I started flying at 16 and was not scared at all. Due to my unending drive to figure out how I was going to eventually solo, I studied and prepared like I had never done before. I was driven towards a goal. Being only 16, I had not been dealt very many life experiences and the amount of fear that I had surrounding this endeavor was minimal. Yes, I had crashed dirt bikes, ran into trees while downhill skiing, and had mountain bike accidents that folded rims and left me limping for 2-weeks, but flying to me was different; it was ‘safer.’
Psychologically, I had 3 things going for me when I started flying. Lack of age that can lead to fear, a lot of study to educate myself, and lack of any negative experiences. My past had not given me any negative outlook on what I was doing and what I was about to do, and my lack of life experience was also not very dense. Due to these facts, I was task focused and easily blotted out all the other negative factors that surrounded my journey. Mind you, I started flying just after the September 11, 2001, terrorist attacks on the World Trade Center. There was a LOT of fear surrounding what it was like to be a pilot and start a profitable and productive career in the industry.
Your outlook on life shapes what you fear based on past experiences. Constantly studying a subject will sometimes stagnate your growth because the action part of the equation hasn’t been accomplished. Humans are good at recognizing and working with patterns. Without the ‘doing’ part, the patterns are just nebulous pieces of information floating around. Colleges and schools like to taut their ability to make you knowledgeable. Knowledge is completely worthless if it isn’t persistently and effectively applied. The ‘action’ part, the ‘doing’ part, the ‘application’ part requires the individual to take the first step. Education is a way of mitigating risk but there are so many variables that are part of this world that unless you start putting the knowledge into action, many will never see dreams come to fruition.
Dreaming doesn’t make you money…putting dreams into action does.
There are always risks in investments. You should have fears associated with passive apartment investing; that is 100% normal. The plan to minimize risk needs to run like a well-oiled McDonald’s franchise. Systems and processes with backup options are what’s going to allow the investment to grown and minimize the downside.
If you are pre-disposed to investing in real estate, specifically apartment complexes, the best way to do this is through a syndication. A syndicator is a funny word that is used for the active partner running the apartment investment. The active partner (“syndicator”), will form a legal entity to title the property in, in my case, I use limited liability companies (LLC), and then allocate shares of the property equity within the LLC to individual investors based on the amount each person invested in the deal. Because the passive investors own equity in the property, they enjoy all of the tax benefits, income, potential appreciation, and wealth accumulation without having to talk to tenants, fix toilets, or deal with contractors.
What prevents an apartment complex from losing money?
- Demographic shifts of baby boomers and millennials moving into apartment complexes is higher now than ever before
- Apartment owners have continued to see very low vacancy rates in multi-family properties even during the 2008 housing market crash and the COVID-19 international pandemic
- The city and sub market that the apartment is in can drive rental income higher or lower
- Major employers in the area will bring in workers that are looking for apartment living
- Each market and sub market is affected differently in a market downturn, owning shares in multiple properties is a way to diversify and offset the risk associated with only 1 property
- An experienced apartment syndicator may have better insights in the market and sub-markets where the properties are purchased
- The business plan MUST have conservative underwriting
- If the plan is to purchase the property and increase rents significantly without any renovations, what data supports that plan?
- Is the active partner raising money for the necessary renovations up-front or expecting rental income from occupied units to pay for the renovations?
- How much of an annual increase in rents are in the projections?
- Did the active partner increase the expenses on the property each year in the underwriting process?
- If the underwriting shows a 100% occupancy level, that is not a good plan because there will always be apartment turn-over
The BIG 3 rules to protect your investment during the ownership period
- The property MUST cash flow
- If there are up-front renovations, this needs to be included in the business plan
- The active partner (syndicator) MUST keep adequate cash reserves in a separate account
- If there is debt on the property, the mortgage should be at a fixed interest rate and cover the timeline of the business plan
*Note, commercial mortgages are different than residential loans so don’t be surprised to see 5, 7, 10, 25, or a varied yearly rate. The typical 30-year note you have on your personal residence is underwritten and valued differently. Commercial properties, apartments greater than or equal to 5-units, are valued based on the rent money that they collect each month.
Don’t Lose your Passive Investor Protection
By passively investing in an apartment syndication, you maximize the use of your own TIME. There are many other benefits. Of note, passive investors aren’t involved in the daily work that goes into owning property and therefore aren’t liable – you, personally, can’t be sued – the active partner is the one who is exposed to that risk and the manager. Laws protect the passive investor. The active partner is the one that puts the deal together, finds investors, and manages the property until it is time to sell.
The main goal of a passive investor should be to research the deal and the active partner’s experience and background prior to investing. The due diligence of the passive investor is the heaviest up-front prior to buying into the project. Researching the market, sub-market, business plan, and legal documents takes some time but after the deal closes and you own legal shares of the property, the most work you should expect is to read monthly recap emails, review quarterly statements, and provide a good bank account number where you want your investor returns sent.
Many apartment syndicators charge hefty fees to run investment properties. If the deal is good enough, this is not a problem as the work that goes into these projects is sometimes pretty intense! Make sure you know what fees are being charged and know who gets paid first when collecting rent. If the property isn’t run efficiently and the syndicator is taking payment first, that could cut into the money you expected to collect.
Viper Ventures LLC does not charge any fees. We are massively committed to generating wealth both for our passive investors and ourselves. Returning the investor’s money as efficiently as possible is our goal! We are transparent about this up-front and our underwriting in our business plan shows why this is so beneficial for the passive investor. By eliminating all the fees that are normally charged in the deal, we can increase the rate of return for our passive investor base and accelerate money back to you.
Communication on the part of the active investor in running the property is important as well. Every deal has its own challenges but generally you should expect to receive monthly updates on properties that are undergoing heavy renovations and that have a lot of change happening in a short period of time. At a minimum, investors can expect a synopsis of the property on a quarterly basis that also shows what has been completed, property management statements, financial and bank statements, and any future planning pertaining to the project.
Every one of the properties goes into their own separate legal entity. Each legal entity that holds the property has its own separate business checking account. Every investor’s contributions and cash payments are individually tracked through our accounting process. By segregating and separating all of our properties, we can keep our accounting accurate and provide solid future projections. Additionally, our accounting staff can keep track of cost segregation, depreciation, cash distributions, and profit and losses through the year. Paying your taxes is easily accomplished by way of a 2-page investor K-1 statement provided to you at the end of each year.
There is no such thing as the ‘perfect’ investment. Education and knowledge will only benefit you if you use that information to put it into ACTION.
Grow your Proactive Wealth™. If you don’t know what that means, my book, “Single Seat Investor” is available for purchase on Amazon Prime and for less than $10. This short book is easily read in 60-90 minutes and all proceeds are donated to support the Anna Schindler Cancer Foundation.
Buy the book here on Amazon Prime and start your path to financial freedom and WEALTH today!
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