There are several common questions that potential investors ask in preliminary meetings. I thought it might be helpful to share some of these in a brief blog post, and also post them on the Cove Investments website. Of course, I’ll continue to update these FAQs over time. I’ll also write more detailed posts on many of these topics over time. But if you’d like to go deeper into a conversation, set-up a meeting via my calendar.
Let’s dive in!
Can I see an example of a recent deal you’ve done?
Sure. Last summer I invested in Central Park, a 90-unit building in Atlanta, GA. Here’s a snapshot of the characteristics from the investor presentation. Click here to see the entire slide deck.
What returns can I expect?
Like all investments, past performance is not necessarily indicative of future returns. Targeted returns are currently ~100% over a 5-7 year holding period. A portion comes through a preferred return of 7-8% per year, paid monthly or quarterly. Note that due to depreciation charges, most (or ideally all) of that dividend will not be taxable to you as income. The balance of the total return comes through transactions such as a sale of the property or a refinance/cash return to investors. Those returns typically occur beyond the window of short-term capital gains, meaning that the bulk of the taxable profit is treated at the lower long-term capital gains rate (currently 20%).
The tax treatment of real estate is a tremendous advantage to investor’s returns, but will not be a critical benefit if you invest through your IRA or other tax-deferred vehicles. You should seek advice from your tax advisor.
Keep in mind that recent returns have been much better than these targets. But we’re later in the cycle now, so it’s prudent to select more conservative projects more likely to deliver. These include projects in attractive markets (limited supply additions and job growth), opportunities to force appreciation through value-add renovations, reasonable forecasts for rent/cost growth, long-term financing on attractive terms, and experienced property management teams in place.
What is the minimum investment?
It depends on the deal and the sponsor team. That said, $50,000 is a typical minimum. Since lack of liquidity (5-7 year target holding period) is the main negative to keep in mind, I’ve found a self-directed IRA or similar vehicle to be an excellent source of funds for these investments. You can’t withdraw the money until you’re 59 and-a-half anyway, so depending on your age, the lack of liquidity may not be much of an issue. If you want to learn more about how to use your IRA or a 401k from a former employer, I can explain the process in more detail and recommend specific providers that I’ve used.
How large are these apartment buildings?
When people hear the word apartments, many assume we’re talking about a single unit, a duplex, or even a small multi-family with 5-10 units. While many individuals invest in these assets, I prefer to focus on apartment buildings of 80-250 units. Why? The answer is scale.
Not only does the rental income enable you to hire experienced, professional property management companies, but you’re protected against any normal turnover. Think about it. With a smaller property, any vacancy will vaporize your cash flow. With more substantial buildings, you can manage renovation projects and optimize rental rates without worrying about manageable levels of empty units.
Finally, through the process of syndication, you can diversify your apartment investments across multiple projects in different markets.
Can anybody invest in apartment syndications?
The SEC regulates the process under Regulation D, Rule 506. The rules restrict participation in privately issued securities only to those investors with a minimum income or net worth. Most apartment syndications require an investor to meet ONE of these two requirements:
- Annual earnings of $200,000 for an individual, or $300,000 for a couple who files jointly, for each of the past two years, and with the expectation of meeting that level in the current year.
- A net worth exceeding $1 million, not including your primary residence.
On occasion, syndications filed under the exemption 506c are available both to non-accredited/sophisticated investors.
This is not an exhaustive list, nor is it meant to be. Hopefully it answers some of your questions. If you have more questions, please email us directly at david@coveinvestments.com or give us a call at 207-619-1043.
Thanks for reading!
