“Happiness cannot be traveled to, owned, earned, worn or consumed. Happiness is the spiritual experience of living every minute with love, grace and gratitude.” – Denis Waitley
Our Better Self
Denis Waitley is best known as the author of The Psychology of Winning (one of the all-time, best selling Personal Development programs, ever), Seeds of Greatness and Empires of the Mind, just to name a few.
I have read that, for people who knew him personally, just being around him inspires you to want to be a better person, friend, communicator, confidant and student. Denis always has a unique way of reminding those around him of what truly matters while inspiring us to reach farther and be better.
Here are some of my favorite passages from his quote booklet entitled, Excerpts from The Seeds of Greatness Treasury:
You know you’re a success when people tell you, “I like me best when I’m with you.”
The world needs role models instead of critics.
It is better to earn the trust and respect of one of your children than to gain notoriety and adulation of the masses.
Life is a do-it-for-others, do-it-yourself project.
You are your own scriptwriter and the play is never finished, no matter what your age or position in life.
Belief is the ignition switch that gets you off the launching pad.
Give your best effort because you are worth your best effort.
Why Inflation Concerns Will Drive Money Into Property Investment
The conflicting opinions on how much to worry about inflation make it all the more challenging to decide how to best invest your money.
On the one hand, you see columnists arguing that the price increases we’re currently experiencing are temporary and inflation over the next few years will be modest at most. On the other hand, you see numerous signals that rapid inflation could very well occur: The Federal government injected $4 trillion in stimulus into the economy over the last year; there have been reports of supply shortages on a variety of goods; and the Labor Department recently reported that the Consumer Price Index, an average measure of a number of goods we all buy as well as costs associated with energy and housing, rose 5% from a year earlier. On top of this, there have been significant price increases on items that make up large percentages of our budgets. For instance, childcare costs were up 47% due to the Covid-19 pandemic, and the cost of college has gone up 1,200% since 1980.
No one has a crystal ball for how bad inflation will be over the next five to 10 years. Still, when thinking about how to invest, it’s safe to assume that in a best-case scenario we’ll see modest inflation over the next decade, and in a worst-case scenario we’ll see significant inflation that effectively diminishes people’s savings. Given this reality, the question for people with money to invest becomes: Where’s the best place to put your money with moderate to significant inflation on the horizon?
In beginning to answer this question, imagine you could buy something today, at today’s pre-inflation prices, and pay for it later. That’s how mortgages work. You buy a property now, lock in the price and pay for it over time. Banks, in return, collect interest on the loan and offer buyers fixed interest rates at the start of the mortgage for its duration.
This is not a get-rich-quick scheme. It’s a patience game. Buy property and set it up so that your investment experience is passive. Then, just hold it.
Holding is the magic move. People often get advice from financial experts around making smart moves and shrewd decisions. What is less talked about is just holding and letting both inflation and real growth occur while you live your life. Many of the world’s best investors know how holding wins — just take a look at the returns Warren Buffet has seen from holding on to Coca-Cola shares for more than 30 years!
My biggest advice is not to worry about inflation, but instead base your investment decisions on the assumption that inflation will occur to some degree. The institutional buyers know that with inflation, we’ll see a rise in home prices and a rise in rents, too. That’s why they’re deciding to buy residential properties now, finance them at mortgage rates that are still near all-time lows and generate cash flow by renting them out. If you’re looking for an investment that’s largely inflation-proof, you should consider doing the same.
Benefits Of Passive Multifamily Investment
If an investor has decided that they would like to invest in the multifamily asset class, they have two options for doing so: actively or passively.
In an active investment, investors form a limited liability company (LLC) and find a property on their own. Once identified, they also need to underwrite it, perform due diligence, arrange financing, get the deal closed and manage the asset once the purchase is complete.
This is a tremendous amount of work and requires very “active” participation from investors/property owners. It also requires a significant amount of expertise, time, resources and relationships to do it well. For individual investors, this is likely not the best strategy for investing in multifamily properties. They may be better served by a passive approach.
What is a passive multifamily investment?
In a passive multifamily real estate investment, all of the above work still needs to be done; it is just outsourced to someone else. Often, this takes the form of a multifamily investment firm or individual transaction sponsor who specializes in the acquisition and management of multifamily properties.
For individual investors, there are a number of important benefits to this approach.
What are the benefits of passive multifamily investment?
- Lower Barriers To Entry
The barriers to entry for passive investing are much lower than an active approach. An individual does not need to be a multifamily expert or have detailed knowledge of the tools and systems used to acquire and manage these assets. Instead, they simply need to have a relationship with a transaction sponsor who will bring them investment opportunities and the capital to make an investment. In certain types of transactions, they may also need to qualify as an “accredited investor,” which means they need to meet certain income and/or net worth requirements.
Multifamily investment firms are experts in the space. It is all they do on a daily basis and individual investors who work with them get the benefit of their relationships, software tools, expertise and time. These are extremely valuable assets in commercial real estate investing and can have a positive impact on investment returns.
- Better Properties
One of the major downsides to an active approach is that there is a limit on individual resources, which can also limit the quality and scale of the investment properties that can be purchased. At the other end of the spectrum, multifamily investment firms have the ability to source capital from a large number of real estate investors. This means that they can afford to buy higher quality apartment buildings that are in better locations and have more stable cash flow. For individual investors, it can be more advantageous to own a fractional share of a high quality asset than a 100% share of a lower quality asset.
- Passive Income
As described above, a multifamily investment firm is responsible for the day-to-day management of the property in a passive investment. For individual investors, this means that the manager does all of the hard work of property management and they are entitled to their share of whatever income is left over after all of the property’s operating expenses have been paid (including debt service).
In other words, a passive investment provides investors with the benefits of multifamily ownership without the hassle of actually managing the property. This provides them with passive income so they can use their time to pursue other interests.
- Tax Efficiency
Investments with a multifamily transaction sponsor are structured in a tax efficient manner, which provides two important tax benefits for individual investors.
First, the apartment complex is purchased in a limited liability corporation, which is structured like a corporation and taxed like a partnership. All property income and expenses are run through the LLC and anything left over is “distributed” to individual investors. This sort of structure reduces individual tax liability.
Second, individual investors can defer capital gains taxes on a profitable investment by utilizing a specialized type of transaction known as a 1031 exchange. There is no time limit on these exchanges and they can be repeated over and over, which allows for the tax-free growth of capital while deferring taxes indefinitely.
- Relative Stability
A multifamily real estate investment is often compared to other alternatives available such as those in the stock or bond market. Many passive investments are not publicly traded, which means that they also benefit from a degree of price stability not seen in publicly traded debt and equity markets.
However, I advocate for passive multifamily investments as part of a broadly diversified investment portfolio.
How can you make a passive multifamily investment?
For those who are convinced of the benefits of a passive multifamily investment, there are two common investment vehicles through which this can be accomplished: REITs and individual syndicators.
Real estate investment trusts (REITs) are a specialized type of investment firm that provide investors with exposure to commercial real estate assets. REIT shares can be publicly traded on major stock exchanges or they can be privately offered to accredited investors. REITs can also specialize in certain property types. For example, Camden Property Trust is a large, publicly traded multifamily REIT. As an investment strategy, publicly traded REITs provide liquidity and low minimum investments. But, they aren’t for everyone.
As an alternative, multifamily investors can work with an individual deal syndicator who is raising capital for the purchase of one specific rental property. This scenario provides less liquidity, but it also provides investors with direct knowledge of the property they are investing in so that they can complete their own due diligence.
Regardless of the vehicle chosen, passive investors in multifamily housing have the potential to realize both the benefits described above and a handsome return.
I am now an ADU Specialist
I recently received my ADU Specialist Credential and am assisting homeowners, investors and developers understand site eligibility, local regulations, development process/costs and the return on investment.
Accessory Dwelling Units (ADU) are also known as secondary units, in-law units, granny flats, backyard cottages, etc. No matter what you call them, ADUs are an innovative, affordable, effective option for adding much needed housing in California. They are self contained residential units on the same property as a single-family home or a multi-family building. ADUs must have a kitchen (or efficiency kitchen), bathroom, place to sleep and a separate entrance from the main property. You can use an ADU to house family or friends, or lease to a rent-paying tenant. New policies are making ADUs more affordable to build, in part by limiting development impact fees and relaxing zoning requirements. By design, ADUs are more affordable and can provide additional income to homeowners and often the rent generated from the ADU can pay for the entire project in a matter of years.
If you or someone you know might be interested in learning more how to help solve the current affordable housing crisis while also creating some additional and passive income, please contact me.