What Happens Inside A Commercial Value-Add Real Estate Syndication?
Investment risk can be defined as the probability or likelihood of occurrence of losses relative to the expected return on any particular investment. Stating simply, it is a measure of the level of uncertainty of achieving the returns as per the expectations of the investor.
I am sure you have read the investment warnings – Past performance is no guarantee of future results or there are no guarantees when it comes to investing.
Let’s take a close look at investing in stocks versus real estate, the four basic risks of investing, how commercial multifamily real estate investments mitigate risk, and why the stock market can be much riskier than real estate.
The key is not to look for investments that are risk-free (that doesn’t exist), but to understand the risks thoroughly, determine your threshold for risk, and ensure that you’re doing everything you can to mitigate risk.
Risk #1 – Market Correction
One of the most common fears and possibly the biggest reason would-be investors remain on the sidelines is for fear of a sudden market correction.
During a downturn, investors may exit quickly (which only solidifies their losses). Others aim to accept short-term losses in exchange for long-term gains. Historically, the market bounces back, but clinging to that “trust” is challenging during the downward trend.
Multifamily Real Estate Investments
Recessions are sometimes good for commercial multifamily real estate investments, especially for workforce housing.
In good times, incomes and savings rates are higher, which means more people tend to move up to class A (luxury) apartments.
When faced with layoffs or pay cuts, homeowners may sell, and renters of class A apartments may downgrade to more affordable apartments (class B or C).
Hence, during a recession, demand for apartments actually tends to go up, thereby decreasing the risk.
Risk #2 – Competition
When Netflix stormed the scene, they beat out Blockbuster because not only did they target the same audience, but they also got ahead of the technology and consumer trends.
Consumers don’t have insight into technology development or companies’ operations. Thus, new competitors can have a significant impact on investment returns.
Multifamily Real Estate Investments
Multifamily competitors don’t just spring up out of nowhere, because space, zoning, and permits are limited. When new apartments are built, they’re always class A (i.e. newer luxury tier) apartment buildings.
Since the demand for workforce and affordable housing is on the rise, the risk of having high vacancy in well-maintained class B and C apartment buildings is fairly low.
Risk #3 – Consumer Behavior
companies who create products for people to use. Facebook, iPhones, Happy Meals, and soap are all consumable products.
However, it’s impossible to predict the term length of those products’ and companies’ popularity. Blockbuster had a long reign, but when technology and consumer behavior changed, the company stagnated, dragging investors down with it.
Multifamily Real Estate Investments
When you invest in real estate, you’re investing in a basic human need that will never go away: the need for shelter. As long as humans have existed, we’ve required a roof over our heads, and that need has only strengthened over time, especially with rising population trends.
Risk #4 – Lack of Control and Transparency
Investing in stocks is like buying a train ticket. The train is leaving, with or without you. Whether you’re on board or not is up to you.
When the market is sailing upward, the ride is smooth and exciting. During a correction, a terrible, helpless feeling takes over. The conductor (CEO) is unreachable and you better buckle up.
Multifamily Real Estate Investments
When you invest in a real estate syndication, you know exactly who the deal sponsor is, and you can reach out directly to ask questions and provide feedback.
Further, when you invest in a solid syndication, you can be assured that there are multiple buffers in place to protect investor capital, such as reserves, insurance, and experienced professionals to handle the unexpected.
Plus, with monthly and quarterly updates, you have ongoing transparency into each deal.
There’s certainly no one “right” way to invest. The key is to invest. Period.
Understand the risks going in, and just do it. Because that money you see sitting in your savings account? It’s losing value (because of inflation) with every passing second.
And if someone offers you a “Risk Free” investment or a “Guaranteed” return, RUN !!
The school wasn’t any better. There’s never been a lesson throughout my class that taught me about savings options other than a traditional savings account or investment techniques other than an employer-sponsored retirement plan. If you’re anything like me, you learned everything you know about personal finance and how to get ahead in life through your hard work and dedication to thinking outside the box.
These five high-level concepts can significantly improve your ability to earn income fast and efficiently.
Money Management In Four Steps
A fantastic view of the high-level cash flow journey is to break it down into “four pillars,” as M.C. Laubscher from Cashflow Ninja calls it. Cash creation, cash capture, cashflow creation, and cash control are the four pillars he’s taught to his faithful followers for years.
In the first stage, Cash Creation, your role is to create money. You venture out on your own, obtain a degree, land a salaried position at a stable company, develop connections with industry peers and seniority, start your own business, find a mentor, and hustle toward bonuses and raises. The cash creation stage is the foundation of all the other steps. The key is not to get stuck here for 40 years, like most of the US population!
Next, we have Cash Capture, and in this stage, you create a buffer between how much you bring home and how much you spend. You likely succeed at this by budgeting and saving as much take-home income as possible. The difference between your income and your spending is where you capture cash and use it to fund your investments, purchases of appreciating assets, and your private banking strategy (I’ll explain this in a little bit.).
Once you have emergency funds and other savings in place, have a grip on your budget, and are consistently capturing cash, you move on to the cash flow creation stage.
Take notice of the name: Cashflow Creation – There’s a big difference from the first stage of working for cash. In this third stage, you learn how to use the money you’ve saved and the relationships you’ve nurtured to invest, generate additional cash flow, earn interest, and create income independent from your day job.
Typically, people in this third stage actively seek investment opportunities, including insurance policies, stocks, REITs, bonds, residential real estate, and commercial real estate syndication opportunities.
Next isn’t the final resting point, but more of an ongoing focus to protect and tweak your financial strategy for the best. Cash Control involves creating a will, pursuing estate planning, maintaining life and disability insurance policies, and ensuring your finances are set up for longevity. You didn’t learn this stuff in school, so it’s up to you to intentionally learn and refine your financial plan toward protecting your assets from creditors, taxes, and lawsuits and providing a legacy for your loved ones.
I’m sure you’ve heard the phrase “making your money work as hard as possible” thrown around, and in a nutshell, intentional action throughout each of these stages will do precisely that!
Private Banking Strategy
The next high-level concept I’d like to share also called “becoming your bank” and “infinite banking strategy,” is where you use a carefully drafted whole life insurance policy to become your lender, borrower, and beneficiary all at the same time.
Look at the big-bank business model. They accept people’s deposits in exchange for a “safe” place to store the cash promising minimal interest earnings. The bank loans that money out to others and earns a much steeper amount of interest off the loan. All along, if someone defaults, they are the beneficiaries via collateral, collections, etc. Why save your hard-earned cash for minimal interest and then borrow other money at a higher interest rate? It just doesn’t make sense!
I invite you to explore flipping this widely-accepted business model and create your own private banking system. If you followed the four stages above, you captured cash and have significant savings ready to invest in creating passive cash flow. With this cash, you can buy a dividend whole life insurance policy from a mutual insurance company. When written correctly, your policy will allow you to fully fund it quickly and borrow a large portion of that money from inside the policy within the first year.
Now before your head spins, let me explain. When you fund the policy quickly, you become eligible for dividends and earnings inside the policy itself. When you borrow against your policy at a low rate, you’re still earning interest on the full value, AND you get to reinvest that borrowed money into a real estate syndication.
Boom! You’ve taken 1$ and invested it into two places at the same time, AND now you have an insurance policy too! There are many other details to this, which I’ll save you from right now, but just know this is one tax-advantaged option for creating a wealth-building machine.
Value Your Time Most Of All
Your time is your most precious resource, and when you start, you don’t have much choice but to trade your time for money. You likely spend 40-60 hours a week contributing your expertise and energy in exchange for a paycheck.
That’s not a sustainable life/happiness model, though, right? At some point, you want to have captured enough cash and begun to invest in lucrative deals so that you could reduce the amount of time you have to put in and instead spend it doing things you enjoy.
This is where you reclaim your time. Maybe that means hiring an assistant to keep you organized and run little errands for you, or perhaps that means hiring household services like laundry, a maid, and a landscaper. In all areas of life, I encourage you to explore the activities you do, their worth, whether you like doing them, and how much of your time and energy they take. When you conclude that specific actions are not worth your time or energy, hire them out and, in exchange, use your time to learn about and pursue the next level of wealth generation.
Another way you can fast-track your wealth-building machine is to intentionally surround yourself with people who inspire you. Find connections ten steps ahead of you, who are doing things you wish you could be doing, and then find ways to infuse their lives with value. Use your knowledge and expertise to support them and further develop a positive rapport with them.
You’ve probably heard the quote by Jim Rohn, “You are the average of the five people you spend the most time with.” Well, recent research shows that who you are is even affected by your friends’ friends and those friends’ friends! This emphasizes how imperative it is to seek masterminds, mentors, and relationships with those you admire.
As you surround yourself with valuable connections, nurture the relationships created, and allocate time and energy-sucking tasks, you create more space in which you can explore higher-level concepts and accelerate your wealth-building journey with fewer mistakes.
Continuously Break Parkinson’s Law
Finally, the greatest, most valuable high-level advice I can provide is that you have to break Parkinson’s Law repeatedly. Parkinson’s Law is the high-level idea that the more income you make, the more you spend.
Most people find that with each raise or bonus achieved, they can afford something they’ve wanted, which is all exciting until years pass by, and they’re stuck with no savings to show for all their hard work.
But you, you’re different. With the four pillars, buying your time back, and private banking knowledge, you are destined to thrive in that Cash Capture stage and ensure your expenses are much less than your income. Beyond that, you have to continually refine your cash capture strategy, always ensuring you have more to invest.
With each raise, cash flow check, and bonus, strive to remain conscious of the temptation to spend more and break that cycle again.
While you focus on the high-level strategies outlined above, we at Kind Equity Partners are focused on nurturing relationships with investors (like you) and presenting the best real estate syndication opportunities available to our Kind Equity Club members.
For access to our private community of like-minded investors focused on wealth-building, we are inviting you to join Kind Equity Club today. Together, we will take steps toward these 5 high-level concepts discussed in this blog post.