Reducing Market Risk and Alternative Investment Options

The market has provided a fantastic YoY return for many investors.  However, based on when you read this, the market is ripping in one direction or the other. And for some, they have started to put money on the sidelines to reduce downside risks.

If you take off risk, where do you put it? 

With your investment money on the sidelines it feels like capital preservation, capital preservation gives up significant potential returns and focuses on security and stability. Capital preservation securities are associated with minimal risk.  These investments include— savings accounts, CDs, federal bonds, and treasury bills as they are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. Other options include various types of annuities or insurance products.  The biggest drawback of capital preservation is its ability to maintain or surpass inflation, and capital preservation assets usually rely on much-lower interest rates averaging less than 2 percent.  If you're not close to retirement age, this may not provide the kind of return to keep your money working for you.

So then what?

What if you could invest in an asset-backed, risk-adjusted product that provided options for an 8-10% annual return, and target a 20% IRR at the asset's sale (more to follow).

Recession-fighting, Income-generating Real Estate

During a recession, people will save cash and cut spending. Retail and Office sectors are often impacted as spending slows and contraction starts. People will travel less and unfortunately some companies shutter. But people will continue to need a place to live. When people feel the pressure to conserve cash, some will refrain from capital expenditures like cars or planning a new home purchase. This compounds as liquidy tighten so does lending from banks. Therefore, it's likely that the share of renters will increase during these uncertain times.

The advantage of large Multifamily Real Estate

Due to its size, at 200-400 units, the individual vacancies have a little material impact on revenue. Although it is vital to manage vacancies, they are much more impactful to retail and office properties.  Focusing on Rent stabilized assets ( greater than 85% occupancy) provides positive cash flow via rents allowing the operator to concentrate on the business plan.

• Tax-Advantaged- As a partial owner of the asset, the investors will receive a K1 at year-end for tax purposes. As the operator depreciates the asset through cost segregation they can accelerate this loss on certain items. This will create a passive loss that will reduce the amount of overall tax on m monthly distributions. This loss can accumulate as well to further reduce tax liability at assets sale. A further advantage at the sale of the asset is to use a 1031 and roll into another project without tas penalty.

Strong asset class

Working in the Value-add space is a strong area for success. Taking a Class B Asset (more than 15 years old, in a good neighborhood) and improving the building through updates and renovation can bring it to B+ or A equivalent. This improvement will make the asset desirable to new tenants at higher rents and future buyers like major institutions for a healthy exit.

Wrapping it up

An alternative investing approach has become more available to investors. Large Value-Add, Multifamily Real Estate investments will fight a recession and provide robust investment returns.

Here is some common language for returns.  

Class A units: 10% preferred return

Class B units:  7% preferred return  + share of profits 70/30 LP/GP profit split to 2x multiple Greater than 2x multiple, then 50/50 split on every dollar over the 2x hurdle.

• Hold Period: 3 to 5 years
• Distributions and Reporting monthly
• minimum investment of $ 50,000

Class A will receive a 10% return annualized and distributed monthly until the asset's sale (preferred means subordinate only to creditors).

Class B will receive a 7% return annualized and distributed monthly until the sale of the asset (Subordinate to creditors and Class A). They will also participate in profits on the sale of the asset at 70%. Based on the hold period, this will generally create a 2X return on investment in 3-5 years.

At Anthem Investing, we are focused on Value-Add commercial real estate.

To learn more or preview upcoming opportunities contact me.