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Navigating Risks of Real Estate Syndication for Physicians

As a physician or medical professional, you may be considering real estate syndications as an alternative investment to diversify your portfolio and hedge against economic uncertainty. However, it is crucial to understand the risks of real estate syndication before diving in. In this comprehensive blog post, we will explore various aspects of these investments and provide insights on how to mitigate potential pitfalls.

We will delve into the importance of trust between investors and sponsors, performing due diligence checks on deals and sponsors, mitigating market volatility risks through stable cash-flowing assets, reducing exposure through diversification and property selection criteria. Additionally, we will discuss navigating legislative constraints by partnering with experienced legal teams and ensuring adequate insurance coverage.

Lastly, we’ll examine the suitability and limitations of real estate syndications for passive investors like yourself – addressing concerns such as illiquidity issues, high minimum investment requirements, and limited control over property management decisions. By understanding the risks of real estate syndication thoroughly beforehand, you can make informed decisions that align with your long-term investment goals.

Table of Contents:

  • How Real Estate Syndication Works
  • Pooling Resources for Larger Investments
  • Partnering with Experienced Syndicators
  • Why Real Estate Syndications are Safer than Direct Ownership
    • Expertise of Seasoned Operators
    • Mitigating Market Volatility Risks
  • Real Estate Syndication: Pros and Cons
    • Diversification Benefits
    • Illiquidity Concerns
    • High Minimum Investment Requirements
  • Navigating Transparency and Communication Risks
    • Open Conversations with Sponsors
    • Reviewing PPMs for Informed Decision-Making
  • Assessing Market Fluctuations Risk
    • Diverse Employment Opportunities
    • High Median Household Incomes
    • Low Crime Rates
  • Proper Debt Financing Strategies for Real Estate Syndications
  • Legal Risks in Real Estate Syndications
  • FAQs in Relation to Risks of Real Estate Syndication
    • What are the risks of syndicated real estate?
    • What is the risk of syndication?
    • Can you lose money with real estate syndication?
  • Conclusion

How Real Estate Syndication Works

Real estate syndication is a popular investment option that allows passive investors to pool their resources and invest in larger, more lucrative properties like multifamily units.

Pooling Resources for Larger Investments

Multiple passive investors come together to raise capital needed for acquiring high-quality real estate assets, enabling them to participate in deals that would otherwise be inaccessible due to high costs.

Partnering with Experienced Syndicators

Working alongside seasoned professionals within the industry maximizes returns while mitigating risks involved in the process.

  • Diversification: Participating in multiple projects spreads financial exposure across various types of properties and geographic locations.
  • Economies of Scale: Investing alongside other passive investor partners provides increased buying power and cost savings related to property management fees or maintenance expenses.
  • Professional Management: Syndicators have a team of experienced professionals who handle all aspects of property management, allowing passive investors to enjoy the benefits of real estate investment without dealing with day-to-day responsibilities.

Real estate syndications offer passive investors the opportunity to invest in real estate deals without the hassle of property management or the risks involved in direct ownership.

Despite the potential issues, like changes in market conditions, rent control and Section 8 housing impacting returns on investment, real estate syndications remain a popular option for investors aiming to diversify their portfolio and generate passive income from rental properties.

Despite these risks, real estate syndications remain a popular choice for those looking to diversify their investment portfolio and generate passive income through rental properties.

For more information on real estate syndications and the risks involved, check out these credible sources:

  • Investopedia
  • Forbes
  • Bigger Pockets

Why Real Estate Syndications are Safer than Direct Ownership

Real estate syndications are a safer investment option than direct ownership because they allow passive investors to minimize risks by relying on the expertise of seasoned operators.

Expertise of Seasoned Operators

Partnering with experienced sponsors who have a proven track record in acquiring and managing properties reduces the likelihood of costly mistakes often made by inexperienced property owners.

Mitigating Market Volatility Risks

  • Diversification: Investing in multiple properties across different markets provides diversification benefits that help protect against economic downturns or localized issues affecting one specific area.
  • Cash Flow Stability: Real estate generates consistent rental income from tenants, offering more predictable returns even during uncertain times.
  • Hedge Against Inflation: As inflation rises, so do rents – making real estate an effective hedge against rising prices over time.

Real estate syndications offer strategies that can help investors navigate economic uncertainty while still achieving their investment goals.

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Real Estate Syndication: Pros and Cons

Real estate syndication can provide a good opportunity for passive investors to expand their investment portfolio, yet there are some difficulties associated with it.

Diversification Benefits

Spreading your investment across multiple properties can reduce the impact of any single underperforming asset on your overall portfolio.

Illiquidity Concerns

Real estate syndications tend to be less liquid than stocks or bonds, but this can be mitigated by focusing on deals with shorter hold periods or partnering with sponsors who offer secondary market options for selling your shares.

High Minimum Investment Requirements

  • Raised capital: Many real estate syndications require a significant initial investment, which could deter some potential passive investors from participating.
  • Potential pitfalls: Thoroughly vet each opportunity before committing any funds, even if it means passing on a deal with a high minimum investment.

Before investing in real estate syndications, consider your investment goals, market conditions, and potential risks involved, such as rent control, rental rates, and section 8 housing.

Navigating Transparency and Communication Risks

Real estate syndications can be risky due to lack of transparency or poor communication from sponsors, so it’s crucial to engage in open conversations and review Private Placement Memorandums (PPMs) before investing.

Open Conversations with Sponsors

Ask questions about the sponsor’s experience, track record, and the specific details of the deal to establish a strong relationship and avoid potential pitfalls.

Reviewing PPMs for Informed Decision-Making

  • Analyze financial projections: Look for conservative estimates and review rental income forecasts and property management expenses.
  • Evaluate market conditions: Assess factors such as rent control policies, local employment rates, or Section 8 housing regulations that may impact future rental rates.
  • Determine investment goals alignment: Ensure that each sponsor’s strategy aligns with your personal financial objectives by comparing how raised capital will be allocated across various deals.

By taking these steps, you can mitigate transparency issues and establish proper communication channels throughout your real estate syndication journey.

Assessing Market Fluctuations Risk

Investing in realty may involve hazard, yet there are ways to reduce exposure to market swings.

Diverse Employment Opportunities

Target properties in regions with a variety of industries and job sectors to maintain rental demand.

High Median Household Incomes

Properties in areas with high median household incomes attract tenants who can afford higher rental rates and are less likely to default on rent payments.

Low Crime Rates

  • A safer neighborhood attracts more potential renters and increases property value over time.
  • Tenants are more inclined towards long-term leases in low-crime areas as they feel secure living there.
  • Property management costs may be lower due to reduced vandalism or theft-related expenses.

Assessing market fluctuation risks is crucial when passively investing in real estate syndications. By focusing on properties located in areas with diverse employment opportunities, high median household incomes, and low crime rates, investors can better protect their investments from potential pitfalls. Real estate syndications can be a great way to invest in real estate without the hassle of property management, but it’s important to understand the risks involved and set clear investment goals

Proper Debt Financing Strategies for Real Estate Syndications

Using debt financing through floating-rate loans can accelerate returns on equity without jeopardizing financial stability.

Investors should ensure their chosen syndicator has a proven track record of implementing value-add strategies and adhering to conservative loan-to-value ratios (LTV).

Floating-rate loans provide flexibility in managing debt payments while maximizing potential returns.

Conservative LTV ratios reduce risks involved in case market conditions change unfavorably.

Investors should look for multifamily syndications where the sponsor maintains an LTV within the range of 60-70%.

Partner with sponsors who prioritize transparency and communication throughout all stages of your investment journey.

Stay informed about any changes or updates related to your passive investor status, property management, or rent control policies affecting your rental income stream. Debt financing can be a valuable tool for real estate investors, but it’s important to understand the potential pitfalls and risks involved.

Short-term rentals, rent control policies, and Section 8 housing can all impact rental rates and potential returns.

Investors should have clear investment goals and understand the potential risks before passively investing in real estate syndications.

By partnering with experienced sponsors and carefully evaluating debt financing strategies, investors can raise capital and achieve their investment goals.

Legal Risks in Real Estate Syndications

Legislative constraints may pose risks in real estate syndications, making it crucial for investors to partner with sponsors who have experienced legal teams on staff and appropriate insurance coverage.

A strong legal team is essential when investing in real estate syndications.

Partnering with a sponsor that has an experienced legal team ensures they understand the complexities of these transactions, minimizing your exposure to potential pitfalls.

It’s vital that your chosen sponsor carries adequate insurance coverage to protect against unforeseen events such as property damage or lawsuits from tenants.

Make sure you inquire about their insurance coverage, so you’re confident they have sufficient safeguards in place.

Passive investors should educate themselves on relevant regulations governing real estate investments to better understand how these factors could impact their investment goals.

By staying informed and working with experienced professionals, you can mitigate the legal risks involved in real estate syndications and confidently pursue this lucrative investment strategy.

Real Estate Investing For Physicians

FAQs in Relation to Risks of Real Estate Syndication

What are the risks of syndicated real estate?

Investing in syndicated real estate can be risky due to illiquidity, limited control over property management decisions, reliance on sponsor’s expertise, and market volatility. It’s important to perform due diligence checks on sponsors and deals, diversify investments, and ensure value-add strategies with conservative loan-to-value ratios to mitigate these risks. source

What is the risk of syndication?

Syndication risk refers to potential losses in a pooled investment vehicle like real estate syndications, which can arise from poor property selection or management by the sponsor, economic downturns, or legislative changes impacting operations or financing options. source

Can you lose money with real estate syndication?

Yes, investors can lose money in real estate syndications if properties underperform due to market conditions or mismanagement by sponsors. To minimize this risk, it’s crucial for investors to conduct thorough research on both the deal and the track record of its sponsoring team before committing capital. source

What are 4 major real estate risk concerns?

  1. Economic Risk: Market fluctuations affecting demand for rentals and property values.
  2. Sponsor Risk: Incompetence or fraud by managing partners responsible for project execution.
  3. Leverage Risk: Overuse of debt financing leading to increased vulnerability during downturns.
  4. Liquidity Risk: Inability to quickly sell an asset without substantial loss in value.


Real estate syndication risks can be reduced through proper due diligence, diversification, and careful selection of sponsors and investment properties.

While some investors may worry about relinquishing control over investments, building trust with sponsors and ensuring transparency can help ease these concerns.

It’s important to consider market volatility risks and the suitability of real estate syndication as an illiquid investment option, but stable cash-flowing assets and responsible use of debt financing can provide long-term benefits.

Partnering with experienced legal teams and maintaining adequate insurance coverage can help investors navigate legislative constraints that may arise.

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Real Estate

The Journey Of A Physician And Real Estate Investor With Gurpreet Padda, MD

This week’s episode is the first in a two-part series that features Gurpreet Padda, MD. He is a private practice physician out of St. Louis, Missouri, who runs Reversing Diabetes MD and Padda Institute Center for Interventional Pain Management. Dr. Padda also runs Red Pill Kapital, which is a real estate investment development and management company. He is an advocate for educating private practice physicians on passive wealth strategies through owning real estate.

In This Episode, We Talk About…

[5:05] Getting into real estate as a teenager

[6:08] The desire to have a life outside of the hospital

[9:05] Characteristics that are more relevant than your education when it comes to owning a business

[10:30] The applicability of medical training to real estate

[11:09] How Dr. Padda decided on his medical specialty

[12:39] How capital flow impacts our health as well as the real estate market

[15:17] The importance of investing in real estate for your practice(s)

[16:31] How to decide where to purchase real estate for practice locations based on patient perspectives

[17:33] The effect of the pandemic on retail real estate

[21:28] Selling restaurants before the pandemic began

[24:14] Educating clinicians on creative passive cash flow and equity growth

[25:22] Why physicians tend to make financial decisions based on narcissism

Links To Resources:

Reversing Diabetes MD:

Padda Institute Center for Interventional Pain Management:

Red Pill Kapital:

If you simply need more information. have questions, or want to discuss a specific deal, I’m always excited to help. Reach out to me at

If you are ready to start your journey to financial freedom but want specific additional educational materials, we have a course designed for physicians.

Real Estate

Questions For The Syndicator

I Thought I Would Share The Exact Questions I Get Asked As A General Partner, Which Are The Same Questions I Ask Of People That I Invest With Who Are General Partners. I Invest In Other People’s Deals, And I Have My Own Deals, And I Want To Share The Commonality Of Questions That Are Super Important To Ask. I’m On Both Sides, And I Want To Share This Information.

Real estate is the most powerful way to accumulate wealth. More people have become millionaires through real estate than any other means. We know how to find the property, create a plan for improving the cash flow, negotiate the deal, and manage the asset. Your passive investment provides you with the opportunity to earn an income without the nine to five. We create a unique business strategy that fits your financial and investment goals. Get the financial freedom you need to do more of what you love. We are Red Pill Kapital, with a K.

How Long Have They Been Actively Engaged In Real Estate Investing?
I want to vet the general partner. I want to figure out how long they’ve been engaged in real estate investing.

• Did they just start a year or two years ago, or have they been in this for 20 years?

• What’s their track record?

• What’s their experience?

I want to look at their comparative analysis of this offering versus other offerings, look at an analysis of the things that they’ve actually completed, and look at their actual results delivered.

I want to know what they offered before and what the result was from that offering. In other words, what was their pre-offering package, and what was their final result? I want to get a copy of their previous deal. I want to get a copy of their investor communication that they’ve provided, because more than likely, how they communicated with other investors is how they’re going to communicate with me.

I want to know how long they’ve been doing syndication. I want to know what their investment strategy is. Is their strategy to just kind of shoot everywhere, or are they a highly refined sniper? Both things are good. You could have a wholesaler that was buying houses, and that might be one way to approach it – not the way that I would approach it. You could have a targeted sniper that looks at hundreds and hundreds of potential real estate deals or targets, but then picks the one out that’s super important and super necessary.

I Want To Know About Their Strategy.

• Does it correlate with the current and future market conditions?

• Can they describe their strategy?

• Can they describe how the macro trends affect their hyperlocal neighborhood, where this specific piece of real estate is?

• Do they understand what’s going on with this local neighborhood and how the job trends are going to make a difference?

I Want To Ask Them Before I Do Their Background Check:

Is there anything negative that they want to discuss with me? Is there anything negative they want to disclose? I pay very close attention to the vocabulary that people use and their style of communication. That vocabulary is going
to determine how clear and standardized they are and how their verbiage is going to come out, because if they’re not clear with me, and they’re not using standard vocabulary in the real estate vernacular, then there’s going to be a problem, because they’re not going to be able to deal with the banks. This might be their way to learn, and I don’t want to pay for people’s education.

That doesn’t mean that people don’t make mistakes. It doesn’t mean that things won’t happen.

What It Means Is I Don’t Want To Pay For Somebody Else’s Education.

I want to know if what they’re telling me is a fact or it’s an opinion, or if they’re mixing opinion as if it’s fact. Everything has a rational basis underneath it, but do they understand what that rational basis is, or are they just opening? I want to make sure that they’re using industry-standard metrics, not something that they made up, not something that they think they can derive.

I Need To Know What Locations Do They Invest In?

• Do they invest in the location that this project is in, and why are they investing there?

• Are they investing there because there’s a demographic reason?

• Are they investing there because they heard this was a good place from their buddy Joe, and they’ve listened to some real estate shows and everybody says, «Austin is hot, so I’m going to Austin»?

I want to know how well they know this hyperlocal environment that they’re currently investing in. Do they have a team that’s ready to undertake the investment? That doesn’t mean that
they have to have a team that has a general partner with an attorney, an inspector, a loan broker, insurance broker, and property management. All of those things can be hired out, but is it assembled? Is it ready to go? Do they have an attorney? Have they specified out who the inspector’s going to be?

• Have they picked out the loan broker?

• Do they have a relationship?

• Have they talked to an insurance broker?

• Have they even talked to somebody who’s going to help on the taxes? Because who knows?

In certain areas like Arizona, once you buy a property, your tax rate may go up a few percentage points, whereas if you buy a property in Texas, it may go up a few hundred percentage points.

Really, the functionality is to make sure that they’re prepared for this, and that they’ve anticipated this. Not all the team members are part of the general partnership. Some are just simply independent contractors.

• If there’s going to be major construction, have they identified the team that’s going to do the construction?

• Have they identified the rehab budget?

• Who’s going to manage that construction?

• Has that construction management cost been built into this?

• Has a pro forma that matches the construction, that’s specifically going to determine the cash flow, been done on a monthly basis, rather than some sort of nebulous percentage basis of the whole year?

Because the reality is you can’t take a percentage basis to the bank. What you can do is take the monthly income to the bank, so you need to know exactly what your pro forma is going to be per month – not as a global number, like an IRR, you need to know what the cash flow’s going to be. Cash flow you can deposit. IRR you can only look at.

I want to know what asset classes do they regularly invest in and what grade of asset. If they invest in multifamily, which makes sense, but they only invest in grade A, and this is a grade C, I don’t think they’re going to do as well, because what they’re going to try to do is take a grade C and upgrade it to a grade A, and that’s never going to happen. You might be able to get to a
grade B-minus, but you’re never going to get to a grade A, and you’re just going to spend a ton of money for nothing.

If they’re used to grade C, and they’re buying a grade A, they probably may not have the skillset to deal with the grade A tenants, because grade A tenants have a much higher need basis, and you’re basically creating an experience
for them in which you take care of things. Grade C, not so much. You want to know how many years of experience do they have with a particular asset class and how many years of experience in this grade of asset.

I Want To Look At Their Credibility

Are they going to put their own money in the deal beyond the acquisition fee? A lot of times all they’re putting in is the acquisition fee, which is the money that you’re putting in, and the acquisition fee might be 3 to 5 percent of the deal. It might be 7 percent of the deal. Just depends on the deal. But if that’s all of the money that they’re putting in, they’re not putting in anything. They don’t really have anything to lose.

Yeah, they spent a lot of time. They may have looked at a lot of projects, but I want them to feel the pain of failure if there is failure. I want to know: have
they ever had a deal gone bad? I don’t invest with people that have never had a deal gone bad, because a deal gone bad creates a whole different feeling and creates a whole different set of skills for the syndicator.

I want to know if they’re sponsoring other investments. How many other investments? Where are they at? Because I don’t want their attention overly diverted. That doesn’t mean that they can’t do other investments, but I need to know how much of their bandwidth of time is going to be spent on this investment, because this is the one that’s important to me. Can they give me names and contact information of past or current clients? Can they provide contact information for other investors so I can talk to them for a reference?

Credibility Questions

• Do they put their own money into the deal, beyond the acquisition fees?

• Did they ever have a deal go bad? If so, how did they handle it?

• Are they sponsoring any other investments? If so, how many?

• Can they give you the name and contact information of their past/ current clients?

• Can they provide contact information for other investors, that you can speak to them from a reference?

Deal Structure

I need to know what the deal structure is.

• Is there a preferred rate of return?

• Is there a waterfall?

• What’s the split?

• How do we structure this deal?

• Do they change the split between the general limited partner after a certain threshold?

It might be 70/30 going in, but then it might become 50/50, and you need to understand that.

• Are they only allowing accredited investors in, or is it also sophisticated?

• How are they making that decision that they allowed certain sophisticated investors in? Because that could impact the entire investment.

• How many key principles do they have?

• If there are no other partners, what’s going to happen if the investment goes south? Because if there’s only one general partner, and something happens to that one key person, everything is going to go south.

• What are their sponsor fees?

• How long are they usually holding an asset for?

• What’s their investment strategy?

• Is this a value-add?

• Is this a buy and hold?

• Is this a value-add with an intended refinance?

• What are we doing here?

• Where are we going to?

I want a map that tells me exactly what they’re actually thinking. If they can’t describe this to me in probably two or three sentences, they haven’t thought hard enough about this. This investment strategy is an elevator pitch – it should be that refined.

Reputation Search
I Will Always Do A Reputation Search

That might include just a simple online search looking for complaints. I want to look for positive comments. I want to look for negative comments. I want to do a UCC background check. I want to do a criminal background check. I want to check if they’re a prohibited party from the Securities and Exchange Commission.

I want to look for references on social media about this specific syndicator.

• Are they on a podcast?

• Do they have other websites?

• Do they have YouTube channels?

The more web presence they have, the less likely that they are going to be anonymous, and more collateral information is available that keeps them from behaving poorly later. I want to know if I can discuss this offering with one of my trusted advisors. More likely than not, I’m going to have to sign an NDA to make sure that everything is okay.

I want to contact the syndicators’ past or present colleagues or employees, and I want to know what their opinion is. I want to ask details about the past deal that the syndicators handled.

Legal Documents
When I look at the documents, I want to make sure that they’re professional – that they’re legal, they’re accurate, they’re complete. For me, they have to come over by DocuSign or one of the other electronic means. If they’re sending me paper, I kind of wonder about that, because in this day and age, that’s highly unusual. I want to make sure that all the documents are there, and that they look professionally prepared – that there’s not any typos in there.

I want to make sure that it’s an actual syndication attorney that signed off on this and not just some online tool that they’ve used to create a private
placement memorandum. I want to analyze the property, the market, the major employers in the area, the location, and the proximity to shopping centers and employment hubs. That should be described all in the offering memorandum.
I want to cross-validate it later, but I want to make sure that’s in there.

I want to review their pro forma and their underwriting and their hold period, and I want to determine for myself if this is conservatively written. Has this been stress tested? If need be, I’ll use a third-party underwriter to validate. Using a third-party underwriter to validate a plan, to validate somebody’s pro forma, is a very cheap insurance policy and can save me a ton of heartache later. Typically, this runs about $2,000 by the time that I’m done.

When I’m getting my offering memorandum, I want to make sure it was professionally prepared, that it’s not full of typos and mistakes. I want to make sure that it’s concordant with the property. I want to make sure it hasn’t been copied.

When I Deal With People, I Want To Know:

Is this a pressure situation? Because if this is a pressure situation, it is possible that they’re making a mistake. I want to make sure that there’s been plenty of time for me to analyze it and that I’m getting the appropriate amount of attention that I need in this deal. Are they answering my questions, or are they brushing me off?

I Want To Make Sure That They Understand My Particular Situation, My Goals, And My Needs. What Does That Mean?

Well, if I’m investing with an IRA, it means something totally different than if I’m investing with my own cash. If I’m investing for a five-year horizon, and this is a ten-year opportunity zone project, I’m not in the right deal. You can’t manipulate an opportunity zone project for ten years and expect to make a five-year return.

I Want To Know:

is this a pressured sale, or was this a pressured piece of information that they’re putting out? How many other deals did they look at before they selected this one to present? Did they look at three deals and this is the one? Because usually I find that, at minimum, I’m looking at 20 to 40 deals, and sometimes
a lot more, to find one that is worth analyzing. I want to make sure that they’ve verified, that they’ve evaluated, other similar assets of similar grade in a similar demographic. I want to know why they rejected those deals.

Pressured Sales?
• Is the deal sponsor giving you enough time and attention?

• Are they answering all your questions?

• Do they understand your situation, goals, needs?

• How many deals did they look at before they selected this one to present?

The Actual Deal
When you actually get to the deal, and you look at the market comps that are provided by the syndicator, you want to make sure that it’s in the right neighborhood. If you look at the market comp, and it’s plotted out, and it’s from two miles away, it’s probably not the same neighborhood. So, that’s not reliable. There are all kinds of online tools that you can use to validate a particular neighborhood.

You Want To Look At Their Projections Of Those Market Comps, and are they in line with neighborhood comps, not from something two miles away? I
guarantee you that if you invest in St. Louis, and you’re investing in University City, which I’ve invested in, if you go two blocks, you’re in a hellhole. If you go two blocks in the other direction, you’re in the business district, and the cost differential in housing is that one side sells for 40,000 and the other side sells for 400,000. One side rents for $350 a month, and the other side rents for
$1,800 a month – and they’re within blocks of each other.

You want to make sure that the overall offering makes sense in terms of the returns and the duration of the syndication. You want to make sure it makes sense for this particular syndicator and their background and the proposed plans. You certainly wouldn’t put up a high rise in the middle of farmland, so you want to make sure that this specific plan makes sense.

• Have they stress-tested this deal?

• Have they looked at what would happen on this deal if you went to historic vacancy rates – 30 percent vacant?

• Would they still be able to pay debt service?

• What would happen if taxes jumped 150 percent?

You want to look at the reversion cap rates. That’s what would happen to the value at a particular net operating income if the cap rate goes up.

Let’s say that you’re buying at a cap rate of six and you’re going to sell in five years. I usually increase the cap rate by 0.2 percent per year. So I’m looking at a reversion cap rate of seven, and then I want to know what it is for value. You also want to know if and who the lender is that’s underwriting. If it’s Freddie Mac and Fannie Mae, then it’s probable that you have additional eyes on this loan, because Freddie Mac and Fannie Mae have amazing underwriters. Those are the people that I use to underwrite my deals, and I think it’s very important to have that level of underwriting because it means the deal will stand on its own. Freddie Mac and Fannie Mae do not lend you money unless this deal is going to stand on its own.

You want to look at your cash-on-cash return. You want to look at your equity multiple. You want to look at your average annualized return, and the bank wants to look at your debt service coverage ratio. If your debt service coverage ratio is below 1.2, this is a no-go deal. If my average annualized return is below 7 percent, for me, that’s a no-go deal. If my equity multiple is not at least 1.9, this is a no-go deal.

I want a cash-on-cash return that’s significant. I don’t want to do deals that I’m not going to make a decent return on because I know what I can get in the market, and so I want to be very careful. When I look at the actual deal, I also want to impute what the depreciation value is to me, specifically.

The Actual Deal
• Evaluate the market comps that the syndicator has provided. Are the target rents competitive for this neighborhood in this grade property?

• Are the projections in line with the comps?

• Does the overall offering make sense in terms of returns, duration, syndicator integrity and background, and proposed plans?

• Have they stress-tested this deal? Vacancy rates? Taxes?

• What are the reversion cap rates?

• Is this a loan being underwritten by Freddie or Fannie?

• What’s the COC, Equity Multiple, Average Annualized Return, DSCR?

Thoroughly Understand The Capital Stack And Distributions

Equity Distribution

• Equity split at refinance or sale
• Asset management fees before or after pref
• Catch-up clause
• Refinance contingency
• Waterfalls

You have to understand what the capital stack is, so I’m going to just go over what a full capital stack is because I think it’s relevant. When you buy a piece of property, a portion of it is going to be equity and a portion of it is going to be debt. The debt is what you’re going to get from the bank. There are two levels of debt: senior debt and mezzanine debt.

Senior debt is the debt on the property if you’re not doing a rehab, so let’s just take an example. Let’s say that you’re going to buy a property.

Of that 70 percent debt, if there’s a rehab in it, it’s likely that about 50 percent of that is senior debt, and the other 20 percent is mezzanine debt. It’s a lender that is not going to give the full amount of money. It’s going to be at a slightly higher interest rate, and they’re second in line should anything bad happen. But if there’s no significant construction, then the whole thing is going to be senior debt.

So you’ve got 30 percent left that you have to raise equity for. The preferred equity gets the preferred return. The common equity gets the non-preferred return. The preferred equity is you; you’re the limited partner. So you’re going to get a split, and it could be a 70/30 split, or it could be a 50/50 split, or some combination thereof.

Inside that preferred equity, there’s usually a percentage. The first 6 percent goes to the preferred equity, and then it’s equally split, so you want to take a look at those numbers very closely. I usually map out my full capital stack. I usually just take this diagram and I put it down on paper so I can visually interpret this.

• What’s the mezzanine debt?

• What’s the senior debt?

• What’s preferred equity?

• What’s the common equity?

This is the easiest way for me to figure out exactly who’s going to get what, and what my expectations are going into this.

Then, when you look at the equity distribution – and you need to look at the equity split – what’s going to happen if it refinances versus sells? A lot of places, a lot of folks, will do an equity split at refinance or sale of 70/30, but if they’ve refinanced it, and you’re still in the deal, then the subsequent part is usually 50/50. It’s difficult to tell, but you’ve got all your money back, so for you it’s an infinite return anyway. Really, the ongoing risk is to the syndicator.

So, you want to take a look at that equity split at refinance or sale. You want to look at those asset management fees. Do they come out before or after pref? I’ve seen it done both ways. I think it’s very reasonable to do it before, and I’ve seen it very reasonable to do after. Most of them are done before the preferential payment.

There’s also something called a catch-up clause. The catch-up clause is we had enough money to pay the asset management fee. We had enough money to pay the 8 percent pref or the 7 percent pref, but we didn’t have enough money to do an equity split at all. So next year we do the same thing, and the next year we do the same thing. Eventually, the general partner catches up at the time of sale.

It’s very important to know whether there’s a catch-up clause or not. You want to know about any refinance contingencies. You want to know about waterfalls. Waterfalls are shifts in percentage based upon particular targets. There might be waterfalls because of construction. There might be waterfalls because you hit certain numbers. These are additional kickers. It’s very important to understand them.

So What’s My Process?
My average time to preliminarily analyze a deal is about four to six hours. I have people, though, that help me. I’ve got two full-time paralegals. We’ve got a full-time attorney. We have an in-house financial analyst, and we outsource our Freddie Mac underwriting for an extra look at deals that have gone forward.

I look at the people first. I look at the syndicator first. Then I look at the general demographics of the area, specifically looking for jobs. Then I look at the hyperlocal environment of the particular deal, and then I look at the deal. I don’t get to the deal until I’ve vetted the people and I’ve vetted the demographics. I’ve looked at the hyperlocal environment, then I look at the deal, and the least important thing that I look at is the entry cap rate.

People always talk about, “Oh, so-and-so has this cap rate. So-and-so has that cap rate.” Almost all of my deals are value-add. So what I’m looking for is not the entry cap rate. I’m looking for the exit cap rate, and I’m looking at the net operating income. Based upon the net operating income, that’s going to drive my value. I look at that delta between current net operating income and anticipated net operating income. That’s my value-add because that’s going to drive that value up.

I rebuilt the entire pro forma. I don’t want to use unintended math errors that might be hidden in a formula in their pro forma. So I basically copy the rent roll. I look at the T12, which is the last trailing 12 months, and I also look at the T3. I copy out all of the data, and I apply the rule of thumbs to costs. I want to make sure that I’ve done my own independent pro forma.

If my preliminary analysis is good, then I usually go visit the site. If I have to visit the site, that’s me adding about another 24 to 36 hours into my analysis. I don’t need to visit every single unit in the site, but I need to get a feel of it. I don’t invest remotely.

Last 6 Months Of 2019

Passive Investment

per 17 Offers (total received 51 offers, 43 different syndication groups)
6 Preliminary analysis
2 Site visits
1 Investment
did 3 passive investments last 6 months
added 17 syndication groups to my no-fly list
Active Direct Investment

>150 properties analyzed (actual site visits on 19)
4 offers made (full due diligence)
1 purchased and closed
In the last six months of 2019, in my passive investments, per 17 offers, I received basically 51 offers in 43 different syndication groups. From these 17 offers, I had six preliminary analysis, I had two site visits, and I had one investment. So it went from 17 to 1. I’ve basically done three passive investments for the last six months, and I added 17 syndication groups to my no-fly list.

These are 17 syndication groups that sent me offers, and I did the preliminary analysis on the people in the syndication group, and they had significant red flags. I know that I don’t have to reanalyze their deals. I might wait a year or two and let them back into my group to fly, but for the next year or so they’re locked out. I’m not even going to bother looking at their offers, because there’s something in there that I’ve identified in that particular group or those particular people that’s super dangerous.

It could be an SEC violation. It could be a pending bankruptcy. It could be a bunch of UCC liens. It could be some other criminal behavior. So, they go on my no-fly list so I don’t have to analyze them again. When I look at my
active direct investments, I looked at over 150 projects. I did actual site visits on 19 of them. I made four offers, and then did full due diligence with those four offers. I purchased and closed one. Greater than 150 down to 1, versus passive investment 17 down to 1.

Final Thoughts
Syndications are long-term prospects. You really need to understand the people that are in the syndication, because most syndications are going to outlast the average marriage in the U.S., which is about 8.2 years. The average syndication deal is between five and nine years right now. If you’re investing in an opportunity zone, that’s a minimum 10-year hold, which definitely outlasts the average marriage in the United States.

You’re creating a contract and offering memorandum. You’re looking at disclosures. You’re looking at PPM. These are all just the prenup to the marriage. The longer the syndication, the higher the risk, the greater the mischief that can go wrong, and the less likely that that prenup will even apply.

You want to make sure that there’s always a contingency plan to remove a bad actor. You don’t want to be stuck with a bad syndicator, and you don’t want to get bamboozled by beautiful graphics and beautiful pictures that somebody’s put together. I want the data. I want the math. The pictures are nice, but they don’t mean much. I can’t eat a picture. I can’t put a picture in the bank. I want to know what the cash flow is that’s associated with these beautiful graphics and pictures and how I’m going to get that into my bank.

Again, it’s a combination of the syndication team, the demographics, the hyperlocal environment, the actual deal, making sure it’s stress tested, looking at the exit, and how does it interact with my specific situation?

If You Need Help Underwriting A Deal, Let Me Know. Just Send Me An Email: Info@Redpillkapital. Com. If You Need Us To Help You Underwrite A Deal, It’s Pretty Cheap. It’s About $1,900, But That’s Not Specific, Because Some Deals Are Very, Very Complicated. But $1,900 Is Really Cheap Compared To Getting Into A Really, Really Bad Marriage.
Now this doesn’t mean that we’re going to go do a site visit for you, because that takes a lot more time, but at least we can help you with your underwriting and the reputation analysis research.
That’s one way to do it. But if you just have a couple of questions, that’s always free. Just email me info@redpillkapital, and just put in the subject line, call me. Give me your number, and we’ll chat, because we want to help other investors. We don’t want people to go into bad deals.

So What’s Red Pill Kapital?
Red Pill Kapital is a physician-owned commercial real estate investment and education company. It allows you to invest passively alongside us. We find the property or we find the investment group. We create and validate their plan. We look at how to improve the cash flow. We negotiate the deal. We manage and oversee the asset. Your passive investment provides you with an opportunity to earn an income without the nine to five because physicians don’t work nine to five; we probably work six to nine. We create a unique business strategy that fits your financial investment goals because we understand the specific needs of physician professionals.

Is Red Pill Kapital Right For You?
Your passive investment provides you with an opportunity to earn an income without the nine to nine, because physicians don’t work nine to five. We probably work six to nine. We create a unique business strategy that fits your financial investment goals, because we understand the specific needs of physician professionals.

Are you looking to enhance your financial wealth and truly live the life that you deserve? Are you an accredited investor who’s interested in learning more about passively investing and cash flowing
commercial real estate? Are you interested in investing alongside us? Because we don’t need your money. What we’re trying to do is do bigger projects with more leverage, and the bigger the project, the less the risk because the leverage improves. We only make money if you make money. If you have any questions, please email me at and that’s Kapital with a K.

We search for value-added real estate for our passive commercial real estate partners, and we actively manage that investment long-term for a successful exit. We are Red Pill Kapital.

Find us at Redpillkapital.Com

If you simply need more information. have questions, or want to discuss a specific deal, I’m always excited to help. Reach out to me at

If you are ready to start your journey to financial freedom but want specific additional educational materials, we have a course designed for physicians.

Real Estate

What Is A Cap Rate?

Today, I’m Going To Talk A Little Bit About Cap Rates. I Think That Cap Rates Are Very Important For Professionals To Understand And Frequently They’re Misinterpreted. I Want To Spend A Few Minutes Going Over What Cap Rates Are, What They Actually Mean, And How Do You Best Utilize Them.

Real estate is the most powerful way to accumulate wealth. More people have become millionaires through real estate than any other means. We know how to find the property, create a plan for improving the cash flow, negotiate the deal, and manage the asset. Your passive investment provides you with the opportunity to earn an income without the nine to five. We create a unique business strategy that fits your financial and investment goals. Get the financial freedom you need to do more of what you love. We Are Red Pill Kapital, With A K.

Risk And Reward: The Greater The Risk, The Greater The Opportunity For Reward.
In real estate, one of the most important things that you can figure out is how do you define what something is worth. I think that this is one of the most important formulas in real estate, so I’m going to spend a few minutes on it. It is essentially net operating income divided by the value equals the cap rate. The cap rate is inherent and specific to different asset types, different locations, different quality of asset, whether it’s an A, B or C type location, whether it’s a major metropolitan area, or whether it’s rural.

What Is The Asset?

Is it an industrial building? Is it a farmhouse? Is it farm rental land? Is it a multi-family apartment unit? There’s an inherent cap rate that we measure one asset against another and this is a different way to look at risk than just reward and having a generalized principle, and we do that through cap rate. If something has a 10 cap or a 10 percent cap rate, that’s going to have a different value than something that has a five cap. Let’s go over that net.

Net operating income is equal to income minus expenses. You take all of the income, you take all the expenses away, and that’s what you’re left with. For example, if an investment property has $50,000 of net income before you look at any debt service, you have $50,000 of net income and its value in the market is a million dollars. That means that its inherent cap rate is 5 percent.

Now let’s take a look at it a different way; let’s play with the formula. Let’s say that I want to figure out what the value would be if I changed my net operating income. What would the value be? What would be the value in a different market if my net operating income was higher, but I was able to buy it for the same amount of money? Let’s take that example. Let’s say that I went to a different market and the thing was generating $80,000 as opposed to $50,000, but I was only having to pay a million dollars. In both situations, the value’s the same.

One cap rate, the first one where I was generating $50,000, is a cap rate of 5 percent. Where I’m generating $80,000 in net operating income, my cap rate is now 8 percent. That’s a 3 percent difference in cap rate and that can be very substantial. It can tell you a lot about the demographics. The higher the cap rate, the higher the perceived risk for that asset group by people that are far smarter than you and I.

It’s a summary total. It’s people that have already invested in this kind of asset class, in this kind of city, and they’ve kind of sat down and said, «Hey, this is what I am willing to pay.» “Well, this is what I’m willing to pay.” You and I have probably done a few real estate transactions, but this is the summarization of 10,000, 20,000, or 50,000 real estate transactions of that asset group, of that asset type in that community with that demographic.

The Cap Rate Is An Easy Way To Compare Different Rates Of Return. It Also Can Have The Formula Manipulated So That If You Know The Cap Rate, You Change The Net Operating Income. You Haven’t Changed The Property—It’s The Same Property—So The Cap Rate Stays The Same, But You Change Your Net Operating Income. What Happens To The Value?

Cap Rate: Comparison Of Net Income For The Same Dollar Investment Between Different Investments
Cap rates allow you to compare what you do with net income for the same dollar investment between two different investments, whether they’re the same class of investment like, for example, multi-family compared to another multi-family or the same class of investment such as a retail shopping center compared to another retail shopping center or comparing between classes of investment, comparing a multi-family to a commercial office building.

Cap rate says this is my net operating income for this dollar invested. Cap rate is a comparison of net income for the same dollar invested between two different investments. An example is, if I have $1,000 invested and I get $100 of net operating income per year, that gives me a cap rate of 10 percent.
Another example would be that I get an $80,000 return for an $800,000 investment, and that’s a cap rate of 10 percent. Let’s say that I get a $90,000 return for an investment of $800,000; that’s an 11.25 percent cap. If you go further and you get a $60,000 return, which is less, for the same $800,000 investment, your cap rate is 7.5 percent.

Or, A Comparison Of Value-Driven By NOI

If you look at it a different way, if you take the cap rate formula and you take the net operating income and divide it by the cap rate, you end up with a presumed value, and this is very relevant because this is how frequently brokers discuss what a particular value is. They’ll say, «Oh, this is an eight cap and its net operating income is X, Y, Z, and therefore its value must be Y.» This is a value derivative and this becomes very, very important when you’re starting to talk to people and ask them, «What’s your cap rate? What’s your net operating income?» That’ll give you what the presumed value is but this can also be very, very confusing and we’ll go through that in a few minutes.

Given A Cap Rate Of 5%
Let’s give you an example. Let’s say that you know what the cap rate is for the area, for this kind of property. It’s about 5 percent and you know what the net operating income is, it’s $100,000, so what’s the value of that property? Well, if you’re paying more than two million dollars, you’re an idiot because based upon cap rate it should be two million dollars. Now, that’s what it should be and there’s some manipulations that you can do to that but that’s, in essence, assuming all things equal, a five cap with
$100,000 of net operating income should give you a translated value of $2 million.

∆ NOI And ∆ Value
Let’s say that you change your net operating income slightly — $10 per unit per month for 100 units. You go up 10 bucks, which doesn’t seem like a lot, but you do it for 100 units and there are 12 months in a year, so you get a $12,000 increase in your net operating income. On that five cap, you changed your value by $240,000, which is a very significant portion of your purchase price, so a small subtle change creates a huge leverage effect on value.

Changes In Cap Rate, With The Same NOI

A change in cap rate with the same net operating income dramatically changes the value. The higher the cap rate, the lower the value; the lower the cap rate, the higher the perceived value.

∆ NOI And ∆ Value

You can also use the cap rate formula to decide if you make a change in the operations of a particular facility or particular commercial office building or particular multi-family. If you change the net operating income, given that the cap rate stays the same, what’s going to happen to that value? Let’s take an example.

Let’s say you have a 100-unit apartment building and you change the rent just merely $10 per unit per month. That works out to about $12,000 per year. Let’s say that the going cap rate for that kind of
building is 5 percent. That changed the value for a $10 rent change for 100 units by $240,000. That’s a very significant leverage effect that occurs because of this division by cap rate.

Slight Change In NOI Can Have A Disproportionate Effect

Any slight change in net operating income has a disproportionate effect and it’s in the same direction as the value. In a low cap rate environment – i.e., if the cap rate’s about 2 percent – a $1,000 change results in a $50,000 value change. In a high cap rate environment, so let’s say 10 percent, a $1,000 change in net operating income only results in a $10,000 value change. Why is this relevant? This
is relevant because there’s certain markets, such as in California and other places that are relatively mature, like New York, that are very low cap rate environments for the same asset class as would be compared in the Midwest.

You would think because the cap rate is higher, you’re getting better bang for your buck, but that’s not necessarily true. In a low cap rate environment, a smaller change in net operating income drives a
greater value change. This is very important because you can make money whether the cap rate is high or low. It’s really a derivative of net operating income. Keep in mind that cap rates are an explanation of risk, so if the cap rate is super high for a particular asset group and in a particular city, that just might be because that’s a very high-risk area or a very high-risk asset.

Is It Really That Simple?

No. Cap rates are an artifice. They’re a calculation; they’re a derivative; they’re not real. Cap rates are looking at your back or rearview mirror trying to figure out where you’re going to get to. Cap rates are a translation of existing market behavior into a number that allows a comparison between asset groups or between demographics. Cap rate is an explanation of market sentiment, and it doesn’t mean much more than that. It’s like a numerical pain scale. One person’s pain might be an eight, another person’s pain might be a two, another person’s pain might be a three. It’s a scale and it’s highly subjective.

We objectify it by putting the formula in of essentially net operating income divided by value equals cap rate, but it doesn’t mean much – it’s looking at it backwards. Cap rate is a measure of forward-looking financial safety and
wealth preservation. It’s really a marker for potential market risk in a particular environment. You should never be lulled into a sense of safety by looking at a cap rate.

The cap rate is often used by brokers to obscure the real facts, and it confuses the individual investor. You have to remember that real estate is a hyper-local environment and cap rates are typically regional. They’re usually citywide.
Nobody really defines a cap rate for a neighborhood or a three-block area. I know that in the city that I live in, if I literally drive 250 feet from one residence to another residence or one street to another street, I can go from a war zone into some of the most expensive areas in the city, so the hyper-locality of real estate is not explained by cap rates and it’s very easy to confuse.

You can make money whether your cap rate is highor low.

It’s really the property that matters. It’s the management and what the management does with the net operating income. The hyper-local environment determines the value of that particular property, and the time horizon in which you’re going to hold property. The cap rate is really a look at supply and demand and risk. If the demographics are declining for that area—i.e. people are leaving the city – you can expect that the cap rates would go up because the risk goes up. It’s proportional to the risk. Keep in mind the cap rates do reflect the net operating income, so if you have a low cap rate and a high-interest rate, you’re going to find a very tough time financing a particular property because your net operating income may not be sufficient to pay for the debt service.

We search for value-added real estate for our passive commercial real estate partners and we actively manage that investment long term for a successful exit. We are Red Pill Kapital.
Find us at

If you simply need more information. have questions, or want to discuss a specific deal, I’m always excited to help. Reach out to me at

If you are ready to start your journey to financial freedom but want specific additional educational materials, we have a course designed for physicians.

Physician Retirement Physician salaries

Physician Salaries And Income May Be High, But Their Expenses Are Also High

Physician salaries and income may be high, but their expenses are also high. Physicians’ hyper-specialization into the medical field isolates them from the world of finance and money. This lack of financial understanding is having a huge impact on physician retirement and financial stability. We went to medical school to care for and improve humanity. We sacrificed the majority of our adult lives to help patients,… to help save their lives. We’ve spent so much of our brainpower caring for our patients, we have ignored and stunted our own financial future. We assumed that by doing good for others, we would do well for ourselves. Unfortunately, it’s simply not true. The financial rules have all changed. We have to adapt to this new world, or we’ll die extremely highly educated, but extremely broke.

Are you a physician interested in creating true wealth, but overwhelmed with all the information and don’t know where to start? At Red Pill Kapital, we are physicians just like you. We recognize your time is valuable, and are here to help simplify and streamline the process for you. Our mission is to empower you, as a physician investor, by providing you with a clear and concise map to navigate commercial real estate investments. We do this by leveraging our knowledge and network, to bring you investment opportunities. We partner with experienced sponsors, who have proven track records so you can confidently put your hard-earned money to work. What differentiates us from other investment groups is that we have direct and personal knowledge in commercial real estate development and management, having personally been in the construction industry before starting medical school. We have true hands-on experience of real estate construction, development, finance, and tenant, toilets and termites. We currently directly own several hundred units of multifamily and over 2 million square feet of commercial space. We have also joint ventured into real estate syndications, of close to a thousand units of multifamily.

How Do You Get Started? Just Follow These Four Easy Steps.
Step 1:

Sign up. Visit us at, and sign up under the Contact tab. Fill out our investor questionnaire so we can better understand your investment philosophy and goals.

Step 2:

We will then connect with you personally, so we thoroughly understand your goals and desires, and make certain they align with our processes and capacity. We want to assure ourselves and you, that you are an accredited investor with similarly aligned goals.

Step 3:

If we are synergistic in our goals, we will advise you of potential investment opportunities as they arise. Keep in mind that we reject over 99% of the opportunities we evaluate, literally pursuing 1 out of roughly 150 transactions.

Step 4:

Once you review the available opportunity, and if it meets your needs, you confirm your interest in investing alongside us. The deal sponsor will then contact you directly with the legal documentation.

Each deal is unique, but usually closes two to four weeks after funding is complete. Approximately six months after closing, investors will begin to receive regular updates on their investment, including a K-1 tax form annually. Distributions to the investors typically occur on a monthly or quarterly basis. As a passive investor, you are not the landlord. Instead, you’re a fractional owner in the property; meaning you can take advantage of the benefits of investing, but leave the tenants, toilets and termites to the deal sponsors.

If you have any questions, please email me directly at and that’s capital with a K.

Red Pill Kapital is a physician-owned commercial real estate investment, and education company.

It allows you to invest passively alongside us. We find the property. We find the investment group. We create and validate the plan. We figure out how to improve the cash flow. We negotiate the deal. We manage and oversight the asset. Your passive investment provides you with an opportunity to earn an income, without the 9:00 to 9:00, because physicians never work 9:00 to 5:00. We create a unique business strategy that fits your financial investment goals, because we understand the specific needs of physician professionals.

If you simply need more information. have questions, or want to discuss a specific deal, I’m always excited to help. Reach out to me at

If you are ready to start your journey to financial freedom but want specific additional educational materials, we have a course designed for physicians.

Real Estate

14 Secrets Of Successful Passive Real Estate Investing

Hi. I’m going to be going over 14 secrets of investing in passive real estate. These are the things I wish someone had told me or things I had to learn the really hard way. You might even call it, “How not to lose millions of dollars when you start out.”

Real estate is the most powerful way to accumulate wealth. More people have become millionaires through real estate than any other means. We know how to find the property, create a plan for improving the cash flow, negotiate the deal, and manage the asset. Your passive investment provides you with the opportunity to earn an income without the nine to five. We create a unique business strategy that fits your financial and investment goals. Get the financial freedom you need to do more of what you love. We Are Red Pill Kapital, With A K.

1. Operator Integrity (Each GP)

You want to know about the operator integrity of each of the general partners. You want to know exactly what their experiences are. You are passive in this deal, but the general partner is active. They’re responsible for maintaining and operating this specific investment for you. You’re the customer.

But unfortunately, it’s not that simple. The reality is being the customer, you have to be extremely well informed about the investment to the same level as the general partner, and not only that, you have to make sure that that general partner is going to be well behaved during the timeframe of your investment. You have to do a background check on each and every general partner. You want to make sure that you’ve done a UCC check. You want to
make sure that there aren’t any security law violations. You want to check their creditworthiness. You want to see how close they are to financial solvency or if they’re using your money to solve a problem hidden somewhere else. Are they undergoing bankruptcy somewhere else and this is a way for them to raise a bunch of money and then take advantage of a situation where you’re passive, they’re active, they’re in control, and they have your money?

You Want To Understand The Specific Roles Of Each Team Member

• Who’s going to manage this asset?

• Who’s going to manage ongoing after the purchase?

• Who found the deal?

• What’s the relationship of the deal finder to the property?

• What’s the relationship of the deal finder to the real estate agent?

  • You Want To Figure Out Who Did The Underwriting.

Is the underwriter somebody that’s independent or is the underwriter somebody that’s so dependent upon this deal going forward that they might create difficulty for you by changing the numbers or changing the perception or not adequately stress testing the deal?

  • You Want To Figure Out How They’re Raising The Capital, And That Has A Huge Impact On Your Expected Rates Of Return.

If the capital raise is being done in a global way and there’s a lot of people coming in – potentially customers that could be passive – you’re going to find out that your rates of return will drop. But if it’s a limited raise, if it’s just friends and family, it’s a small group and it’s not actively being marketed to the general public, you’re going to find that your rates of return are higher.

  • You Want To Figure Out Who The Key Principal Is.

Who’s backing the loan? Who’s got the assets that the bank is going to be looking to come back? Because it’s not going to be you. You’re passive. If this is for you, a passive investment, the money that you invested in the only money that you have at risk, but the key principal, whoever that is, they’ve got everything at risk. They’re on the hook potentially for the entire loan.

Understand The Roles Of Each Team Member

2. Incentives Integrity

The key thing is, do you know, do you like, do you trust the general partner? That’s the most important thing. It’s not so much the deal. It’s the general partner.

You want to make sure that the general partner’s incentives are aligned. You want to make sure that they’ve put money in the game, too, because if they didn’t put any money in, they’re not really aligned. Whether you win or lose, they’ve got nothing to lose. Now, there are going to be acquisition fees, no matter how you do it. There are always acquisition fees in any project, and the acquisition fees are not something you should run away from because if there’s no acquisition fee, that means that you’re basically taking a very significant gamble that they didn’t look at a bunch of other deals. The acquisition fee pays for the general partners, whoever was doing the asset analysis, whoever was doing the underwriting to have looked at possibly hundreds of other deals and exclude those from an offering to say, «Look, I looked at 50 other deals. I traveled to 25 other localities and those weren’t good deals. I’m not even going to present those to you.» But that stuff costs money, so the acquisition fee is used to defer or defray the cost for the deals that you didn’t look at. It’s to get rid of the bad deals.

Now, if you’re going to do major construction—and I’m not talking about painting, I’m not talking about changing out a bathroom—but if you’re going to do major construction roundup or you’re going to massively rehab a project, there are going to be construction management fees.

You want to make sure that they’re between five to 10 percent. Obviously, the bigger the project, the greater the construction management fees. You’re going to have to pay somebody to manage the construction because you’re passive. You’re not going to go out to the site. You’re not going to be doing this yourself. If there’s no incentive for the general partners to manage that construction well and efficiently, you don’t get as good of a deal.

The asset management fees are ongoing fees charged to this partnership, and what it is is typically between one and two percent, and they’re used to manage the managers. You have to have somebody who manages the managers – somebody that directly interacts with a management company and makes and holds the management company accountable, to make sure that you’re maximizing your depreciation, to maximizing your marketing, to make sure that all of your assets are protected. If there’s no asset management fee, people are going to lose interest, and you want to make sure that’s between one to two percent. That asset management fee says, «Hey, look. We’re going
to be looking very closely at this project and we want to make sure that nobody screws this up for us.»

You want to make sure that the general partnership returns are only after your preferential return is paid first, and so there’s usually a split. It’s typically between 30 to 50 percent of that annualized or quarterly or monthly return that gets paid to the general partner. This keeps them engaged because if that’s not engaged if there’s not a heavy incentive for them to maximize your return on investment on a cash-flow basis, things can fall through the cracks because the end result is at the end when you sell the thing. That’s an equity position, but the cash flow basis is what do you make every month? What do you make every quarter? Some partnerships payout annually, but most of them payout quarterly. You want to make sure that they maximize your cash flow and that they’re sharing in that, but after they’ve paid your preferential return.

In terms of capital paid for a successful deal, that’s the difference in price between what you purchased the asset at and what you’re selling it at. Typically there’s a split at that, and so that’s typically a 70/30 all the way down to a 50/50 where you’re getting 70 percent and the general partnership’s getting 30 percent, or it could be 50/50 where you’re getting 50 percent and the general partnership is getting 50 percent. I’ve seen some variations of this, and depending upon the class of stock, there may be some variations that have to occur, but that’s your equity raise, so a big chunk of your money comes as cash flow on a monthly or quarterly or even yearly basis. The bigger chunk — the real income — comes when you sell the property or refinance the property.

3. Deal Integrity

You’re looking for the integrity of the deal itself now. You’ve trusted the partnership; you’ve trusted the people in the partnership. Their incentives are aligned, but now is this a good deal? This is very important. This determines how this deal operates, and in deal integrity, the number one thing you have to look at is the demographics. Is the area that you’re investing in growing? Is it stable or is it dying?

You have to realize that real estate is hyper-local, and hyper-locality means neighborhood, street by street. It’s not that I’m investing in Texas, it’s not that I’m investing in San Antonio, a city in Texas, it’s that I’m investing in this three-block or seven-block or 10-block or 14-block neighborhood. It’s that hyper-local. You can’t tell me that if I invest in Texas, I’m going to increase my
real estate value by 7 percent because there are places in Texas that are going to increase their real estate value by 30 percent and there are some areas in Texas that are going to increase the real estate value negative 30 percent.
So it’s hyper-local. It’s not the state, it’s not the city, it’s not a ZIP code. It’s a neighborhood, and that hyper-locality is very important.

There are certain tools that we utilize to determine the hyper-locality of a neighborhood. You want to look at job growth in the region. People live in the region, but they live in a neighborhood, and very specifically jobs come to the region. They might be in industrial parks, but people don’t live in industrial parks. They live in neighborhoods. You want to look at population growth for that city because it’s almost impossible to get direct population growth for a neighborhood, but you can get population growth for the city.

You Want To Look At Household Income And Its Affordability.

Is the price that you’re paying close to what it would cost for somebody to just go ahead and buy? Then there’s a lot of competition for your product. If, on the other hand, the price that you’re paying per unit is relatively low and the cost of them purchasing a similar amount of square footage is high, it’s highly likely that they’re going to rent instead. That concept is called affordability. It’s a comparison for price to rent versus price to buy for a similar sort of asset.

When they underwrite this deal, if they’re using non-recourse lenders, that’s a really good thing because the non-recourse lenders are an additional set of eyes on this deal. They’re going to hire an outside independent consultant or they’re going to use an inside independent consultant who’s going to stress test the deal. They’re going to figure out: is the information being provided accurate or inaccurate? They’re going to look at that cap rate. They’re going to look and see what your start cap rate is. If it’s a value-add deal, it doesn’t matter so much, but if it’s a stabilized deal, the cap rate is what you’re going to be making, so you want to look at how this deal is being underwritten. Is this deal being written, underwritten, as a cap rate with a value add? Then you want to look. That incoming cap rate doesn’t mean anything, but if this is a stabilized deal and your cap rate is 4 percent and your interest rate is 4 percent, it doesn’t leave a lot of room to make cash flow. Now, it may appreciate over time, but the cap rate is going to determine your cash flow.

  • Demographics Before Underwriting
  • Hyper-locality
  • Population growth
  • Job growth
  • Household income and affordability
  • Underwriting This Deal
  • Non-recourse lenders add additional layers of due diligence
  • Cap rate and value add

You Want To Make Sure That The Deal Is Stress Tested

• That means what would happen if occupancy dropped to its historic low?

• What would happen if prices would drop to their historic low?

• What would happen if cap rates went up?

Because the higher the cap rate, the lower the price, and so you want to be able to predict your monthly or quarterly income, and you want to predict your exit as well.

4. Property Evaluation

You obviously need somebody that’s going to look at that property in real-time before you’ve invested. Typically, it’s done with a property management company that’s going to come in and long-term manage that deal. You want to make sure that each and every unit has been walked, that each unit has been memorialized by photography, so they’ve looked under the sinks and photographed the stuff, that they’ve looked at each appliance and categorized it.

• How many dishwashers will need to be replaced?

• How many refrigerators will need to be replaced?

• What’s the likelihood going forward that we have to change this electric system?

• Are there GSCFIs in the wet spaces?

You Want To Look At Each Mechanical System.

What’s the lifespan of the motors that are expected for this HVAC unit? One of the things — a horrible mistake that I’ve made — is I forgot to have a sewer scoped once. That was a $15,000 disaster.

You Want To Look At The Usable Lifespan Of The Roof.

I did a project once that I was able to identify that the roof was at the end of its usable lifespan, and right before closing when I got my roofing report back, I was able to get a $400,000 credit on a usable lifespan of a roof on a commercial strip center. It’s very important that you know eyes wide open going into a project what’s going to be happening. Foundation work may sometimes require a specialist. You can’t just look at a foundation and say, «Oh, this is awesome. This foundation looks fine.» There are things that people hide in foundation work with stucco or dry wall that you can’t identify right now, and they may move subtly over the next six months, a year, or five years, and then when you’re trying to sell, somebody does a foundation report and it decreases your value by 30 percent, and all of a sudden the big profit that you were going to have doesn’t even exist.

A Lot Of Lenders Require Flood Letters.

That determines, is this property in a flood zone? Now, you have to realize that flood letters change over time and historic areas that used to never flood are now starting to flood, so you want to get a professional evaluation. Is this area prone to flooding? When you do your memorialization of each unit, you’ll be able to identify if there’s mold underneath the sinks. You’ll be able to identify if your tiles have asbestos in them. Is there lead in the paint? Are there other hazards that are lurking under the ground such as petroleum from a leaking gas station nearby? These are all environmental issues that become very significant because it’s not just that you’re buying this property – you’re eventually going to be selling this property, and you may be selling to somebody who is very, very detail-oriented, and this may destroy your value if you don’t yourself become very, very detail-oriented.

5. Comparative Market Analysis (CMA)

You Want To Make Sure That They’ve Done A Comparative Market Analysis, Not Just Of What’s The Value Of This Property Because The Value Of The Property And Commercial Is Typically A Derivative Of Cap Rates.

What you want to figure out is that your comparative market analysis for rental rates going forward for this particular asset, this class of asset, this space, this kind of amenities, is accurate. Remember I said that real estate is hyper-local, so you can’t use a rental rate comparison for a property that is on the other side of town. You can’t use a rental rate comparison for something that might only be four or five blocks away if it’s a different neighborhood.

So, I typically do all my comparative market analysis on a basis of the neighborhood, and usually when I have a property team go out and look at the specific property that we’re doing and we’re taking photographs of each and every single unit and we’re memorializing each and every single unit, the next day we do go out and do a comparative market analysis. We visit all of the local neighborhood apartments, all of the local neighborhood areas, and try to get an idea of what are these people charging and how relevant is our rental rate to their rental rate.

You want to be able to determine what’s going to happen to your rental rate by your asset class, with your level of amenity, and based upon the demographics that you’re both serving. If the apartment three blocks away have twice the household income that your apartments do, you’re really living in two different neighborhoods, so there could be a significant difference.

I always do a reputational search on each and every unit because that tells me in terms of multifamily, what’s the reputation of the management company that’s currently there? That’s one of the easiest things to fix. Now, if it turns out it’s a horrible result, then I may have to change signage and change the name because that’s the only way I can get away from the original reputation, so I have to build that into my cost, that I’m going to have to re-market the entire system and change all of the signage. Typically, I also change the color scheme so that the drive-by looks totally different.

6. The Value Add Plan

You want to look at their value-add plan if that’s the way that they’re going to be going. One of the things that I always look at is what’s my occupancy or vacancy? If there’s almost no vacancy, that could be a problem. If I’m running close to 100 percent occupancy, what that tells me is either the management company is really lazy because they don’t want to raise rents and nobody wants to move, or I’ve completely distorted this market. Now, the other thing is if there’s a high vacancy – i.e. a low occupancy – that could be a problem, too. Have I already reached the maximum amount of rentals that I can get to, or is it so mismanaged that I can’t get customers in the door?

In my value-add plan, I also look for sources of net operating income. What are the other things that I can add that will generate my net operating income? Because the net operating income will determine the value because NOI divided by cap rate equals the value change that I’m going to get. So if I can get a slight increase in the laundry or start charging some parking fees, if I can get some cable or internet fees, if I can start charging for pets, if I can force the tenants into paying a proportional share of the utilities, if I can increase the water efficiency, I’ve dramatically increased the net operating income. Based on the cap rate for that area, I could have dramatically increased the value.

The areas that I look for in a value-add plan is I do marketing first. I increase the inflow of customers. Then I look at areas of increasing that operating income. Then I start doing things like curb appeal and kitchen and appliances and baths, and I only keep my rehab budget, which is a large capital expenditure, after I fix the first problems. It’s a tiered approach. You don’t want to do a major rehab budget and use your cash flow to pay for it if you haven’t even fixed your marketing first. You want to get maximization of the lowest-hanging fruit first before you spend a ton of money on capital expenditure.

7. About This Deal Structure?

Now, look at your deal structure. There are two kinds of essential deals that people look at 506b and 506c. Do you want to know what the structure of that deal is? A 506b, you can sell for credit and say that you’re an accredited investor or you’re a sophisticated investor and
they’re letting you into the deal, but this deal isn’t advertised to a lot of people. Usually, I find that my rates of return are higher in a 506b.

A 506c says, «Hey, I’m a verified accredited investor. Third parties verified me, but this deal might be advertised to a lot of people and it might be heavily advertised on Facebook and it might be advertised on other areas and portals.» Frequently, I find that my rates of return are a little bit lower here. You want to know what your investment minimums are and what your investment maximums are because if your investment maximum is low and you’re trying to deploy cash, your cash multiple may not be that good. I have a minimum amount that I want to invest and I want to know that I can deploy that capital and it’s going to be safe and I’m going to get a multiple of that capital coming back.

You want to know what’s the time element for your soft commitment and when do you go hard on your commitment and when do you have to actually transfer that capital? I’ll talk about transferring the capital in a second.

You want to review the detailed subscription agreement. Was this professionally prepared? Did an attorney put this together? Does it make sense? Did you read the thing? I find that the private
placement memorandums, most people don’t even read. Take that nondisclosure that’s in there very seriously. If you’re taking the information and sharing it with friends, that’s not cool because if they disclose that information, especially if there’s information about tenants in there, you could jeopardize your position in this project and you could actually be sued. Take the nondisclosure very seriously in sharing that information outside you.

You want to know: should you visit the site? Can you delegate this? Most passive investors don’t visit the site, but occasionally if you’re in the neighborhood, if you live nearby, it might be worth your while to visit that site.

One of the biggest mistakes I’ve ever made was unfunding or transferring capital because I screwed up my routing numbers, so I always validate the routing by two different modalities – typically by a phone call, email, or text. I use two different methods to verify and validate that routing number so that my money doesn’t end up in Uzbekistan.

8. Financial Integrity

You want to look at the financial integrity of the deal. Have they set up strategic reserve accounts to hold capital expenditure budgets? Because you don’t want to use cash flow for capital expenditure. Capital expenditure should be set aside at the beginning so you can predict it.

One of your biggest expenses in real estate is going to be your taxes, and you want to make sure that they’re setting aside money through the year to pay for the taxes. You don’t want a cash call on this thing at the end of the year. You want a separate operating account. That operating account is what the management company works out of, and then they sweep the operating account to the rest of the accounts.

You want to make sure that the reserve accounts are there so that there’s an adequate amount of money for unexpected things and there’s an adequate amount of money for expected things. You know that a particular lifespan of a roof is going to be 30 years. You know that refrigeration equipment lifespan is five years. You know that everything such as carpet has a certain lifespan. You know that flooring has a certain lifespan. You know that painting has a certain lifespan, so you want to be able to predict that and have reserve accounts that account for that in a continuous method. The longer the deal – the longer the length of the deal – the risk of the deal goes up because a lot more things can happen. Economic risks can happen, property risks can happen, and demographic shifts can happen, so the longer the length of the deal, your risk goes up. If it’s a 20, 30-year deal, it’s much riskier than a three- to a five-year deal.

Most people think that the larger the deal, the higher the risk. That’s simply not true. The larger deal decreases the risk, and the reason is that in a larger deal, you’re forced to have professional third-party maintenance and management companies. You’re forced to have additional oversight and you get economies of scale. In construction, you get economies of scale and maintenance. You get economies of scale in marketing, and individual occupancies have much lower individual impacts on your cash flow. The more the number of units, the greater the incremental income enhances the value. If you’re trying to increase rent by $10 a unit in 10 units compared to $10 a unit in 100 units, the net operating income is much greater at the same cap rate, and so the value is tremendously greater.

9. Communication Integrity

You want to make sure that they communicate with integrity. You don’t want to get communications on a monthly or quarterly basis that have a bunch of fluff. You don’t care about family pictures. You don’t care about Fluffy the pet. You don’t care about travel pictures. What you care about is the property.

I recommend that you have pictures and videos, and you also have net cash flows that go hand in hand with marketing reports, and all of this is archived so that you can go back and compare month over month over month and look at each of the reports and validate their integrity.

I set up a separate Excel spreadsheet for each individual investment that I go into and I archive all of the information in a single folder, and then I have a spreadsheet that tells me: This is my expected date of next payment, this is my expected rate of return, and when the deal opens and when the deal closes, I revalidate. I go back and look at what they promised and looked at what they delivered, and I want to make sure that they underpromised and end up overdelivering. I want to make sure that there’s integrity in that communication so that I don’t get surprised by unusual things.

The Management Company Should Be Generating A Marketing Funnel Report For You.

• How many people called about the property?

• How many people came out and visited the property?

• How many people submitted an application for the property?

• How many people did we reject from that application?

• How many people did we accept from that application?

• How many people moved in?

• What’s our expected occupancy a year from now, six months from now, a year and a half from now on a month-to-month basis so you can predict looking forward when people are vacating units?

• Do I need to gear up marketing the two months or the one month before a high vacancy is expected?

You want to make sure that there’s a comparative market analysis being done in real-time. You want to make sure that people are looking at the rental rate changes and you get that done at least on a monthly or quarterly basis so you can see where your property’s positioned compared to the market. You want to be very wary of vacancies. Is my vacancy high or is my vacancy too low? If your vacancy is too low, that means you’re not charging enough. What kills most deals is turnover. If you have tenants moving in and tenants moving out, you have to reset that unit nearly continuously. If you have to reset the unit, that costs significant amounts of money and may destroy your cash flow.

10. Compensation Model

On The Compensation Model, Look At The Preferential Return.

11. Deal Exit

You Want To Look At The Deal Exit. Are They Applying The Right Cap Rate For The Expected Deal Exit?

I typically increase my cap rate by 0.2 per year, so 20 basis points goes up per year of the hold. So in a five-year deal, I’m increasing my exit cap rate or my reversion cap rate, by 1 percent. This is really important because this is part of the stress test. Now, it may not go up by 1 percent, but what a 1 percent increase in cap rate does is it forces the value down of the project for the same NOI, and this gives me a better prediction of what I could exit this deal at. Now, I’m hoping that my cap rate stays the same or drops because then my value goes up dramatically, but I want to expect that it may go up, and it really depends on a lot of factors in the economy at the time of the exit.

Does that bring us to the concept of is the exit a hard exit or is there a lot of variability in it? I prefer a lot of variabilities because if there’s an opportunity to hold a property for another year or to exit early by two years to get a better price, I want that executed.

You also want to look at the deal exit. Is this a refinance or are they reselling? You want to look at the contingency plans in case the general partnership becomes incapacitated. Let’s say that it’s a small partnership that’s running the GP. What happens if that general partnership becomes incapacitated? Who’s going to run this deal and how are they going to get you all the way to exit and make that money?

Some people are doing a lot of investment in opportunity zones because there’s a deferral on your taxes in opportunity zones. This is not relevant to you if you’re investing through an IRA. The opportunity zones really don’t mean much to you. Now, if you’re investing directly, opportunity zones do mean something to you, but the thing is a 10-year exit dramatically increases your economic risk. You’re marrying this general partner for 10 years. You really have to vet that general partner, and usually, most of my opportunity zone projects are significant value-add and rehabilitation, so that can have a very big impact.

12. Is This Deal Worth It?

At the end of the day, is this deal worth it? How much am I investing, how long is the deal, what’s my return, how often do I get paid out, and what’s the deal split?

That IRR really is impacted, and that IRR is the internal rate of return. What that tells you is what is my net present cash flow or what’s my net present cash for a future cash flow, and depending upon the timing of the distribution, it can dramatically change the IRR. That may or may not be relevant to you because if you’re using your cash flow for living expenses, that IRR is really important, but if you’re just simply accumulating the cash, that IRR may not be as relevant and your total return may be more relevant.

13. Deal Metrics

(Beyond The Pref And Split)
You Want To Look At The Deal Metrics Beyond Simply The Pref And The Split. What’s The Cap Rate Against The Interest Rate? Is This A Value-Add? Is This Not A Value-Add? What’s Your Reversion Cap Rate? These Are All Relevant.

You want to look to make sure that they’re using the leverage because if they’re not using the leverage, and they’re using only your money, it
dramatically reduces your return because typically using leverage gives an extra set of eyes to the project with the bank. It’s a one-to-five ratio and usually, the interest rate is far below the cap rate, so you’re making money off of the bank’s money without taking a significant additional risk.

  • Cap Rate
  • Interest rate
  • Value add
  • Reversion cap rate

You want to look at your cash-on-cash return. You want to look at your annualized return, which is all of your money back divided by the number of years. You want to look at your equity MURP multiple, which is how much money did I make against how much did I invest. IRR we’ve kind of gone over, which is what’s my value of cash today based upon a future revenue of cash flow, and that can be quite detailed. That’s something that I typically will plot out on an Excel spreadsheet and look at, but it’s not really relevant as much to me as my annualized return rates.

14. Your Personal Situation Impacts

How are you going to be investing? Is this through an LLC? Are you investing directly? Is this through a trust account? You want to look at does this project allows 1031 exchanges? If it does, they have to set up tenants in common for you. Does this project accept IRA or Roth, and if it does, what’s the impact on UBIT? If they use leverage, you’re going to be paying taxes on some of this gain at the highest tax rate there is, and you can’t escape that. You may end up paying trust taxes that are very significant.

What kind of investors are they taking? Is it 506b? Is it 506c? Are they taking accredited or are they taking sophisticated? Accredited is that you have an annual income of $200,000 yourself or $300,000 joint income for the last two years or an individual or joint net worth value exceeding $1 million. A sophisticated investor is somebody who knows something about this and is a friend, and the deal sponsor knows them well, and that’s Aunt Sally who doesn’t have a lot of money but wants to invest in the deal. That would be typically a 506b and it cannot be advertised.

You Want To Look At The Time Horizon.

Will I need this cash in the near future and does the time horizon match my requirements?
If I need the cash in two years but the time horizon on this deal is five, this is not a good deal for me.

You Want To Look At What If

• What if I have an emergency situation? A medical situation?

• If I have to do a liquidation?

• What happens if my preferential returns are delayed?

• What happens if my entire investment is lost?

• How will this impact me?

It’s not just the deal, it’s you, and you need to make sure that you fit in well with this particular deal. Ultimately, how much am I putting in? How much do I get out and when? What’s the likelihood of losing it all?

You’ve got to look at the whole package and look at the tax implications of depreciation, and most importantly, you have to know, like, and trust the deal sponsors.

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