Dear valued investors and future investors,
Yet another sincere welcome to CPI Capital’s weekly news briefing containing a mixture of commentary, updates and informative articles about the lucrative world of real estate investment, especially relating to the multi-family apartment or Build to Rent-Single Family Residence (“BTR-SFR”) spaces.
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This week we’re going to look at some of the ways in which it’s possible to build generational wealth through multi-family and BTR-SFR real estate investing even though this may not be the main priority when a passive investor first makes a decision to invest in a syndicated real estate transaction.
Most times the investor will simply be looking to make a good return on investment, both in terms of annual rental income and, hopefully, capital appreciation. Most investors have their own time frame for receipt of a regular income or recovery of initial capital, without being concerned about providing for future generations.
Yet, making a plan to build generational wealth can be the start of assembling a large portfolio of property assets from which the investor can benefit during his/her lifetime, as well as a positive legacy for future generations.
So, what is generational wealth?
Generational wealth refers to the passing of assets which have been accumulated during the lifetime of an investor from one generation to the next. Such assets may comprise real estate, which is either income producing in the form of residential or commercial properties, or vacant land. These may include multi-family apartments or BTR-SFR properties. Or such assets may be businesses or other investments such as collectibles (antiques, art work etc).
Investing in real estate has, over the years, been one of the primary gateways to accumulating wealth. However, most people will be unable to accumulate major wealth from their salaries alone and, so, any supplemental rental income from investing in multi-family syndications will provide additional funds for an improved lifestyle, plus the bonus of, hopefully, capital growth.
Indeed, any study of the top 100 richest families across the globe will provide evidence showing how generationally wealthy families who invested in real estate have built long-term wealth for their descendants, providing protection and stability for years in the future.
How to build generational wealth by investing in real estate?
Of all the ways to build generational wealth, as mentioned, investing in real estate such as multi-family apartments or BTR-SFR properties is high on the list.
Real estate investing offers investors multiple incentives such as:
- recurrent cash flow from rental received from various properties.
- capital appreciation as properties increase in value over time.
- the ability to obtain finance (or debt) on the property and leverage the initial equity investment, thereby magnifying investment returns.
- scalability, whereby additional properties can be acquired by refinancing an asset once its value has increased;
- a variety of taxation benefits.
Scalability and investing in multi-family real estate syndications to build generational wealth
Although investors can earn attractive investment returns by investing in most types of real estate, creating a large enough portfolio, or accumulating enough income producing property assets to create true generational wealth, is not always easy. This is often referred to as the “challenge of scalability”, which can be a hindrance to building generational wealth. Buying and then refinancing one or several, say, multi-family units over a period of time makes it hard in the short term to achieve the critical mass required to make a truly valuable portfolio and take advantage of the so-called “economies of scale”.
The ability to spread overhead costs more evenly or hire a team to help manage the day-to-day operations of a portfolio of multi-family apartments or BTR-SFR properties can help improve profit margins or net operating income (“NOI”) generated by the portfolio. In turn, this will release an investor’s time to underwrite more and more real estate investment opportunities!
Real estate syndications
However, not every investor has the time nor the right experience to be able to successfully invest in multi-family or BTR-SFR properties. As a result, many investors turn to multi-family real estate syndications to help them build generational wealth.
A multi-family or BTR-SFR real estate syndication is an investment platform which brings together investors and uses their monetary resources to finance a multi-family or BTR-SFR investment property(s). Participation in such syndications enable investors to utilise the resources, knowledge and experience of a syndicator or lead investor to invest in profitable real estate assets.
The syndicator will either form a Limited Partnership (“LP”) or set up a Limited Liability Company (“LLC”) and then sell units or membership interests to investors. Participating investors are called “passive investors” as they don’t take an active role in any deal or holding direct ownership.
One of the key attractions is that such passive investors are able to invest in properties which are much larger, perhaps more suited to institutions, than they could afford or manage themselves, leaving all of the key decisions and operational issues to the syndicator to resolve.
Passive investing in multi-family or BTR-SFR syndications is very much a preferred approach for those investors looking to earn ongoing income and capital appreciation when the property is sold but, importantly, it’s also a long-term wealth-building strategy which will facilitate the creation of generational wealth.
[ Passive investors : do you know how to vet a real estate investment group before making an investment?
Download and read our FREE e-book: 25 Fundamental questions to ask a Syndication Sponsor before making your investment ]
Some of the key benefits of multi-family real estate syndications
Some of the main benefits of investing in multi-family or BTR-SFR real estate in order to achieve long-term wealth over generations include:
Rental income (cash flow) and equity growth
The NOI or rental from such a real estate investment after any debt or operating expenses have been paid can be very attractive, and many multi-family or BTR-SFR real estate syndications offer investors a 7-11% annual cash on cash return.
A strong cash flow enables investors to redirect the returns from their investments and deploy capital into other real estate opportunities. In addition, as the cash flow or rental returns increase over time as either the market rises or the debt is being paid off, there will be equity growth, an important step on the way to creating generational wealth and improving net worth.
Such equity growth may mean that the investor has the opportunity to acquire additional properties to further enhance cash flow and wealth.
Economic and forced appreciation (value-adding)
Over time, real estate values invariably increase. This can be through a combination of economic growth whereby, say, rents growth constantly at 1.5-3% a year, leading to investors receiving a higher NOI and cash flow, but also to “force the appreciation” of an asset.
Forced appreciation, which is sometimes known as “value adding”, is one of the key ways in which a syndication can help increase in value of property through actions taken by its experienced management team.
The multi-family or BTR-SFR syndication team forces an increase in NOI by either undertaking some improvements to the property (ie CAPEX improvements, upgrading units, adding amenities, etc) raising rents or reducing vacancies. Accordingly, revenue is increased or, alternatively, expenses decreased and operating margins improved, or a combination of both.
This approach is one of the main strategies employed by syndications to enhance investment returns of real estate.
Owing to the ongoing consistent demand for housing, investment into multi-family or BTR-SFR real estate has a low or even a negative correlation with other major asset classes. Such a fact means that investors can lower any potential volatility of their cashflow by increased diversification of their investment portfolio.
In addition, by investing with several syndications, investors can gain access to assets in different markets further helping with income diversification.
Better understanding about how to manage capital
By regularly reading through investment summaries or prospectus’ offered by real estate syndications, potential investors can gain a considerable amount of knowledge and experience about how a market works, its dynamics and how to look at and analyse real estate opportunities.
Successive US governments have encouraged ownership of real estate, one way which has been by offering attractive tax breaks to property investors. In turn, this has enabled many of the world’s wealthiest families to build wealth and keep it.
Amongst other things, real estate offers investors tax incentives such as depreciation, 1031 exchanges, cost segregation and many more options.
Building multi-generational wealth takes time
Having said all of the above, it should be noted that, for most passive, and even active investors, building multi-generational wealth by investing in real estate, by necessity, takes time. Not only is there a lot of competition from other investors for assets but reading the property markets right every time can be a challenge.
However, there are ways to expedite the growth of wealth derived from real estate investment. One such way is agreeing to sign as a general partner (“GP”) on a loan to a syndication for perhaps 5% to 10% of the due amount. By assuming additional risk by signing the loan documents along with the GP means that investment returns will be higher.
In such a case, obviously, suitable due diligence and consultation with a lawyer is required.
Another way to expedite investment returns is to reinvest the distributions from the cashflows received during the holding period. By way of example, when investing in a syndication, the equity split (ie, between the cash flow that the property generates and the proceeds from the subsequent sale of the property) between general partners and limited partners is 70-30 or 80-20 in the favour of investors.
Such shares of rents and income can be reinvested in another property, as well the share of the sale when the property sells. Repeating the process time and time again is the start building generational wealth over time.
CPI Capital understands that building wealth which can sustain multiple generations in the future is the goal of many individuals and families. Our shared success with our many passive investors in our multi-family and BTR-SFR syndications is a proven way to build such wealth.
Many of our investors start with one investment and, seeing the success, add to or repeat the process, utilising our knowledge skills and experience to help them create generational wealth and diversify their portfolio holdings.
It’s key to participate in multiple deals and have the discipline to reinvest the income and any capital gain in other multi-family or BTR-SFR real estate assets. Investors can speed up the process by signing on with the general partner and increase their equity holding.
Fortunately, we at CPI Capital are creative investors and can find a variety of ways to build multi-generational wealth by investing in real estate, following the key principles of discipline and patience!
CSO, COO, Co-Founder CPI Capital