Real Estate Investment Opportunities

Do you ever go to Target without a clear purpose and end up buying things you didn’t know you needed? It’s easy to fill up a cart with items like cute towels and clothes. Similarly, when researching real estate investments, it’s easy to get lost in the options available. With so many choices, it can be hard to make a decision on what’s right for you.

On the other hand, when shopping for a specific occasion, such as a wedding, you have a clear idea of what you need. You know the type of outfit that’s appropriate for the event, and you take the time to find exactly what you want. It takes a bit more effort, but you end up with the perfect outfit.

The same applies to real estate investments. When trying to decide whether a rental property or other real estate investment properties are right for you, it can feel like you’re browsing without a clear agenda. You’ll come across different options for generating rental income, such as single-family rentals, duplexes, and triplexes, as well as real estate investment funds and REITs.

If you’re lucky, you might even discover something called real estate syndications. With so many choices available, it can be challenging to know what to do, who to trust, and where to go. However, by having a clear investment goal in mind, you can narrow down your options and find the right opportunity for you. It’s essential to take the time to research and make an informed decision to achieve a successful investment.

Weighing The Odds Whether to Invest in Rental Property

Soon your head feels like it’s spinning. At the same time, your brain tries to weigh the benefits of annual rental income versus taking on additional mortgage payments and the liability exposure you’d assume weighed against the diversified real estate portfolio filled with investment properties you’ve always wanted. It already sounds overwhelming, right?

Just like in the shopping example above, you’ve got to go into real estate investments with your end goal in mind.

“Ooh, this deal looks nice. Maybe I’ll try this one on for size…”
But, you should aim to get to the latter example, where you’re investing with a very specific goal in mind.

Once you share that you’re interested in investing passively in real estate, don’t be surprised to find an inbox full of potential rentals, fund announcements, and real estate syndication opportunities.

It can be easy to start browsing aimlessly and to get lost in these emails and the associated real estate investment summaries, which can often be over 50 pages long, with details of the property’s net operating income, the down payment, operating expenses, rental income, and annual cash flow.

But who the heck has time for that?

You should be able to decide within 5 minutes of opening an email for a new investment opportunity whether the deal meets your investing goals and whether you want to move forward with the investment, and that’s exactly what we’ll walk through in this article.

What Is An Investment Opportunity?

Residential rental properties are commonly referred to as single-family rentals or small real estate investments. These properties are usually pursued by individuals for potential rental income. They are not typically referred to as “investment opportunities” like larger real estate assets.

Investment opportunities are usually offered by large investment firms that manage assets on a much larger scale. Such firms offer options like real estate funds, REITs, or syndications to passive investors. Experienced management teams handle the assets, operating costs, tenant and property management, and take on most of the risk associated with handling these multi-million dollar assets.

For instance, Goodegg Investments provides investors with opportunities to invest in multifamily and hotel assets passively in exchange for tax benefits and quarterly cash on cash returns. By pooling the total cash invested into an investment opportunity, returns that wouldn’t be possible individually can be generated. These real estate deals, called commercial real estate syndications, can only be discussed in private emails and Zoom calls, as they are not allowed to be publicly advertised and investors must qualify to invest.

Investment Opportunity for 50K: Real Estate Syndication or Rental Property?

Rental real estate properties are undoubtedly a great way to make money and build wealth. Still, you need to double-check that the investment vehicle you chose is right for you, whether you’re looking at real estate syndications, traditional rental property, or real estate investment trusts (REITs).

Let’s pretend you have 50K to invest and you’re just looking for the right deal. Should you pursue rental income and use the cash as a down payment on a residential single-family or duplex home? Or would it be better to invest as a limited partner in a multifamily syndication?

Rental Property:

On one hand, perhaps you can find a 200K single-family home for sale, put 40K (20%) as the down payment, and keep 10K in reserves for repairs, maintenance, and, in a pinch, to make a few mortgage payments. Your insurance, mortgage payment, and property taxes come out to about $1,800 per month and you manage to find renters who agree to pay $2,300 in monthly rent. Sweet deal!

You’re looking at $500/month in cash flow provided no repairs or surprise costs come your way. This isn’t typical, but hey, we can dream, right?

On the downside, you also take on all debt and liability associated with owning this new property plus all responsibility for property and tenant management. Ugh.

Real Estate Syndication:

On the other hand, perhaps you find out about a multifamily syndication deal with a total investment of 50K upfront. Meanwhile, you take on no debt, never have to deal with a tenant or contractor, aren’t responsible for any insurance, tax filings (for the asset), or bookkeeping, and you still get cash distributions like clockwork every quarter.

According to the PPM (private placement memorandum) you signed and the sponsors’ projections, you can anticipate annual returns of about 8%, a share of the profits once the property is sold, plus your initial investment capital back in about 5 years.

Over the 5 year illiquid hold period, you earn about $1,000 every quarter. Then when the sponsors sell the multifamily investment property for a profit, let’s say your cut is about $30,000. Plus you receive your initial investment of $50,000 back. All with no responsibility toward managing the property, tenants, contractors, or brokers.

So, which would you do?

Well, it all goes back to your personal goals with your finances. Use the financial calculator all you want, fuss over how much profit each option might garnish, but if you wouldn’t be happy with either a hands-on or hands-off investment, then that particular option just isn’t for you.

Average Yearly ROI Calculation

Real estate investors who want to diversify their investment portfolio may choose to measure their rental income return on investment to determine whether an opportunity is profitable or not. Your return on investment is a percentage that measures the profitability of your rental property based on how much income it generates versus the costs to maintain.

Several different factors affect ROI, such as the property type, how much rental income you make, purchase price, total operating expenses, and property taxes. Some property owners include their home equity in the equation, which is the market value of a property minus what’s owed on the mortgage.

Here’s the formula for calculating ROI:

ROI = (Final Value of Investment – Initial Cost of Investment) / Total Cost of Investment

For the purposes of this article, let’s pretend your ultimate desire is to invest as a completely hands-off investor, with no obligations to ever fix holes in walls or deal with tenants, and that your qualifiers are steady returns, limited liability, and tax benefits.

This rules out a rental property because even with a property management firm on board, you’re still ultimately responsible for the repair and maintenance costs and tenants. So, real estate syndications look like a pretty sweet investment based on those factors alone.

The First Glance for Passive Real Estate Investors

When you receive a new deal alert email for a real estate syndication, it can sometimes feel like a surprise gift has just been dropped under your Christmas tree. You didn’t know it was coming, but if you’re keen to start real estate investing, you’re excited to rip the wrapping paper to shreds and see what’s inside.

Typically, a new deal alert email will give you a few very important pieces of information. Among these data points, there are a few that you should pick out on your first glance through the email:

• Type of asset

• Market

• Hold time

• Minimum investment

• Deadline for funding

The first time you open up a new deal alert email, just aim to extract these key pieces of information. Don’t get lost in the weeds of the projected returns or the business plan just yet. Those will come later. Just figure out if at a high level, this investment meets your investing goals and if you’re actually able to invest in this deal.

For example, you might receive a deal alert and gather this information:

• Type of asset: B-class multifamily

• Market: Dallas, TX

• Hold time: 5 years

• Minimum investment: $50,000

• Deadline for funding: 3 weeks from now

Understanding the Options

Once you take stock of this information, you might realize that, although this is the asset class and market you wanted to invest in, you were looking for a longer projected hold time, a different type of investment property, or more of an emerging market. Or perhaps you’re not able to get your funds ready before the deadline to wire in your funds. Serious real estate investors aim to be strategic about where they have cash invested.

If so, pass! Don’t spend another minute hemming and hawing over this deal.

If the investment property doesn’t align with your goals, it’s best to move on and save yourself the time and effort of analyzing its details. Fortunately, there are many other investment properties available, so you’re bound to find one that meets your criteria.

However, if the investment property appears to align with your goals, it’s worth taking a closer look and analyzing the relevant data.

Real Estate Syndication Investments: The Numbers

Now that you know you’re able to invest in this deal and that it meets your investing goals, it’s time to dig into the numbers. If you were to invest in this deal, how much money could you stand to gain, and what’s the total investment?

Almost all deal alert emails will give you a high-level idea of the return on investment (ROI) you can expect from investing in the deal.

For example, you might see something like this:

• 8% preferred return

• 9% average cash-on-cash return

• 17% IRR

• 20% average annual return including sale

• 2.0x equity multiple

• $50,000 minimum investment

• 5-year hold time

The problem is, what in the world do all those percentages mean for you and your money? How do you calculate ROI? And are they good, compared with other deals?

No need to worry if you find it difficult to understand the numbers in the investment data at first. With practice and time, you’ll learn how to quickly analyze the figures and evaluate the potential returns on investment.

However, if this is your first time reviewing such data, you may find it challenging to understand what each number means and how it impacts your real estate investment. The information can be overwhelming and not entirely clear on how it specifically relates to your investment.

Preferred Return & Cash-on-Cash Return

Let’s begin with the preferred return, which is a typical way deals are structured. When you see an 8% preferred return, it indicates that you, the passive investor, will receive the first 8% of the returns, while the sponsors receive nothing until that threshold is met.

This implies that if you invested the minimum amount of $50,000 and everything went according to plan, you should expect to earn approximately 8% of that amount each year. For example, if the investment generated monthly cash flow distributions, you could anticipate receiving $4,000 each year ($50,000 x 8% preferred return) in monthly payments of $333.33 ($4,000 / 12 months). This is the same as receiving $1,000 every quarter, as previously mentioned.

If you were to invest $50,000 in this deal, you should expect monthly cash flow distributions of about $333.

Given that the average cash-on-cash return is 9% (which is higher than the 8% preferred return), that means that this deal is projected to pay out above that 8% during part of the hold time, but you can dig into that later when reviewing the full investment summary.

For now, you’ve got a basic benchmark of $333 in monthly cash flow based on that 8% preferred return, which is pretty typical for most deals we do.

Equity Multiple

The next thing that I typically jump to is the equity multiple. At a glance, the equity multiple tells you how much your investment will grow during the project’s lifecycle.

For example, if you were to invest $50,000 into a deal with a 2x equity multiple, you would end up with twice your original investment, or $100,000, once the asset is sold (this is when adding up all the cash flow distributions, as well as the profits from the sale).

Just a quick note: We usually target an equity multiple of 1.75x to 2x during a 5-year holding period. This can serve as a reference point for you as you begin your analysis.

How to Calculate the Rate of Return on a Real Estate Investment Opportunity

The last number I look at when reviewing a new deal alert or comparing it to similar real estate investments are the average annual return.

The average annual return tells you the returns you can expect, averaged over the hold time. If you were to invest $50,000 and doubled that to $100,000 in 5 years, that means the total returns would be 100% of your original investment.

Given that, your average annual return would be 20% (100% or your original investment / 5 years).

The IRR, or the internal rate of return, takes the average annual return and adjusts for the time delay. In other words, because there’s a hold period of 5 years, you’re not getting all of your returns at once. The time delay has a cost that comes with it, since you’re not able to earn interest on those returns or invest them elsewhere. The IRR takes that time delay into account.

Side note: We typically aim for an average annual return of around 16-20% and an IRR of at least 14%.

The Decision

Once you’ve reviewed the high-level investment highlights and the numbers, it’s time to make a quick decision.

Remember, this isn’t the full decision of whether or not to actually wire your money in right this instant. This is the decision of whether or not it’s worth your time and energy to continue down the path of researching and vetting this opportunity to see if it is indeed something you want to invest in for the next 5 or so years.

Based on the information you’ve gathered about the asset class, market, and numbers, decide whether this investment opportunity meets your investing goals. If so, let the sponsor know that you’re interested (either by requesting the full investment summary or submitting a soft reserve with the amount you might want to invest). This will give you more time to review all the materials on rental properties or real estate syndications in more depth.

Understanding Your Average Yearly Return on Investment for Real Estate Investors

It can be exciting, yet sometimes overwhelming, to get a deal alert email announcing a new real estate syndication investment opportunity or rental property with an attractive purchase price.

You may be in a situation where you have had your funds available for a few weeks, and you’re actively looking for the next investment opportunity. On the other hand, you may still be in the process of transferring your 401(k) into a self-directed IRA and aren’t sure if the purchase price funds will be available in time. Additionally, you might be unsure about making a cash payment.

Whatever your situation, it’s important to know exactly what you’re looking for going into an investment property deal so you can make a quick decision and go on with your day without wasting too much time. If the deal meets your criteria, it’s important to know why it’s a good fit, and if it doesn’t meet your criteria, you can get back to your day.

Either way, knowing what you’re looking for will help you decipher investment opportunities, navigate calculating ROI, and wade through deal alert emails to find your next best investment opportunity.