All Forum Posts by: John Nachtigall

 Every time I get tempted to invest in a property and not a syndication I read a thread like this and I feel much better about my choices.   

i would have converted a long time ago, but I make more than allowed.   I have been above the income limits for a long time.   So traditional is my only choice unfortunately.    If I could I would be in a Roth, especially in 2009 when I had that great drop in value.  Still, I am happy to have maxed out my 401k since my 1st year working.   So now 21 years in I am very well positioned and I still have 15-20 years of contributions left.  

Honestly this is just a math problem.   It is not really about opinion.   I think it is very hard to beat the tax advantaged returns of a 401k.   In my case, I have a traditional, not Roth, but to use an example

I invested 18,500 last year and was matched with 5,029 from the company.   So $23,529 total.   

S&P 500 has returned 10% (dividends reinvested) for the last 100 years.   but lets just use 8% to be conservative.   oh and you can find S&P index with 0 fees now FYI.  

Just that 1 year worth (23,529) with 30 years (which is still short of your retirement) of 8% returns assuming 3% inflation is still worth $236,764, so a 10x ROI. The compound interest with no tax taken out is just almost impossible to beat. 4 years of investment is a 1,000,000 account in 30 years.

https://www.bankrate.com/calculators/retirement/ro...

I am sure people are going to tell you you can blow away 8% return in RE, and that is true some of the time.   But how much do you need to blow it away to get 8% after taxes?   In a 401k you pay taxes at the very end when you withdraw, so all the money works for you the whole time.  In Real Estate, those tenets rents are taxed every year.   Granted there are some great things like depreciation to offset the taxes, but they are not 100% for 30 years worth of returns.  It is also a ton more work than the 401k route which is as passive as you can get.

I would suggest just doing the math and making a decision.   I think you will find that the compound interest offered tax free in the 401k is just almost impossible to beat with a taxed investment.  

@Carson Wilcox

Design Question?   One bedroom has carpet and one has hardwood (laminate).   Was it done on purpose or out of necessity?  

@Stephen Fahey

Two of those links are from CrowdStreet and RealCrowd.   You can sign up for free to see the offerings, they each have about a dozen or more active at any time.   Each one has a waterfall and a PPM.   They also have a webex that runs about 30-50 min each where sponsors talk about the deals.   Each site also has a learning tab with lots of info.      I would suggest starting there. 

 So in real estate syndication the distribution is called a "waterfall".   Each deal is different, there is no set "standard" but there are things that tend to be the same.  Links below to articles that explain some of the possibilities.   I will explain some of the basics here.   These are just made up numbers, just to let you see how it works.   Each deal is different and small changes make big differences, this will be a simple example.  

Lets say you invest $100,000 into this deal.   And the total invested by the limited partners is $1,000,000, so there are 10 limited partners.   That keeps the math simple.  The waterfall on this deal is a 6% preferred and 65/35 on everything after that.  

So now lets imagine that after year 1, after they pay the sponsor fees, taxes, expenses, any reserve fund etc., the total net income for the entire property is $200,000 for the year

You will get your preferred first, so 6% of your 100k investment is $6000.  

Now remember there are 10 limited partners so you each get $6000 x 10 = $60,000 paid out to the preferred.   200,000-60,000 = 140,000 left.

the limited partners get 65% of the remaining.   So 140,000 x 65% = 91,000.   That is divided 10 ways since you are all equally invested, so 9,100 each.    The sponsor gets the other 35% of the 140,000 = 49,000

So after year one, you would have 6000 + 9100 = $15,100 (for each partner).   The Sponsor gets $49,000.   That would be a pretty awesome return after 1 year on 100k invested BTW.  

Now what if year 2 the property only makes $60000 net income.    Again you get your 6% preferred, so 6,000.   After all 10 partners get paid there is nothing left so the sponsor gets $0.   

They call it a preferred because it is the first profit paid after all the expenses.   The idea is that you get first crack at the money and the sponsor only gets paid if the deal performs very well.   

https://origininvestments.com/2017/12/28/what-are-...

https://www.crowdstreet.com/what-sponsor-promote/

https://www.realcrowd.com/blog/2017/08/podcast-ope...

Hope that helps

I agree...you don’t think your tone was such that warrants immediate severance.  They, on the other hand did.   Being polite does not cost you anything.   And while I agree that there is a time and place for aggressive communication, you were aggressive right off the bat.   Your point 1 and 2 above are interesting in that what you just stated is the opposite of what your original email implied.   Where in your email did you say or even imply “you did not expect perfect tenets”?   

They are simply applying the same logic you would with a problem tenet.   Your business was not worth your maintenance costs.   You posted this publically for an opinion, I gave you mine.   The opinion is free so not worth much, but it is an honest opinion.  And for the record, I read the whole thread.  I just don’t agree they were sacrificing quality for occupancy.  Again, just my opinion.  

I sincerely wish you luck and success.   I hope your next PM or if your self manage you get a better tenet quickly    

I am failing to understand your outrage at the management company.

- They placed a previous tenet with a 2.5 year track record

- They used their experience and provide a very modest move-in special to fill the vacancy

- The resulting tenet was bad and was removed and the place is ready to rent again

So they placed a single bad tenet.....so what?   No one on this site or in real estate in general has a 100% record of placing good tenets...especially in sub 60k properties.   There is no pattern or bad behavior.   The only person who was unprofessional in the email was you.   They apologized and explained why they offer it.   You took the hard line not them.   

Either you trust them to manage your property or not.    If you are a better expert on finding tenets in OH in the winter then why are you using them?

 Hi

You can join CrowdStreet, RealCrowd, and Other crowdfunding sites all for free.   They have dozens of offerings at any time and each deal has a PPM you can read (make sure to drink caffeine before hand, they are boring).    You can also watch the webex presentations of the deals.    

I would also recommend a book called “Investing in Private Real Estate” by Sean Cook.   It defines what to look for in deals for investors, so it can guide you as a syndicator also.   Available on Amazon   

Finally Origin Investments, a very high powered syndicator, has an excellent blog about syndications   I would read them all but this one is specifically about waterfalls

https://origininvestments.com/2017/12/28/what-are-private-equity-waterfalls-clawbacks-catch-up-clauses/?highlight=Waterfall

Good Luck

 Well I would say you are half right, sponsors do put in 5-10% normally,    It they don’t take that much equity.   In my experience, for a ground up, high risk deal like this it would be a waterfall like the following;

-  8% preferred return for investor

- return of investor capital

- catch up contribution to sponsor to equal 8% of their investment

- something like 30-70 split till 15% IRR

- 50-50 after that

There would be some 2-5% sponsor fees off the top.

That is what you can get from an experienced sponsor with decades of success and billions in management   If you want some examples check out the PPM on CrowdStreet or RealCrowd to see real life examples.