All Forum Posts by: Lane Kawaoka

LP equity positions are lower in the capital stack, meaning if the property value declines and a forced sale covers only the debt, the equity is completely wiped out. While the intrinsic value of the real property initially seems like a safety net, the reality of the capital stack reveals the risk. Common equity often offers great returns, but during market corrections of 20-30%, your position becomes vulnerable. Preferred equity, though also exposed, offers less upside compared to common equity.

Sadly, even if we were in different market times (not down 30% off the highs of 2021) and your particular project was doing well. Liquidity redemption (if even possible), you would have to face a 30-60% discount of what you put in.

You might want to reach out to sponsors to private sell to other LPs. What else have you tired?

Congratulations on breaching the $1 million net worth milestone! Took me to my early 30s with my crappy engineering salary at the time. Seems like there is a bit of Dave Rambsy elements in there that need to move away from but here is a course of action:

With $400k in a HYSA, you’re in a strong liquidity position but NOT maximizing potential returns. 

Here are a few options to consider:

• Emergency Fund: Keep around 6-12 months of expenses - most professionals this is about 20-30K. I mean lets be serious you will find another job in a few months so relax.
• Invest in Index Funds: Continue adding to your VTSAX holdings. Low-cost index funds are a great way to achieve broad market exposure with minimal effort. But start to get out of the SAD (sad american investment diet).
• Real Estate Investments: Cash flow and appreciation aside for you as a high income earner over 400K AGI its going to be more about saving taxes. Most of my folks shave off 10-20% in taxes their first year even without REPS real estate professional status.
• Taxable Brokerage Account: Not recommended, put into Alts.

• Backdoor Roth IRA: Great that you're planning to max out the Backdoor Roth. This is an excellent way to grow your retirement savings tax-free. But could be inhibiting you to go into more Alts. This is more advanced strategy here based on your AGI and goals so a personal sit down here would be better. But as soon as I hear about someone doing backdoor IRAs I know we are working with someone doing more traditional investing. Side note: might want to also do spousal IRA for your wife if you're not already. This can also be converted into a Backdoor Roth if her income exceeds the Roth IRA limits. This is where infinite banking is a stable for accredited investors - doing 50-100K a year to one of these plans (over 5-8 years) for starters.

• Tax-Loss Harvesting: Use taxable accounts to offset gains with losses, minimizing your tax bill.
• HSA Contributions: If you have access to a Health Savings Account (HSA), max it out. It offers triple tax benefits: contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free.

• Forget 529 Plans: Use infinite banking as a much more flexible vehicle.

• Update Wills and Trusts: Ensure your estate plan is up-to-date to protect your growing assets and provide for your children. You might want to consider an irrevocable trust once your net worth goes over 3-4M. Most other people I say 5M but since you are high liability doc it makes sense to get this extra protection sooner.

You're in an excellent position to achieve your FI goal by age 50, but you really need a group of good accredited investors around you. I found this when I because accredited and it really opened up these new strategies that were outside the normal realm of rentals, 401ks, backdoor roths... or stuff you hear you co-workers talk about.

Industry standard is 10-25%

So many massive events recently

I'm not affiliated with these guys, but for those who have owned turnkey rentals, I owned 11 from 2010 to 2018 before selling them off. Back then, prices were much better, and turnkey marketers could make a decent fee.

As prices increased, many turnkey providers had to move to less desirable areas (I know people are always looking blame other people but in reality blame it on yourself for being the investors that picked bad areas and did not do due-diligence and buy assets where the numbers worked with 10-20% economic vacancy), and now that gap has essentially disappeared. That's just the nature of turnkey properties, whether you buy from these guys or anyone else.

Given the current market, it makes sense for these providers to shift towards flipping and more value-add projects, despite the increased risk and operational challenges. You can't just buy and hold and pray anymore; you need to actively add value.

Once upon a time, I could scoop up rental properties for a cool $90,000, and pull in a rent of $1,000 per month. Fast forward to today - that same property is now worth $140,000, but the rental income? Still stuck at $1,000 or maybe $1250.

Creating 'alpha', or superior returns, is becoming a game for the big leagues. Yet it's not just a local phenomenon. Abroad, the challenge is equally glaring. A 1% rent-to-value ratio seems like a pipe dream as properties are operating at half a percent or worse, mirroring markets like Hawaii and California.

Current market conditions, especially with cap rates having risen from the low 4s to over 5-5.5%, essentially wipes out LP equity when the value of properties went down at least 30%.

Recent shifts due to 0 => 5.5% Fed Rate in the quickest time in history, has turned cap rates from the low 4s to over 6.5-7% in some markets for Class B apartments. This shift has notably impacted property values, leading to significant downturns. To illustrate, a property initially valued at $60 million might see its worth decrease by 30%, settling at around $45 million. In scenarios where senior debt (and renovation costs) hovers around the $50 million mark, the resultant cause pushes preferred, and LP and GP equity positions below the surface.

Basics on Property Evaluation:

To figure out how much your commercial property is worth, you can use the following simple math equation. You take the money you make (NOI) and divide it by something called the cap rate. The cap rate tells you what people are willing to pay for properties like yours.

So, the equation looks like this:

Value of Property = Net Operating Income / Cap Rate

Imagine your shopping center makes $100,000 a year after you pay all your costs (that's your NOI). And let's say the cap rate in your area is 0.05 (or 5%). You can figure out how much your shopping center is worth like this:

Value of Property = $100,000 / 0.05 = $2,000,000

But here's the tricky part: You don't get to decide the cap rate, it's decided by the market, kind of like how fashion trends decide what clothes are cool. If the cap rate goes up because the market changes, like from 0.05 (5%) to 0.06 (6%), even if you're still making $100,000, your property's value changes.

So with a cap rate of 6%, it looks like this:

Value of Property = $100,000 / 0.06 = $1,666,666.67

Even though you're making the same amount of money, your shopping center's value went down because the cap rate went up. It's important to remember that you have control over making your shopping center nicer and more profitable, but you can't control the cap rate, which can make your property's value go up or down without you changing a thing!

It's a sobering situation that no one has faced since 2009 faced with it firsthand (the dinosaurs who did are out of the game or in the institutional world not working with BP type retail investors like you and I). The stark reality is that a 30% market downturn, again caused by an unprecedented surge in interest rates – the highest in four decades – can profoundly affect market values. Such a scenario doesn't just bring values down by 30% but also places substantial pressure on property holders, especially when debt refinancing looms on the horizon, compelling action at these reduced market values.

Here is the double whammy that increases the cash in refinance needed, the capital markets (bank lending) terrain has tightened greatly. Banks, previously granted loans at 70% of the property's value, are now capping at 50%. This adjustment demands a greater cash input at the point of refinancing. This is the debt renewal tidal wave everyone is talking about and where we will start to see a lot more of.

From a personal perspective, this period has been particularly taxing. Having personally a lot of skin in the game, often being among the first to contribute when things got difficult. Witnessing the dissipation of substantial (multiple seven figures) personal capital, especially in efforts to steer through these turbulent times, has been a sobering experience. It became very apparent in Q4 2023 (point of no return for those in 2021-2022 vintage project) as the market cap rates deteriorate even more as pricing has not found a firm ground, particularly when it seems that additional capital infusion won't bridge the gap to more secure financial footing.

In these moments, the weight of the situation can feel particularly burdensome, and I speak from a place of shared experience. The recent period has been emotionally intense, marked by earnest discussions with investors navigating these very challenges. It's prompted a profound realization of the importance of compassion for everyone involved and those caught in this same situation.

If you find yourself in a similar position as a GP, grappling with the uncertainties and complexities of the current market, know that you're not navigating this alone (unverified data something like 25 million assets with renewing debt situation). In times like these, empathy and understanding are important. If you're an investor or a general partner facing similar challenges, I encourage prudence and reflection before funneling resources into uncertain ventures, building a bridge to no where as something where I did with my personal capital. While I might not be the first person you'd think of reaching out to, I'm here to lend an ear, to engage in a dialogue, I've seen operators commit suicide over this and some flee the country check I don't think either are viable actions. If you're navigating these turbulent waters, know that your experiences resonate, and you're not alone in this journey.

I began investing in 2009 and started out of state turnkeys in 2012 a period that remarkably coincided with a great time to enter the market, I've witnessed the past 12 to 13 years have showcased an impressive and steady bull market. However, it's also clear that markets naturally ebb and flow, and corrections, though challenging, are a part of the investment landscape.

One of the key insights from this journey has been the importance of diversification. Today involved in over 2B of deals or 65 plus projects - most of these ventures are secured with fixed-rate debt or long-term notes, extending beyond five and even ten years, or particularly in the realm of developments through substantial completion. Spreading investments across various sectors and over time has proven to be a prudent strategy, especially for navigating through market corrections. Abet it still sucks.

Another undeveloped takeaway that I have is how influential interest rates are with real estate prices especially when you get such a synthetic change to interest rates we have seen this year, whereas we have seen the stock market react counterintuitively positive (perhaps due to fake money being produced). This as an investor has forced me to look for Alpha in different asset classes potentially outside of the BiggerPockets world of real estate. From late 2022, we did not do traditional value add multifamily deals because we could not make the numbers work due to the distressed capital markets terms that were available in the market... this is essentially why the market came down so much because buyers like us were not buying. There are a lot of operators out there saying that they can get properties at 30-50% off the highs (they are correct on that) but without the debt package, the deal ROI numbers don't work.

This is a good idea someone should work on this with the downtime in the low transaction market.

Definitely need more context. If under 1M net worth, focus on buying rentals nearby. Birmingham, Atlanta, are a couple places I started with the Rent-to-Value Ratio are good.

@Jane Kim 

Thinking about a low down payment FHA loan for a pricey place in LA? Here's the lowdown:

Pros:

1. Low Down Payment: You only need about 3.5% down. Super helpful if you don’t have a ton saved up.
2. Easier Approval: FHA loans are more forgiving on credit scores and debt-to-income ratios.
3. Gift Money Allowed: You can use gift money for your down payment, which can be a big help.

Cons:

1. Mortgage Insurance: You’ll have to pay for mortgage insurance upfront and monthly. This can add up.
2. Property Standards: The house has to meet certain standards, which might limit your choices in a competitive market like LA.
3. Loan Limits: There's a cap on how much you can borrow with an FHA loan, which might not cover the higher-priced homes in LA.

My Take:

If you're set on buying now and can handle the extra costs, FHA could work. But, remember the added insurance costs and potential property restrictions. Make sure you're comfortable with all the terms before diving in.