All Forum Posts by: David Lilley

We are undoubtedly facing significant headwinds across the commercial real estate industry, but these problems can be solved depending on how well risk has been mitigated. We will see if Tides can solve theirs.

I find it odd that investors are relatively okay losing money quite frequently in the stock market but view real estate investments with extreme scrutiny. I think it is a matter of conditioning. The general public is quick to trust one of the big money managers who have little incentive to generate a meaningful return yet they continue to receive their fee regardless. Money is rarely lost in real estate, returns are less volatile, and returns have been similar to the S&P 500 for the past 50 years (9.5% for MF v. 10% for S&P 500).

@Mohammed Nasser you need to be in contact with the title company on this and find out what their attorney is saying. It should be very clear cut in the contract that your 20% down payment is not considered earnest money. It usually takes a few days for them to opine on this. If it is murky, they send it to a judge to decide. Either way you should know something so I would be blowing up their phones. 

Another thing to consider if you are turned off by low cap rate markets-

If the market cap rate is 4%, every $1 increase in my net income yields an increase in value by $25. That is 25 to 1.

5% cap is 20 to 1.
10% cap is 10 to 1.

If you are a value add buyer like me, this is very important to understand.

Cap rates are used for determining exit valuation. There is little reason to use it for anything else. I have bought negative cap rate deals, and I have bought 7+ caps. The negative cap rate deal ended up making investors a 2.9x on their money in 27 months (our best to date).

You have to put pencil to paper and see what the numbers say. As far as exit cap rate, the simplest answer is to use whatever CoStar forecasts for that submarket in the year you plan to sell and bump it up 50 bps or so. The honest answer- it's gut instinct based on empirical data and experience. There is no hard and fast rule.

@Alex Clermont it stands for Limited Partner which used to be the only legal term to describe passive investors until Limited Liability Companies (LLC) were created in 1977. Now, LLCs are the most prevalent legal structure in real estate and passive investors in these companies are actually called Members.

I would start by doing your own due diligence and market research to determine which states and cities have the best economics and growth potential; this is what we do and why we invest in Dallas, Tx. Once you identify where you want to invest, start Googling Real Estate Private Equity firms in (whatever city), or "multifamily syndication", etc.

Feel free to shoot me a DM if you have more questions.

You will learn a lot by investing passively as an LP first before going out on your own. Rates and values are inverse, so if you wait for rates to go down, you are essentially waiting for real estate values to go up. 

We routinely buy well located multifamily properties in Dallas around 125k per door. Lots of factors at play in this question. 

@Eric Michiels If you haven't identified which properties you are going to acquire, it sounds like a blind fund is what you would need to form. If it were a portfolio of 20 homes that you could buy in one transaction, you could do a specified offering.

Funds are more complicated than specified offerings, so I wouldn't go that route unless you have lots of experience raising money and managing equity. My firm is at $50M AUM and we may start thinking about raising money for a fund at around $100M AUM.

@Dylan Murray DM me and let's set up a call. Happy to help answer any questions you may have. I have syndicated seven investments since 2018.

@R Durney you can choose to classify them as all one activity. Then, as a REP, you would be able to apply losses against any earned income.

Depreciation still does benefit passive investors. Most will not be able to use all of their losses from depreciation, but those losses are carried forward until you can use them. In the event of a sale and you 1031 exchange, you keep the losses and then get another huge slug of depreciation at the acquisition of the next property.

If you choose not to 1031, then you should still have a loss on your K-1 that helps offset some of that gain.

Take advantage of the bonus depreciation while you can. It's getting phased out starting in 2023.