archieves - Cherif Medawar

Real Estate Syndication From a Passive Investor’s Point Of View

January 16, 2023 by devteam

A real estate syndication is a partnership between a group of investors pooling their resources into a single investment. A real estate syndication, the structure, is set up by an investor or “syndicator or sponsor” who is raising capital for a specific project. In turn, passive investors may invest in the syndication for debt or equity shares. The real estate syndication process involves an investor using a legal entity known as a limited liability company (LLC) or corporation to hold ownership of the investment property. The structure allows a syndicator to legally raise capital from individuals. Real estate syndication is typically used by institutional investors, such as hedge funds and pension funds, who want to acquire real estate assets without becoming directly involved in managing those assets. Real Estate Syndication Framework A real estate syndication is a form of investment in which a group of individuals or entities come together to pool their money and resources to acquire, manage, and sell a property or property. The syndication framework is the set of rules, guidelines, and processes that govern how the group will operate and make decisions. A typical real estate syndication framework will include the following components: The syndicate’s structure: This will typically be a limited liability company (LLC) or a limited partnership (LP), with each syndicate member holding a specific ownership stake. The roles and responsibilities of each member: This will typically include a lead sponsor responsible for sourcing and managing the property and other members who may have specific roles, such as managing the finances or overseeing the construction and renovation. The terms of the syndicate agreement: This will typically include details such as the length of the syndicate, the distribution of profits and losses, and the decision-making and dispute-resolution processes. The syndicate’s investment strategy: This will typically include details such as the type of property the syndicate is looking to acquire, the target market and geographic area, and the expected return on investment. The syndicate’s exit strategy: This will typically include details such as the timeline for selling the property and the process for distributing the proceeds to the members of the syndicate. REIT vs. Syndication: The Ultimate Guide The Benefits Of Real Estate Syndications Real estate syndications offer several benefits to passive investors. Some of the key advantages of real estate syndications include the following: Diversification: By pooling their money with other investors, syndicate members can spread their risk across a larger and more diverse portfolio of properties. This can reduce the impact of any individual property’s performance on the overall investment. Expertise: Syndicates typically have a lead sponsor or manager with extensive knowledge and experience in the real estate market. This can help to ensure that the syndicate’s investments are well-informed and successful. Access to larger properties: By pooling their money, syndicate members can access larger and more expensive properties that might not be possible for an individual investor to acquire on their own. Professional management: Syndicates typically hire professional property managers to handle the day-to-day operations and maintenance of the property. This can help to ensure that the property is well-maintained and generates consistent income for the syndicate. Potential for higher returns: Because syndicates can invest in larger properties and take advantage of economies of scale, they may generate higher returns on investment than individual investors. Eligibility Criteria For Investing In Real Estate Syndications The eligibility criteria for investing in real estate syndications can vary depending on the specific syndicate and the laws and SEC regulations in the area where the property is located and how the syndication is filed/registered. However, there are some common criteria that are typically used to determine who can invest in a syndicate. Accredited investor status: In the United States, most syndicates require that investors be accredited, meaning they meet certain financial thresholds, such as having a net worth of at least $1 million or having an annual income of at least $200,000. This is intended to ensure that investors have the financial means and sophistication to understand the risks and potential rewards of the syndicate’s investments. Minimum investment amount: Many syndicates have a minimum investment amount, typically in the range of $25,000 to $100,000. This is intended to ensure that investors are committed to the syndicate and have sufficient funds to participate. Experience and knowledge: Some syndicates may require that investors have experience and knowledge in real estate investing or related fields, such as finance or construction. This is intended to ensure investors have the expertise and skills to understand the syndicate’s investment strategy and make informed decisions. This is mapped out in the syndication’s Private Placement Memorandum or Offering Package that an investor is given to review prior to investing in the syndication. . Suitability: In some cases, syndicates may conduct a suitability analysis to determine whether an investor is a good fit for the syndicate. This might involve assessing the investor’s financial situation, risk tolerance, and investment objectives to ensure that the syndicate’s investments are aligned with the investor’s goals. Final Thought We were able to help you learn a little bit more about how real estate syndications are structured and how you may invest in a syndication. We also provide services and support for the investor side, or sponsor side, to set up and legally raise capital from passive investors. By understanding all of the legal concepts and paperwork, as well as knowing what tools and resources are available to help you on your journey, you will be better prepared to make smart investment decisions. Educate yourself and come out on top in 2023. There will be many projects hitting the market and you may want to INVEST in one or manage one. We can assist you in understanding the direction that best suits your portfolio. Join us on our mastermind calls that are better than any Podcast because you get to ask questions live and get expert answers with formulas based on practical applications that work in today’s market

ROI of Real Estate in 2022 and beyond

December 29, 2022October 20, 2022 by devteam

The return on investment (ROI) of real estate is one of the most important considerations when buying a property. If I am buying it to rehab it and sell it, then here is how I do the calculations: Purchase price Rehab cost Duration and holding cost Value at the end as if that was in today’s market and how that would be compared to current, comparable sales Any trends in the market I should be aware of regarding price expected changes? If I will come out ahead, say within 12 to 18 months, and my ROI is at least 20% annualized, then I would want to proceed Then I discuss with various lender loan amounts and construction draw terms If I am buying it to rehab it and keep it, then here is how I do the calculations: Purchase price Rehab cost Duration and holding cost Value at the end as if that was in today’s market and how that would be compared to current, comparable rents and cap rates Any trends in the market I should be aware of regarding rent and cap rates expected changes If I will come out ahead, say within 2 to 4 months, and my ROI is at least 10% annualized, then I would want to proceed Then, I discuss with various lenders the loan terms and figure out my cash-on-cash return which should then be around 12% per annum There are some factors that affect the ROI in real estate: Location: The location of your property will affect its value and its potential for profit. Properties located in highly desirable locations tend to have higher values than properties located in less popular areas. Properties near airports, shopping centers, or schools are also likely to be more profitable than those in rural areas. Size: The size of your property will also affect its value and potential for profit. Larger properties tend to have higher values than smaller ones because they have more rooms to rent out or sell individually for higher prices per square foot. Property type: Houses typically have lower returns than commercial properties because they require more maintenance and they have a smaller return on investment (ROI) than commercial buildings. Condition: If your property needs repairs or renovations before it can be rented out, your return on investment may be affected. Rent control laws: Rent control laws can affect both how much rent you can charge and how quickly properties are rented out. General market trends: So many investors are concerned about the macroeconomy and forget to zero in and focus on a specific area and a specific type of property to understand the values. If you follow my formulas and above and you can come out ahead; you will understand values and will invest no matter the market because when interest rates are low, property prices are high, and when interest rates are high, property prices are lower so it is a numbers game and if you know the numbers and how to work with lenders and contractors, you will become super rich. Join us on our mastermind calls that are better than any Podcast because you get to ask questions live and get expert answers with formulas based on practical applications that work in today’s market Sincerely, Cherif Medawar www.CherifMedawar.com

How Inflation is going to affect commercial real estate in a positive way

December 28, 2022August 24, 2022 by devteam

Inflation is often a cause for concern, but it can be a positive force for commercial real estate. Inflation can increase the value of properties and improve cash flow. What is Inflation? Inflation refers to an increase in the general level of prices for goods and services in an economy over a period of time, which causes each unit of currency to lose purchasing power over that time period. Inflation is generally low for commercial real estate investors because it means that their properties are gaining value over time. The higher the inflation rate, the more valuable your investment will be. For example, if you purchase an office building for $100 million and then sell it five years later for $110 million, you will have made 10% on your investment annually — even though there were no major changes to the building itself! There are many ways that inflation will affect commercial real estate in a positive way, but one of the biggest ways that it will affect us is by allowing us to make more money off of our investments. Inflation allows us to make more money on our investments because it increases their value over time, which means we will be able to sell them at a higher price than what we paid for them originally! Commercial real estate investing: how to get started How inflation affects commercial real estate It’s important to understand how inflation affects commercial real estate. There are two main ways that inflation can have an impact: Inflation drives up interest rates on loans. Interest rates on commercial real estate loans are usually tied to the Federal Reserve’s policy on short-term interest rates. When inflation rises, so do short-term interest rates, which means that lenders will charge higher interest rates on loans to cover the additional risk they’re taking by lending money at higher rates of return. Inflation makes real estate worth less in dollars. As prices rise over time, the same amount of money buys fewer goods and services — including commercial real estate. This means that owners’ net income falls even though their gross revenue may increase because they’re paying more in operating expenses such as property taxes and utilities. Inflation increases rents: Rents increase as a result of inflation because landlords pass on their increased operating costs to tenants. So, if the cost of operating your business goes up by 10%, then you will need to increase your rent by at least 10% to maintain the same profit margin. In some cases, landlords may even be able to increase their rents beyond these levels due to market conditions and lease clauses. Inflation increases the value of cap rates: Cap rate is a measure of return on investment (ROI). It tells you how many years it takes for an investor’s money to double when invested in a property or other assets such as stocks and bonds. For example, if an investor purchases an office building for $1 million with an annual net operating income (NOI) of $100,000 per year and sells it after five years for $2 million, his ROI would be 50%. That means that he earned $1 million from his original investment of $1 million in just five years instead of waiting 20 years before doubling his money at a 10% annual interest rate compounded annually; Bottom Line As the inflation rate increases, Commercial property and great deals of real estate will be on the rise as well. The demand will reach its peak as more people invest in apartments and commercial land. Real estate investors are looking for properties that are more affordable. Do you want to Crack the Code on RE Funds? Reach out to our office and learn about the power of Regd 506 b/c and Cherif Medawar’s structures. 844-720-1031 info@cmrei.com Cherifmedawar.com

REIT vs. Syndication: The Ultimate Guide

December 28, 2022August 2, 2022 by devteam

Differences between REIT and Real Estate Syndications

REITs and syndications are both types of real estate investments. REITs and syndications have a lot in common. What Is a REIT? REIT stands for “real estate investment trust.” REITs are companies that pool investor funds to purchase real estate assets like office buildings, apartments, and hotels. These properties are owned by the REIT and rented out to tenants. Investors receive a payout based on the property’s performance and an ownership stake in the company. The Securities and Exchange Commission (SEC) governs REITs and requires them to pay out 90% or more of their taxable income as dividends to shareholders. There are many different types of REITs based on their size, strategy, or focus. The most common type is an equity REIT, which usually focuses on owning commercial real estate properties such as apartment buildings or office buildings. Another type is a mortgage REIT, which focuses on financing residential mortgages instead of owning homes directly. What Is a Syndication? Syndication is an agreement between multiple investors and one or more property owners. In this agreement, each investor puts a certain amount of money into the deal in exchange for a share of ownership in the project, a specific project with a specific capital raise and end date. The Syndicator then raises and pools funding for the project and oversees its development and construction. Once the project is completed and sold, profits from the sale go back to investors based on their percentage of ownership and set terms of the syndication. The Syndicator may also be defined or called: Sponsor, Executive Manager; and may hold the roles of Property Manager (unless they hire on an outside Property Manager), Project Manager and overall CEO of the project. These roles and responsibilities will be defined in the Offering. How does real estate syndication work? Investors pool together money and use it to purchase properties that meet certain criteria determined by the syndicator or manager of the deal. In some cases, the manager then finds tenants for these properties who will pay rent on time every month, allowing investors to collect their share of the profits from renting out these units. An investor can make an interest return and get paid on the exit, as defined in the syndication. The Sponsor usually will hire a Property Manager who will then take care of everything else that comes up with managing a property – including repairs, maintenance and even leasing out vacant units if there are any left after all the tenants sign their leases. Main differences between REIT and Real Estate Syndications: Direct Ownership REITs offer direct ownership of the property through shares, while syndications involve indirect ownership through an investor group. With syndication, investors pool their cash together and purchase a share of property from a developer or seller. Shareholders don’t own any part of the property directly; they only own shares in the trust (or corporation). Value Volatility REITs are designed to provide stable returns with little or no volatility. This makes them ideal investments for retirement accounts or other long-term goals. Syndications, however, can be more volatile than traditional stocks due to their diverse nature and relatively short track record as an asset class. Tax Benefits REITs typically pay dividends at a higher rate than most stocks because they’re required by law to distribute 90% of their taxable income each year. This makes them an attractive choice for investors looking for yield without compromising liquidity. Syndications may also be eligible for tax benefits if structured as limited partnerships or corporations, but these benefits vary by state and type of partnership Diversification Real estate syndications are limited in the number of properties they can buy. Since they don’t have their own funds, they must rely on investors to fund each individual property purchase. This limits their ability to diversify by location or type of property. However, REITs have much broader diversification because they have their own capital and can purchase many different types of properties all over the country – as long as it’s in compliance with their charter. Liquidity Liquidity is important in real estate investing because it gives you the ability to cash out your investment quickly if needed. REITs are liquid because they’re publicly traded securities, but individual real estate syndication may not be. A REIT can be sold at any time, while syndication will take longer to sell because it involves several different parties. Investors who want the ability to sell their investments quickly should consider buying REITs rather than syndications. REITs vs. Syndications: Which is the Better Investment? Some investors prefer real estate syndications because they can choose specific properties and locations, while others prefer REITs because they offer more diversification and liquidity. Real estate syndications tend to have higher fees than REITs but give investors more control over the properties that they invest in. In addition, many people who participate in real estate syndications are able to profit from doing so without having to pay capital gains taxes on their earnings as long as they hold onto their shares for more than 12 months after purchasing them. Final Thought When it comes to the two types of passive income investments, many investors are hesitant to put their money in either one. Both Syndication and Real Estate Investment Trust (REIT) have their own pros and cons. It is up to individual investors to decide which investment is likely to give them the best return on investment. We will leave you with one more concept…. Could there be a structure that incorporates the benefits of a REIT and a syndication, and creates an even more powerful structure for Sponsors, those raising capital for real estate deals, and investors looking for a return??? YES. Yes, and that structure is a real estate fund. We will Crack the Code on that structure in our next post. Do you want to Crack the Code on RE Funds? Reach out to our office and learn about the power of Regd 506 … Read more

Commercial Real Estate Investing: How to Get Started

December 28, 2022July 8, 2022 by devteam

Commercial real estate investing can be a very lucrative investment strategy if you know how to find the right deals, structure and fund the deals– and take them to their highest & best use. You can buy, fix and flip properties, or you can buy them for long-term appreciation. The money is in the follow up and the strategy to take the asset to its highest & best use. That’s a FACT. Commercial real estate is a very broad term that includes everything from office buildings to apartment complexes. It’s important that you understand what your goals are before you start investing in commercial property because it will dictate the type of property you buy and how much money you need to invest. There are many different types of commercial real estate investments, including industrial buildings, apartment buildings, retail space and even mobile home parks.. Things to consider before starting Commercial Real Estate Investing Commercial real estate investing is a smart way to build wealth and increase your net worth over time. But before you jump into this type of investment, there are some things you must consider first: How much money do you have available for investment? The minimum investment amount varies from property type and region, and the strategy you are using to get the property under contract , but it’s important to have enough money available so that you can afford at least one property for starters. Once you have one property under your belt, just like in residential, and begin receiving monthly rent checks, you can use those proceeds as an emergency fund/reserve or save up for additional investments down the road. What kind of properties are most attractive to investors? There are many different types of properties out there that could appeal to investors based on their individual needs and preferences — from a duplex all the way up to multi-family residential properties such as apartments or condos. Many people start with duplexes, as it seems safer, like a residential fix & flip. However, vacant stand-alone buildings can be much easier to start with coming out of the pandemic AND with the right knowledge to work with tenants. Newer investors may have an opportunity to get financing based on a NNN lease. The Monet is in the follow up. This is a FACT. Are you willing to take on debt? If so, then commercial real estate is a great option for you because it allows you to leverage your assets and borrow money against them in order to control more property than you could afford outright. However, borrowing money means that there are more costs involved in owning property (such as interest payments) What Is Commercial Real Estate Investing? Commercial real estate (CRE) is property that is used exclusively for business-related purposes or to provide a workspace rather than as a living space, which would instead constitute residential real estate. Most often, commercial real estate is leased to tenants to conduct income-generating activities. This broad category of real estate can include everything from a single storefront to a huge shopping center. Commercial real estate investing involves buying and selling property used for business purposes rather than residential use. You may have heard of these properties referred to as “commercial” or “multifamily” properties but they’re not necessarily any different from what we normally think of as an office building or shopping center. The most common types of commercial real estate include office buildings, retail malls, apartment complexes and industrial warehouses. However, there are many other types of properties that may be suitable for investment purposes depending on local conditions, such as motels or hotels. The key to successful commercial real estate investing is finding properties that are located in areas where demand will support high rents or sales prices over time. The goal of commercial real estate investing is usually to make money through appreciation or cash flow (rent). With appreciation, you hope that the value of the property will increase over time because of demand or other economic factors within the market where it’s located. With cash flow, you receive income from tenants who pay rent on a regular basis each month until they vacate or move out of the building altogether. Investors typically look for properties with at least five years of positive cash flow and low vacancy rates. They also like to buy property in strong markets where rents are rising faster than inflation. FACT, there are strategies to take vacant CRE, lease it up and immediately increase the value of the building. This makes it easier to finance and a solid investment to leverage and increase your portfolio. This is why your strategy is important. Commercial Real Estate Investing Strategies There are many ways to invest in commercial real estate, and it’s important to understand the differences between them. Here’s what you need to know about the different types of commercial real estate investing strategies: Buy & Hold: This is the most common type of investment strategy. With buy & hold investments, you purchase a property and then rent it out as-is or fix it up and lease it out until you sell at a later date. This can be a great way to build wealth over time because of the power of leverage — if done right, your initial investment can grow in value by 20% or more each year. Fix & Flip: With fix & flip investing, you purchase an older property that needs work and then renovates it before putting it back on the market for sale at a higher price than what you paid. Fix & flips can be very profitable if done correctly but they’re also risky since they require significant upfront costs in addition to rehabbing expenses before selling. Lease-Option Strategy: This strategy involves buying a property, leasing it out to tenants, then offering them an option to purchase the property at a later date for a predetermined price. There are many ways that this … Read more

How To Invest In Commercial Real Estate In Your 30’s

December 28, 2022June 10, 2022 by devteam

If you’re looking for a new way to invest your money, commercial real estate may be the answer. Commercial property includes everything from office buildings and apartment complexes to warehouses and retail space. If you’re considering investing in real estate in your 30 Here are some tips for investing in commercial real estate. Know your goals: Before you begin investing, it’s important to understand what your financial goals are. Are you looking for passive income or do you want to use real estate as a way to build wealth? Knowing what you want out of your investment will help guide how and where you invest your money. Do your research: Once you know what type of property interests you most, it’s time to do some research. Learn about the market and other investors in the area so that you can make an informed decision about what type of property would be best for you. You may also want to talk with a broker who can help guide you through the process of buying or selling a building or piece of land. The more knowledge and experience he or she has with commercial real estate, the better off you will be when making decisions about which properties are worth pursuing: Learn from your mistake: If you’ve already made investments in property that haven’t worked out, don’t be discouraged. You’re bound to make mistakes as you’re learning about investing. The key is to learn from your mistakes so that you don’t repeat them again. For example, if you lost money on an apartment complex because it was poorly managed, don’t make the same mistake by buying another apartment complex without knowing who is managing it or how well they manage the property. Choose a niche market or geographical area: where you have experience or expertise and stick with it until you become an expert at it. For example, if you’re a plumber who knows how to fix plumbing problems in apartments, then focus on buying apartments with lots of plumbing problems (a sign of poor management). Or if you’re an accountant who knows how to manage finances for small businesses, then focus on buying small businesses with lots of financial problems (another sign of poor management). Types of Investment Strategies Investing in commercial real estate is a great way to build wealth and passive income. The benefits of real estate investing are cash flow and appreciation. As a young real estate investor, building wealth through real estate is appreciation and cash flow. Cash Flow – Commercial properties have tenants that pay rent on a monthly basis. The cash flow from your investment property will be used to pay off your mortgage balance and any other expenses related to owning the property such as property management fees and maintenance costs. This is one of the primary reasons why many people choose to invest in commercial real estate instead of residential properties because they can rely on consistent income each month after paying their expenses. Appreciation refers to the increase in value of a property over time as its market price rises due to changes in supply and demand. In other words, if there’s more demand than supply for a specific type of commercial property (or any property), it will tend to increase in value over time because people are willing to pay more for it than they were before — essentially bidding up prices until everyone agrees on a fair price point based on what buyers are willing. Types of commercial real estate investments Commercial real estate investing is a great way to build wealth and passive income. If you’re looking for a new way to invest your money, commercial real estate could be just the solution you’ve been searching for. There are many different types of commercial real estate investments, including: Office buildings Retail properties Industrial warehouse properties Multi-family housing units Apartments Parking Garages Gas station Building Self-storage investment Mobile Homes But before you jump in headfirst, there are some things you need to know. Here are some tips on how to invest in commercial real estate in your 30s: You don’t need a lot of money upfront Buy a property that needs work Make sure you have enough cash flow after repairs Never go into debt when buying commercial real estate Don’t use all of your savings to buy your first piece of commercial property Get professional advice about how much you should spend on repairs and renovations Be prepared for unexpected costs like insurance premiums and tax bills Don’t forget about taxes when calculating your return on investment (ROI) Don’t expect too much from your first property – results don’t come overnight! Final Thought Ready to dive into commercially investing? The suggestions and recommendations in this article can provide you with the tools and knowledge you need to get started. With the right amount of research, preparation, and attention to detail, investing in commercial real estate can add a source of steady income for life to your financial portfolio. Learn the Steps to Invest in Commercial Real Estate Like a PRO by becoming a part of Cherif Medawar’s Commercial Real Estate Mastermind

Cash Flow vs. Appreciation: Which one should you choose?

December 28, 2022May 25, 2022 by devteam

With real estate being such a popular investment choice, a lot of people wonder whether they should choose cash flow or appreciation when building their next portfolio. With so many factors in play and having experienced both sides. When it comes to investing in real estate, there are two main ways to make money: cash flow and capital appreciation. Cash flow is the amount of money coming in. Appreciation is the increase in the value of an asset. Cash flow is the money you get from your rental property each month. Appreciation is the increase in the value of your property over time. It’s important to understand the difference between these two concepts because they are two very different things. Cash Flow Cash flow is the amount of money you can expect to receive from your investment. Cash flow is typically calculated on an annual basis, but it can also be calculated on a monthly basis. When you’re thinking about cash flow, you should take into account interest rates, fees, and property taxes because these will affect how much money you have left after paying for your mortgage each month. In addition, it’s important to consider other expenses like maintenance and repairs so that you don’t run out of money before reaching retirement age. Appreciation Appreciation refers to the increase in value of your property over time. Appreciation increases your net worth by increasing the amount of equity in your home. For example, if you purchase a home for $200,000 with a 20 percent down payment ($40,000) and sell it 10 years later for $300,000 — then there has been a 100 percent appreciation on your property. Cash flow from rental property Cash flow from a rental property is the amount of money you receive from renting out a property. It’s typically expressed as a monthly figure and is one of the key performance indicators for real estate investors. Cash flow can be calculated in several ways, but it’s often calculated using the following formula: Cash Flow = Net Income – Mortgage Payment Cash flow is important because it shows how much money an investor is bringing in each month. It also helps investors see how much money they’re paying out each month to cover mortgage payments and other expenses. Investors who want to know if they’re making money on their rental properties need to calculate cash flow regularly so they can see trends over time. When it comes to calculating cash flow from rental properties, there are two primary ways to do it: the income method and the expense method. Both methods use identical formulas but reach different results by using different sets of figures. So which one should you use? It depends on what kind of information you want to get from your numbers. How to calculate cash flow Cash flow is the money that comes into and goes out of a business. Cash flow can be calculated in two ways: Cash inflow: The amount of cash you receive from customers for goods or services that you sell. Cash outflow: The amount of cash you spend on labor, inventory, equipment, and other items to run your business. You can calculate cash flow by subtracting your cash outflows from your cash inflows. For example, if you invested $10,000 and had revenue of $6,000 during the first month, then your cash flow would be -$4,000 ($6,000 – $10,000). Advantages of investing for cash flow Investing for cash flow is an investment strategy that focuses on owning assets that pay a steady stream of income. Cash flow investments can be highly profitable and provide the investor with a steady stream of income over time. There are many advantages to investing for cash flow; some are listed below: Tax advantages: Investments that produce cash flow are typically taxed at lower rates than capital gains. This can be particularly beneficial if you have a high income and are in a high tax bracket. Flexibility: Cash flow investments often allow you to access your money without triggering taxes or penalties. For example, if you invest in real estate and need to sell it for some reason, you can borrow against the property to finance the sale without paying taxes on any gain until you sell it. Security: Cash flow investments tend to be more stable than other types of investments because they don’t involve speculation or relying on someone else’s success (such as an investor) or failure (as might happen with a start-up company). Diversification: Cash flow investments complement other types of assets because they provide income while others provide growth potential. Real estate is an excellent example of an asset that produces both dividends (cash flow) and appreciation (growth). Appreciation in real estate Appreciation in real estate is the rise in value of property over time. Appreciation is not the same as price, which is simply what someone is willing to pay for a property at a specific point in time. Appreciation is usually measured by comparing the sales price of similar properties that have sold recently with the asking price of a property currently on the market. Appreciation can be calculated in two ways: by comparing the current market value of a property with its original purchase price, or by comparing current rents with original purchase prices. Appreciation can be divided into two categories: capital gain and income yield. Capital gain refers to the difference between what you paid for your home and what you could get if you sold it today; this is considered appreciation because it represents an increase in value. Income yield is the amount of money generated by your investment in real estate, which can include rent from tenants or profits from selling your property at a later date (after it has been appreciated). There are several factors that influence real estate appreciation, including: Location Property type (house, condo or apartment) Condition of the building (newer or older) Why some investors focus on appreciation Appreciation is the … Read more

What is a K-1 and How is it Used for Taxes in Private Real Estate?

December 28, 2022May 23, 2022 by devteam

A K-1 form is a tax form used to report the incomes, losses, and dividends of a business’s partners or an S corporation’s shareholders. K-1 forms are issued by partnerships, S corporations, estates, and trusts. The recipient of the income, loss, or dividend is responsible for reporting it on their federal tax return. Investors in hedge funds, private equity funds and real estate funds receive K-1 forms if they own interests in pass-through entities, such as partnerships. A K-1 is a tax form used by pass-through entities, including partnerships, S corporations and limited liability companies (LLCs). The form reports the income and losses of a business to its individual owners. Private real estate investors have many choices when it comes to investing, but there are several factors that make real estate investing unique. One of these is the K-1 filing for tax purposes. A K-1 is a form that must be filed along with your income tax return if you are invested in a pass-through entity, like a limited liability company or partnership. The form shows how much income you’ve earned from the investment and what types of deductions you can take. The first thing that you need to know about the K-1 form is that it is not the same as a 1099. A K-1 form is used to report your share of income, deductions, and credits from a partnership, S corporation, trust, or estate. Important K-1 and Tax Filing Information for Private Real Estate Investors Valuation When filing taxes, it’s essential to know the value of your investment at the end of each year. Private real estate funds provide both an estimated valuation at the end of each month as well as a final valuation at the end of each year. The value of the investment at year end may not be the same as the amount reported on the K-1 statement. The amount reported on the K-1 is the “book value” of the asset(s). The book value is typically the price paid for an asset adjusted for capital improvements made during ownership and depreciation taken since acquisition. Because private real estate transactions are complex and vary from property to property, it is not uncommon for there to be delays between when revenue is collected and when expenses are processed. Tax Basis Your tax basis is defined by your initial investment amount into a fund plus any additional capital contributions you’ve made over the course of your investment minus any distributions you’ve received during your holding period. Each investor’s initial investment in the partnership is recorded as their tax basis for the investment. Any additional capital contributions increase the investor’s basis in the partnership. Any distributions from a partnership reduce the tax basis dollar for dollar up to the amount invested in the partnership. If a distribution exceeds a partner’s initial investment, the excess distribution reduces any gain recognized if and when the partner disposes of his or her interest in the partnership. Losses When filing taxes as a private real estate investor, losses can be used to offset other income from sources such as wages or stock dividends. But if your losses exceed $3,000 or so in any tax year — depending on your filing status and income — you may have to carry over some of those losses into future years. To do this, first use all losses against other income in the year they arise; then carry over any unused portion to next year’s tax return; and finally use that remaining amount against other income in that second year. Tax Deferred Distributions Many private real estate funds will offer investors the opportunity to postpone (defer) the recognition of taxable income by reinvesting distributions in additional units or shares of the fund’s interest under a so-called “distribution reinvestment plan” (DRIP). This is advantageous because it allows investors to avoid current taxation on the distributions and instead defer taxation until the eventual disposition of the investment. Additionally, investors may be eligible for long-term capital gains treatment when they do eventually sell their investment. K-1 Arrivals If you are a passive investor in private real estate funds (either directly or through a 1031 exchange), you will be receiving a K-1 form for each fund in which you hold an interest. Once you have received your K-1 forms, please be sure to follow the below steps: Check that the Box 17 codes accurately reflect the tax treatment of your investment. Be aware that certain Box 17 codes may require additional information on your tax return to be properly treated. Be sure to discuss these with your tax advisor. Consult your tax advisor regarding any amendments to the underlying partnership agreements that may have occurred during the year. These changes could affect your allocation of income and/or basis, and may require additional actions on your part. Multiple Forms Some shareholders may receive several K-1s from different real estate investment entities. This can raise multiple questions for investors about how to best file their taxes. It’s important for investors to remember that a K-1 form is attached to each entity that you have invested in during that calendar year. With multiple K-1s in hand, it is also important to remember that each form must be submitted with its own tax return — there can be no bundling of multiple K-1s on a single tax return. Let’s say you have investments in multiple partnerships. Each partnership is required to generate their own K-1s, which means you could potentially have numerous forms to file and track. Keep in mind that each partnership is required to send out their K-1s by March 15th or April 15th at the latest (or soon after).* Composite Returns If you invest through a partnership or LLC, you may have noticed that most fund managers offer Composite Returns so that investors do not have to pay state income taxes on investor distributions. A composite return is a state tax return filed by an “agent” on behalf of two … Read more

What Is A Good Cap Rate & How To Calculate It

February 8, 2024May 5, 2022 by devteam

Cap rate is a useful metric used to value commercial real estate properties. Often considered a benchmark in the industry, cap rates are more commonly utilized in regards to income producing properties as they are a key indicator of future cash flow. Finding the cap rate of a property is critical to determining its value. Ideally, you want to make sure the price you pay for a property is less than the combination of rents and capital expenditures when calculated as a percentage of the property’s value. This is where cap rate comes in. Cap rate can be defined in numerous ways including: (1) net operating income divided by cost or market value; (2) gross income divided by cost; or (3) cost divided by net operating income. What Is Cap Rate? Cap rate is a real estate term that refers to the ratio of the net operating income (NOI) generated by a particular property to the property’s sales price. Cap rates are used by investors as one indication of how desirable a particular property may be as an investment. There are two parts to a cap rate: capitalization rate and value. The cap rate is a useful metric for real estate investors looking to evaluate their existing or potential investments, because it gives an indication of how well that property will generate cash flow. It does not take into account other factors like cash-on-cash return and loan payments, but these can be calculated as well to give a complete picture of your investment. A high cap rate (10%+) indicates that your investment has a low risk of default, while a low cap rate (5% or less) indicates that the property could be at a higher risk of default. Cap rates are commonly quoted as annual figures; however, they can also be calculated on a monthly basis. To convert an annual cap rate to a monthly cap rate, divide by 12. For example, if you have an annual cap rate of 8%, then your monthly cap rate would be 0.67%. What Is A Good Cap Rate For Rental Property? A good cap rate for rental property is largely determined by the location of the property and the condition of the market. The return on a real estate investment depends on how much capital you’re willing to invest, what kind of property you’re buying, and how much risk you are prepared to take. A cap rate is a simple way to estimate the potential return on an investment. It measures the ratio between annual net operating income and purchase price or current market value. A cap rate of 8 percent means that an investor would receive $80,000 in rent annually if they bought a property for $1 million dollars and collected 100 percent of their rent. It’s important to remember that there are expenses related to owning rental properties — including maintenance costs — so it’s not as simple as dividing the monthly rent by the purchase price. You’ll also need to factor in any maintenance costs and other expenses such as utilities and property taxes. The formula for the cap rate is: Cap Rate = Net Operating Income (NOI) / Current Market Value (CMV) For example, say an investment property has a current market value of $500,000 and is expected to generate $40,000 in net operating income after expenses. Using the above formula we compute: Cap Rate = 40,000 / 500,000 = 0.08 or 8% The cap rate formula is as follows: (Net Operating Income / Purchase Price) x 100 = Cap Rate in percentage form A cap rate of 10% indicates that the property generates $10,000 per year for every $100,000 in price. Put another way, it would take 10 years for a property to pay for itself if you use only income to finance the purchase. When Is Cap Rate Used And Why Is Cap Rate So Important? Cap rate is used when estimating the investment value of a real estate property. This figure tells you how much money you will earn each year on your investment without taking into account interest, taxes, etc., and is calculated by dividing the net operating income of a property by its market value. The higher the cap rate, the greater the potential return on your investment. Cap rate is one of the most important metrics for real estate investors because it gives an estimate of how much cash flow a property will generate based on its current market price. When evaluating a property, it’s important to look at the cap rate based on pro forma projections – what you expect the property will return for you once you acquire it, renovate it and fill it up with tenants – as well as the actual returns over time. In practice, cap rate is often used in place of cash on cash return, which is net operating income (NOI) divided by total cash invested. In addition to the capitalization rate, factors that affect the cash on cash return include: Total investment costs Loan size and interest rate Mortgage amortization period Recurring expenses How To Calculate Cap Rate: Capitalization Rate Formula The capitalization rate formula is calculated by dividing the net operating income (NOI) by the cost of the asset. So if an apartment building was purchased for $1,000,000 and it generates annual net operating income of $100,000 then the cap rate would be 10%. When using this formula you are assuming that the NOI will continue indefinitely at the same level and that there will be no further investment in the property after purchase. Cap Rate = Net Operating Income / Current Market Value or Cost of Real Estate Cap Rate Vs ROI A cap rate is an estimate of the potential profit per unit of a property. It’s calculated by dividing total gross income by total cost, and then subtracting all expenses, including vacancies and interest. ROI, alternatively, is the annual return on investment. While cap rate is used to determine the … Read more

Hedge Fund vs. Private Equity Fund: What’s the Difference?

December 28, 2022April 1, 2022 by devteam

key difference between hedge fund and private equity fund

Investors are often confused between the similarities and differences of hedge fund and private equity funds. In modern financial markets, many institutional investors allocate a substantial portion of their portfolios to alternative investments. It is often the case that hedge funds and private equity funds are included in the same alternative investment allocation. A hedge fund is an investment vehicle that uses both types of investments to achieve its goals. A private equity fund is a professionally managed investment partnership that pools money from other investors and invests in, or lends money to companies that the managers believe have growth potential. Through due diligence and research, Real Estate Fund Managers invest in specific segments of a company in hopes of adding value through operational improvements and restructure. Hedge funds A hedge fund is an investment fund that pools capital from accredited investors or institutional investors and invests in a variety of assets, often with complex portfolio-construction and risk-management techniques. It is administered by a professional investment management firm, and often structured as a limited partnership, limited liability company, or similar vehicle. Hedge funds are generally distinct from mutual funds, as their use of leverage is not capped by regulators, and distinct from private equity funds, as the majority of hedge funds invest in relatively liquid assets. Hedge funds can be classified according to certain criteria; for example: Investment strategy (directional/non-directional) Investment objective (absolute return/relative return) Net asset value (single-manager vehicles/funds of hedge funds) Investor type (institutional/high net worth) Hedge funds are an alternative asset class. That means they don’t trade on public exchanges like stocks and bonds do. Instead, hedge funds are usually private investment vehicles that sell shares only to accredited investors (people with a net worth greater than $1 million or annual income of more than $200,000 for individuals and $300,000 annual income for a couple). The value of hedge fund shares can be based on the value of the securities owned, plus or minus any cash or other assets held by the fund, minus any liabilities it has. Since many Real Estate Fund Managers use leverage (borrowed money) to amplify their returns, this can mean that just a small decline in asset values can wipe out the entire value of shareholders’ equity in the fund. Private Equity Fund Private equity funds are a type of investment vehicle that pools together money from various institutions and investors in order to invest in the private equity of startup or operating companies through a variety of loosely-affiliated investment strategies including leveraged buyout, venture capital, and growth capital. Typically, a private equity fund has a fixed life of 10 years, with the possibility of two 1 year extensions. Private equity funds are often classified by their stage of development (early-stage venture capital or growth capital), their geographical location (regional, national/multi-national), or their stage of maturity (opportunistic, value-added, distressed debt). Private Equity Fund Structure Private equity funds are organized as partnerships and structured in two parts: the Limited Partnership (or “LP”) and the General Partner (or “GP”). The LP is composed primarily of institutional investors and accredited investors who provide the bulk of the capital for the fund. The GP is composed of professional fund managers who make investment decisions on behalf of the LP. GP’s typically receive management fees as well as performance compensation through carried interest. There are many different types of funds that exist within private equity; some focus on acquiring certain types of companies while others focus on certain industries or regions. There are even funds that specialize in certain stages of financing (e.g., early-stage venture capital). Some funds will invest across multiple asset classes such as real estate, commodities, etc., which can make them more diversified than other types of funds. Key Difference between Hedge Fund and Private Equity Fund Hedge funds and private equity funds are two of the most significant investment vehicles available to investors. These funds differ from each other in many aspects. Some of the key differences between hedge fund and private equity fund include: Investment Strategy – The major difference between a hedge fund and a private equity fund is their investment strategy. A hedge fund invests in liquid assets, while a private equity fund invests in illiquid assets. Hedge funds invest in stocks, bonds, derivatives, currencies, etc. Private equity funds generally invest in private companies, real estate or infrastructure projects. Fund Size – Hedge funds are smaller than private equity funds. The typical hedge fund manages around US$100 million to US$300 million in assets under management (AUM). On the other hand, the typical private equity firm manages around US$2 billion to US$20 billion AUM. Moreover, large hedge funds can also manage more than $10 billion AUM as well. However, it is comparatively easier for a small hedge fund to raise capital than a small private equity firm. Investment Targets – The main difference between hedge funds and private equity is what they invest in. Hedge funds generally invest in financial instruments that can be bought and sold quickly on public stock exchanges, while private equity firms tend to focus on acquiring entire companies or large portions of specific businesses through leveraged buyouts (LBOs). Investment Risk – The private equity fund takes on more investment risk compared to the hedge funds. The investment of the private equity fund is highly illiquid. But the hedge funds can easily liquidate their investments. So, the hedge funds take low risk compared to the private equity fund. Lock-up and Liquidity – A hedge fund normally does not have a lock-up period or waiting period for investors to redeem their investments. However, a private equity fund has a lock-up period ranging from three to five years which is called an “illiquidity premium” or “time premium”. In other words, investors cannot redeem their investments during the lockup period. Similarities between Hedge Fund and Private Equity Fund Both hedge funds and private equity funds are types of alternative investments. A typical investor in a private equity fund is … Read more

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