SPC Greenpaper – Update 19.05.27

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Dear investor,

This is the new weekly letter update. Many of you have said that although you enjoy the updates to the various guides that the email was too long to read. Going forward I will create an archive-able web-post.

These weekly updates will not replace the quarterly investor letters but will allow people who choose to keep up with the latest changes to the SPC updates as they come online.

Quitting my job last month has allowed me to spend more time making this “great (online) American novel” I call SimplePassiveCashflow.com. Hopefully the contents can help you quit your job too and spend time on what really matters.

  1. Life Settlement Info Page – https://simplepassivecashflow.com/life-settlement-investing/
  2. If you would like a rent-o-meter report go here. I am also on the search for paid groups or subscriptions to join to share the data or services I get with you!
  3. New Most Popular SPC Page – SimplePassiveCashflow.com/top
  4. The Cons of Private Money Lending
  5. Land Conservation Easement info page
  6. Ep 153 – Lessons from the Wealthy w/ Frazer Rice – https://simplepassivecashflow.com/153rice/
  7. 152 – Kyle Jones Apartment Investor & 7 lessons learned
  8. Update to Banking Guide – 

    Index Universal Life (IUL) Caps: Will They Rise When Interest Rates Rise?

    Normally when we are taking about a banking policy we are talking about a wholelife product however sometime an indexed universal life (IUL) is preferred which is why it makes sense to work with only people you (we) trust. The cap defines the upper limit of the policy cash value crediting rate.

    Typically (2014-2019) IUL caps have gradually fallen, leading some to wonder what would stop carriers from gradually dropping caps to the policy’s minimum guarantees. This concern is particularly common when the client is considering whole life as an alternative because whole life discussions begin with guaranteed performance enhanced by dividends. Legally this is possible, and advisors may need some clarity to make a decision.

    So, how valid and relevant is the concern that caps may fall to the level of policy guarantees?

    Cap levels are essentially driven by the amount of money the carrier has available to purchase long options in support of its IUL book of business. While option pricing is a combined function of option budget, market volatility, and the price of zero-risk products, data indicates it is the option budget that is by far the overriding driver. This is particularly true when considered over the medium to long term.

    It’s indisputable that the reason whole life dividends, universal life declared rates, and IUL caps have fallen over the last 20 years is the declining interest rate environment. As rates fall, the general account return must also fall because its portfolio is comprised of primarily fixed income investments. When rates rise, bond returns in the general account will increase slowly as the life insurance carrier replaces maturing bonds and adds additional bonds with new premium. The question is this: will the carrier keep the extra return instead of passing it on to the end client in the form of higher caps, dividends, or declared rates?

    The life insurance carrier would say that they take their profit in the form of money management fees, costs of insurance, and policy charges; thus regarding the improved yields as policy owner money. On the other hand, cynics would disagree and say the life insurance carrier will pocket the increased yield.

    Let’s assume for the moment the cynics are correct, and that carriers have no regard for policyholders and deal only in their own self-interest. Well then, is carrier self-interest positively served by such behavior? The answer is no. And here’s why.

    IUL products are mostly sold to clients below the age of 65 who will live for a long amount of time. If interest rates rise but caps do not, then an IUL product becomes less attractive compared to similar products issued by competitors with higher caps and higher client yields. Healthy clients, encouraged by agents and other advisors, will surrender their policy so that they can move to the more competitive products. Furthermore, this would create another problem for the original carrier because the remaining pool would be the unhealthy, and this would result in more early death claims and therefore further losses.

    Will the original life carrier care about these lapses? After all, they won’t be paying a death claim and have already booked profit, as we noted above. The answer is yes.

    One of the great advantages of life insurance is that as standard practice the carriers guarantee the mark-to- market value of the bonds that support the cash surrender value. This was not an issue in a declining rate environment because the carrier could sell the attractive higher-yielding bonds and pocket the gain. However, when rates are rising and especially if the rise is rapid, the reverse is true. Thus, clients induced to surrender by higher caps elsewhere create a significant mark-to-market liquidation loss for the short-sighted carrier.

    For example, if the insurer has a general account with an average bond maturity of ten years (typical for the industry) the losses would be a 9% loss on the cash value surrendered if there was a 1% increase in underlying market interest rates, and a 35% loss if there was a 5% increase. For a single client this is unpleasant but unlikely to break the carrier. However, if it happens on a large scale it creates an enormous loss that no senior management team is likely to survive.

    Given the potential for considerable losses and that the carrier hits its profit objectives by passing through the increase in general account yield, the carrier is incented to pass through improved yields to the client in the form of higher caps. By doing so, the carrier attracts more premium while simultaneously protecting prior profits. By not doing so, the carrier risks mass surrenders which could result in the loss of hundreds of millions of dollars.

    No one knows when interest rates will rise, but data and logic tell us that the life carriers will protect their profits. To do that they must pass on improved yields to the client in the form of increased caps and/or improved participation rates.

    I’ve been burned before with Life Insurance that was sold to me by a 24-year-old out of college salesperson and everyone says whole life insurance is a scam. What can I do with my old policy?

    Have no fear my friend you basically have three options:

    • Cash it out and just walk away with the cash that’s in it.. In that case you obviously no longer have a life insurance policy so the death benefit goes away.. Because of the way it was designed, it possible does not have enough built in cash value yet for there to be any tax consequence so you don’t have to work about that..
    • Borrow against this policy and use the money that way.. You can use it as a properly design self-banking instrument, the downside being that the it’s not a great cash building policy so there’s more cost in it than what you’d like to see and the loan rate may not be real favorable.
    • Open a new policy (one that is designed for cash build up) and do a 1035 exchange into and this time get a policy optimized for banking.. The nice thing here is that there would be little cash right up front to boost the new policy because we are using the old one.. The downside is just going through the process of getting a new policy with physical evaluation etc..
  9. Ep. 150 – Live Coaching Call with a Doctor going 45 to 75 MPH! 
  10. Ep. 150 – Apartments to Mobile Home Parks with Paul MooreTake the hint from other high level investors and be aware that MFH Apartments is where a lot of new syndicators are starting businesses and where all the gurus are teaching about the space. It might be time to look elsewhere other than Apartments and into mobile home parks.Learn more about the asset class here

  11. Episode 149 – QRP Retirement plans Follow Up Webinar – Follow up on QRP questions with Damion Lupo – Video

  12.  Additions to the Analyser

    What are these expenses?

    Taxes: In the beginning of the acquisition process you have to ASSume part the taxes as a certain percentage of the market price.  However keep in mind that every county calculates this differently and re-assesses the tax basis for properties especially when the property transfers ownership. Best tip is to get around other passive investors in that area to ask them what the change as been or to assume that taxes will go up 10-80%.

    Insurance: You can take a certain percentage outlined in the spreadsheet, ask the current owner (if you believe them), or what we suggest is to get one of our insurance referrals within the mastermind to give you an actual value.

    Management: This is typically 8-10% of the rental revenue plus 50-100% of the first months rent. The property management can also collect additional fees by splitting late fees or charge for renewing previous tenant leases. This is where it is important to have peers or a mentor to save you hidden dollars here. Also make sure you pick a good one with this guide.

    Vacancy/Turn-over Expenses: Typically it takes 2-6 weeks to do some touch ups around the property after a tenant moves out to when the new tenant moves in. 4 week vacancy is 1/12th loss rents and needs to be accounted for as a “Vacancy” expense line item. This is where most novice investors fail to account for.

    Maintenance: I have always been told to put aside 10% of the rents or 1 months rents as money set aside to fix random things in the property. Also remember that when you old tenant moves out you might have to fix a thing or two (or $20,000).

    Also don’t forget about contract services such as lawn/yard service, snow removal, pest control, or pool maintenance.

    Cap Ex: This is not in your net operating income for all you geeks (engineers) crunching numbers but this is another 10% or so going to a cash reserve account to pay for broken stuff down the 2-15 year road. This money is to pay for large ticket items. More info here. I say geeks because experienced landlords know that its very hard to predict this stuff and it is a waste of time to track and build models to predict this stuff. In reality the best thing you can do is spend your time not in Spreadsheet Land but find more deals to decrease your risk but making more cashflow! Easier said than done when you are limited with fund and getting started which is why you get a mentor to mitigate your risk and understand that these scary things is exactly why you should push forward because most people will back out and thin your competition.

    Utilities – In most single family homes the tenant is in charge of the utilities (electric, gas, trash, sewer, water) which makes you life easier. However in 2-4+ unit arrangements the responsibility is all over the place.

    HOA Fees – It worth mentioning but check if your property has this. Condo or townhouses typically have a HOA monthly fee and is why we don’t recommend them as investments in addition the face that it is a nightmare dealing with their governance system.

     

  13. Additions to the guide to People/Psychology guideWall of Shame (don’t make these mistakes)Deprival Super-Reaction TendencyPeople prefer avoiding losses over acquiring gains.  Most of us have a stronger reaction toward losing something we already own. I see this when people have made bad decisions in buying a non cashflowing piece of land or crappy turnkey rental and they just won’t sell for a loss even though they have no other capital to get themselves moving again. When I lost $40K in this deal… my first inclination was to just hold on (stick my head in the sand), but realizing this I sold at a lost and moved on and freed up my mental bandwidth to close on over 1,500 units in 2018.Excessive Self-Regard Tendency
    We overestimate our skills, which leads to overestimating the competency of our decisions, which leads to overestimating the value of our investments or assets.  While confidence is needed in investing, excessive self-regard results in people thinking they’re better at picking stocks or investments than they actually are.  I see this went I go to networking events and run into someone venturing over from the stock trading camp or someone who thinks they are super smart because they are a genius in the computer science universe.
    If you are doing well monitoring trends 28 hours a day awesome for you!
    Sometimes I have a call with someone and they argue with against starting out with a turnkey rental and cite the reason why MFH is superior because they have listened to 1,000 hours of podcasts (inception by Guru) but they don’t have any experience even running a SFH!
    Real estate is very simple and requires soft skills to acquire the network needed to excel. In that respect it is like playing ultimate frisbee where the playing field is leveled and the physically gifted don’t really stand out like a pick up basketball game would. If you don’t know what I’m talking about you should check out the sport, it could be your calling.Social Proof Tendency
    We tend to seek out people who think the same way we do, and we want to do something just because someone else has done it, rather than for its own merit or because we’ve done the research.  This leads to an unhealthy herd mentality.
    Example:
    Investor A tells Investor B that Operator C is a great operator. Investor A does not know anything (how to run the numbers) just investing in a few deals done by Operator Z. Now Investor B invests in Operator C’s deal.
    Charlie Munger’s example:
    “Big-shot businessmen get into these waves of social proof.  Do you remember some years ago when one oil company bought a fertilizer company, and every other major oil company practically ran out and bought a fertilizer company?  And there was no damned reason for all these oil companies to buy fertilizer companies, but they didn’t know exactly what to do, and if Exxon was doing it, it was good enough for Mobil, and vice versa.  I think they’re all gone now, but it was a total disaster.”
    Combine Excessive Self-Regard (rich people with investing track record or not) with Social Proof Tendency you get a recipe for group thinking. This is something I constantly see in my of the groups that I paid to be in and as I grow my own mastermind.Consistency Avoidance Tendency
    Just because something has worked in the past does not mean that markets do not change. It is difficult to be objective and move against your past operating system. This is why in the podcast we always ask guests what is something they once thought, put their ego aside, but they realized was wrong.Envy/Jealousy Tendency
    Its no doubt that its impressive when someone says they own 2,600 units or whatever. Not going to lie, its definatly a pissing contest.
    You might see a 310-unit deal come by and a 424-unit come by and want to invest just to increase your unit count. Just know to keep to your underwriting standards and not compromise.
    Deals are like airplanes. Everyone is waves goodbye in great admiration and fanfare when the airplane takes off but once it disappears into the horizon no one knows if the plane made it to the end goal.
    Sometimes it is clear that some planes leave the origin with a quarter tank of gas or a drunk pilot.
    It is often the deals that you don’t do (even though it costs you $50,000 of earnest money) are the best deals you make because you prevent the drain of money and more important life energy.
    People prefer avoiding losses over acquiring gains.  Most of us have a stronger reaction toward losing something we already own. I see this when people have made bad decisions in buying a non cashflowing piece of land or crappy turnkey rental and they just won’t sell for a loss even though they have no other capital to get themselves moving again. When I lost $40K in this deal… my first inclination was to just hold on (stick my head in the sand), but realizing this I sold at a lost and moved on and freed up my mental bandwidth to close on over 1,500 units in 2018.Excessive Self-Regard Tendency
    We overestimate our skills, which leads to overestimating the competency of our decisions, which leads to overestimating the value of our investments or assets.  While confidence is needed in investing, excessive self-regard results in people thinking they’re better at picking stocks or investments than they actually are.  I see this went I go to networking events and run into someone venturing over from the stock trading camp or someone who thinks they are super smart because they are a genius in the computer science universe.
    If you are doing well monitoring trends 28 hours a day awesome for you!
    Sometimes I have a call with someone and they argue with against starting out with a turnkey rental and cite the reason why MFH is superior because they have listened to 1,000 hours of podcasts (inception by Guru) but they don’t have any experience even running a SFH!
    Real estate is very simple and requires soft skills to acquire the network needed to excel. In that respect it is like playing ultimate frisbee where the playing field is leveled and the physically gifted don’t really stand out like a pick up basketball game would. If you don’t know what I’m talking about you should check out the sport, it could be your calling.Social Proof Tendency
    We tend to seek out people who think the same way we do, and we want to do something just because someone else has done it, rather than for its own merit or because we’ve done the research.  This leads to an unhealthy herd mentality.
    Example:
    Investor A tells Investor B that Operator C is a great operator. Investor A does not know anything (how to run the numbers) just investing in a few deals done by Operator Z. Now Investor B invests in Operator C’s deal.
    Charlie Munger’s example:
    “Big-shot businessmen get into these waves of social proof.  Do you remember some years ago when one oil company bought a fertilizer company, and every other major oil company practically ran out and bought a fertilizer company?  And there was no damned reason for all these oil companies to buy fertilizer companies, but they didn’t know exactly what to do, and if Exxon was doing it, it was good enough for Mobil, and vice versa.  I think they’re all gone now, but it was a total disaster.”
    Combine Excessive Self-Regard (rich people with investing track record or not) with Social Proof Tendency you get a recipe for group thinking. This is something I constantly see in my of the groups that I paid to be in and as I grow my own mastermind.Consistency Avoidance Tendency
    Just because something has worked in the past does not mean that markets do not change. It is difficult to be objective and move against your past operating system. This is why in the podcast we always ask guests what is something they once thought, put their ego aside, but they realized was wrong.Envy/Jealousy Tendency
    Its no doubt that its impressive when someone says they own 2,600 units or whatever. Not going to lie, its definatly a pissing contest.
    You might see a 310-unit deal come by and a 424-unit come by and want to invest just to increase your unit count. Just know to keep to your underwriting standards and not compromise.
    Deals are like airplanes. Everyone is waves goodbye in great admiration and fanfare when the airplane takes off but once it disappears into the horizon no one knows if the plane made it to the end goal.
    Sometimes it is clear that some planes leave the origin with a quarter tank of gas or a drunk pilot.
    It is often the deals that you don’t do (even though it costs you $50,000 of earnest money) are the best deals you make because you prevent the drain of money and more important life energy.
  14. Additions to the Syndication Guide – To be a General Partner you need to find the deal, run it, bring a large portion (25% of the total capital), and answer annoying questions from the bank like this:https://youtu.be/WHC7LmUrnKEUltimately the reason I decided to not do a 4-50 unit by myself was because of the leading options under $1M are horrible and full recourse. Check out with these options for debt that the pros use which are typically out of reach from mom & pop investors.What is Syndication?
    A syndication is pooling of capital to invest in an opportunity. The benefit of putting capital together is that it might make it possible to purchase something that one person or small group may not be able to on their own with a Joint Venture agreement. We use syndications to get into opportunities to get away from the mom and pop chaotic and highly competitive space of under $1M-$2M deals. In addition, we try to stay under $10M-$20M purchase price sizes so we do not compete with larger institutions or hedge funds who are mostly interested in capital preservation not optimizing equity growth.
    You can syndicate anything from a shave-ice store to a multi-million dollar development. I just try to stay in my lane and focus on cashflowing real estate where tenants demand is high.
    Video version of this article with extra commentary:</span><a href="https://youtu.be/z5WHIa5FFng%5B/embed%5D" target="_blank" data-saferedirecturl="https://www.google.com/url?hl=en&q=https://youtu.be/z5WHIa5FFng%255B/embed%255D&source=gmail&ust=1559113668961000&usg=AFQjCNGZ6g95TgHv60sX47JIVtQukfua1Q">https://youtu.be/<wbr>z5WHIa5FFng

    My Experience with Syndications
    In 2016, I paid over $30,000 to get the mentorship to be an apartment operator/investor. What I learned in the process was that I did not need to be a General Partner because I had enough income and net worth to invest as a Passive investor (LP). After doing turnkey single-family homes from 2009 for 7 years I was ready to graduate to bigger deals as a passive investor.
    Technically, I paid $40,000 on this fiasco too.
    Since then I have been General Partner and Limited Partner on over a dozen deals from 2017-2018.
    Webinar – What are Syndications/Private Placements? – https://youtu.be/n_qsZHBOCS4

    </span><a href="https://youtu.be/n_qsZHBOCS4%5B/embed%5D" target="_blank" data-saferedirecturl="https://www.google.com/url?hl=en&q=https://youtu.be/n_qsZHBOCS4%255B/embed%255D&source=gmail&ust=1559113668961000&usg=AFQjCNHHCbdHxFEcFUoGDeKsGPRzh8Ynig">https://youtu.be/n_<wbr>qsZHBOCS4

    Two Types of Syndications
    There are two forms of syndications:

    1. A single (of finite number of assets) that are going to be put into the ownership entity. For example we are going to syndication the purchase and rehab of a 200-unit apartment complex at 123 Main Street. The assets are identified before capital is raised. This allows sophisticated investors to vet the deals on an individual basis.
    2. A Blind Pool Fund (like a real estate fund) where capital is raised based on the sponsor’s vision, track record, and reputation. The capital is raised first the sponsors will then go out and acquire properties.

    What are the Various Roles in a Syndication?
    Whenever you are learning something new like ball room dancing for example its best to learn the definitions first. Then once you understand those we will build up on the concepts. Remember mastery only happens with the right Mastermind and actually jumping into deals.

    Sponsor/Lead/Co-Sponsor/Manager/General Partner (GP)/Syndicator
    There are many terms for this person or company that organizes this investment and that is responsible for managing the whole operation on behalf of the investors. They are interchangeably known as the Sponsor, Lead, Manager, Operator, or Syndicator. Being in over a dozen different arrangements I can tell you that sometimes there can be a lot of dead weight in a GP however if you are looking to be in the GP you need to help with the deal with 1) finding it, 2) doing the grunt work, 3) bringing in a lot more capital than a typical Limited Partner.
    The loans (financial liability) is guaranteed by the Loan Guarantors or Key Principals (KPs). You guessed it! Typically a “rich dude/gal” with a net worth of over $2-5M is signing on the debt for the entire GP and Syndication. You can get compensated for this but every case varies which determines if it is a good risk reward. If you are a “rich dude/gal” we should probably connect and you should enroll in my mastermind with over 50% accredited investors too. But for the rest of you under $2M net worth keep reading…

    Investors
    Investors are known as Limited Partners (LPs). Not giving you any legal advice here of course but 80% of my investors invest in deals via their personal name because as the name implies there is limited liability because the liability goes through the GP first and the loans are guaranteed by the KPs.

    Legal Structures
    As mentioned before, the syndication may be created with a certain tax and legal structure. It is usually created as a Limited Partnership (LP) or a Limited Liability Company (LLC) to own the property on behalf of investors.
    Accredited Investors
    An accredited investor is a defined by the United States Securities & Exchange Commission as someone who makes a minimum of $200,000 ($300,000 if filing jointly) or has a net worth of 1 million dollars excluding personal residence. The significance of being an accredited investor is that you can invest in things that those with less money, cannot. You can also be something called “a sophisticated investor” which has a much more nebulous definition but essentially says you know what you are doing even if you don’t have that much money. These laws were put in place long ago to “protect” the average person from predatory activity. The irony of this all is that there is no protection for the average Joe, or pension funds for that matter, against investing in a wildly bloated stock market at record valuations. Every major trader out there knows we are in a bubble but there is no protection for individuals dumping money into their retirement accounts to buy mutual funds. It’s an archaic system which makes little sense. Certainly, there has been some recognition of this fact. The 2012 JOBS act made it easier for Main Street America to participate in “alternative” investments via crowdfunding and made it easier for sponsors to advertise previously unknown opportunities. However, we have a long way to go. I would advise you that you need to know the lead syndicator personally. None of this “we met at a local REIA and he pitched me his deal”. If a guy does not have a list of solid investors they must lack the track record. Also I did a podcast with Amy Wan a syndication attorney talking a lot about this topic.
    It is a misnomer that syndications are only for accredited investors. 97%-90% of deals out there also accept non-accredited investors it just that you are not personally connected to any of these people.

    Two Typical Syndication Methods
    Most deals are put together with the following structures which follow the SEC’s governances.

    1. Regulation 506B – 97-90% of deals our there accept non-accredited investors and the GP cannot openly market the deal to a non-private list (no TV, Radio, social media ads for example). Investors (LPs) will self certify if they are accredited or non-accredited.
    2. Regulation 506C – the minority of deals following the new rules where you can advertise into the free world but the SEC says if you do this you cannot bring in non-accredited investors. Investors (LPs) will need a third-party letter from lawyer, accountant, or third party site like Verify-Investor validating Accredited status.

    The Process
    The following is how the process typically works.

    1. Someone finds a deal.
    2. GP ties up the property up in a contract and starts building their GP team. (This is where they call me and see if the Hui Deal Pipeline Club is interested in the deal).
    3. The GP performs their due diligence and in parallel they get the syndication lawyer (not another run of the mill person who happen to pass the BAR) to create an investment package typically referred to as a Private Placement Memorandum or PPM. The PPM includes details of the property/deal, terms, sponsor contribution, equity splits, projected returns (proforma), fee structure, payout structure, and other marketing. The PPM is a heavy document over 100-pages. In most cases it scares new investors because it discloses all the risks that can happen. In the end it does two things: 1) Signs the GP up to be fiduciary to no lie, cheap, steal, and run the investment to the best of their ability and 2) Signs the LP up to minimize their ability to sue the GP incase the deal does not go well after all in everything there is risk and sophisticated investors know this.
    4. The GP will then go about raising money from investors (LP). They will decide a minimum investment amount based on the downpayment needed, cash reserves, capital needed for extra construction, fees/compensation for putting the deal together. Experienced GPs will always write the PPM to allow some wiggle room incase an extra 5-20% of capital is needed so they don’t have to spend another $10,000 for another irrevocable PPM. I am mentioning this because a common question from LPs is why does the PPM say the max raise is $4M and the sponsor just told me their take get is $3.5M? As a LP it is important to understand the rough breakdown on what the initial capital raise is being used for. Beware if capital is being raised to pay out investors in the first year. This is technically a semi-legal Ponzi Scheme but is not a good best practice by a GP and a way of tricking unsophisticated LPs.
    5. Once there is enough capital and the financing is worked out, the property will be purchased and the sponsor manages and operates the property. This is always a monumental movement as millions of dollars are being wired in from dozens and dozens of LPs in just a matter of days.
    6. After the property is acquired the fanfare and excitement goes away and the GP rolls up their sleep and gets to work. Distributions and profits are given as outlined in the PPM. In a way the LP courting stage is over, the wedding was a blast, and now we see how well this marriage lasts/goes.

    Why did I focus on being a LP
    Again for me, it was simple math. The assumption was that my money would grow at 15-20% a year in part cashflow and equity & forced appreciation. The syndications that I do are not BS REITs and RE Funds where you know the people running the deal for you and you don’t have layers of people taking hidden fees.
    I get all the pass-through tax treatment and depreciation and interest expense. In fact it is stronger than my direct ownership rentals because of cost segregation and bonus depreciation. See our tax guide.
    What I give up for control (most of which is an ego thing) I gain in diversification (multiple partners, markets, business plans, and asset classes). And the property management is typically a lot more professional than the property managers in the residential (1-20 unit) world.

    What are the downsides of a Syndication?
    Syndications as a LP are for people with money. If your net worth is under $250K its cool to learn but you really should not think about investing in one. Being an LP is more of an end game strategy or once you have hit your critical mass point.
    Lack of liquidity. Should something happen in your life like someone kidnaps your child or your spouse wants you holdings its almost impossible to get the money out. Again not for broke people.
    Lack of control. The GP calls the shots and you are on for the ride. Then again most LPs are amateurs and at some point its better to give the wheel to the pros.
    Costs and fees can be misleading. We break these down in our MastermindYou have to find another deal when it exits. Although I find this fun!

  15. What is an example of an investor split on a Development deal?

    First off most development deals are higher risk and higher returns. Whereas I tend to invest the majority of my portfolio in cashflowing stabilized assets. Development deals have two huge “ifs” which are what the property sells for and how long construction will take. Typically there are huge promote fees on both acquisition/funds raised and during construction.

    Here is one example using a sponsor’s proforma, the manager is at 5.88% of gross on fees + 50% equity.
    Manager profit ration of 38% with a client return of 14%. [That seems greedy to me given the client return and risk.]

    Manager Fees

    3.3% dirt + build ($12.05m) = $397,650
    1% sale ($16.27m) = $162,700
    3.5% build ($11.32M) = $396,200
    50% equity Class A/B; 65% equity Class C
    Gross margin: $4,217,712
    Duration 24 months (build to sale) – this is the largest variable other than what the property sells for.

    To Class A shares or the LP portion ($10.60m raise)

    Preferred return = $2,226,000 10%
    Remainder margin = $1,991,712 * 50% = $995,856
    Total = $3.22m
    $10.60m -> $13.86m ~ 14% return
    To Manager:

    $956,550 fees + $995,856 margin = $1.95m
    Manager/Class A = 60%
    Manager/Margin = 37.7

  16. What are some things that most LP’s over look:
    1. Many general partners put up substantial amount of money that is non-refundable after a certain point in the diligence phase. This is called your money going hard. It’s a dirty little secret that many operators will force a deal to happen with loose underwriting rather than pull out of the deal and eat $50,000 to $200,000 of their non refundable earnest money.
    2. It is good to look at the how the capital raised is being used. The largest amount of money will be used for the down-payment and then for the capital expenses. Then the fees (rightly so) and cash reserves to mitigate a cash call but not too much to dilute investor returns. Be careful if there is extra money raised to pay out investors in the beginning stages of the investment. I am not an attorney but I believe that may be a Ponzi scheme but is definitely not a best practice in borrowing from the future to pay investors out of. The cashflow should come from the income minus expenses generated.
    3. Where are LP’s in a capital stack? Sometimes there may be a preferred equity partner in the general partnership that is gaining better treatment before LPs. Something to be aware of and understand how profits flow to investors.
    4. Anyone have “the talk” with their parents? Any insights to add to this article to help others in our community? 
    5. Additions to the Crowdfunding guideChicago company that was recently shut down for allegedly running a Ponzi scheme.They promised investors returns of 15% to 20% on Chicago real estate. This is a huge red flag in my opinion. Those returns are extremely tough to achieve in Chicago, even in “high yield” areas.https://www.housingwire.com/articles/46567-sec-shuts-down-equitybuild-claims-company-is-135m-real-estate-ponzi-scheme
    6. Additions to the 1031 Guide – Delayed Sale TrustGood for people selling very large assets such as a $5M dentist franchise due to high costs.
      Defers taxes on the sale of a primary home. Unlike a 1031 Exchange, the proceeds from the sale do not have to be invested in “like- kind” property in a very short timeframe to achieve tax deferral. Moreover, a DST can be used to “rescue” a 1031 Exchange that is in danger of failing.Doing this converts an illiquid asset, like a business or commercial real estate, into a diversified portfolio of liquid investments. Now you get diversification from a variety of asset classes or geographical locations like how we are investing syndications.There is an added benefit of being able to split partnership interests and outside of taxable estates at the close of the DST ($11M and $22M married). Here is one firm that we have a relationship with.
      Additional reading: IRC 453, Installment Sales
    7. Additions to the QRP & Retirement Plan GuideCan a Roth IRA be converted directly into a QRP? And if so, can a Roth IRA be converted into a regular IRA first and then immediately converted into a QRP as a way to get around this rule?Converting Roth IRA into Traditional IRA is called “Recharacterization”. It is not as common as Traditional IRA –> Roth IRA, due to the tax benefit of Roth IRA.In 2018, as part of the Tax Cut and Jobs Act, recharacterization of Roth IRA conversions from traditional IRAs and qualified plans (e.g., 401(k)) was repealed. As a result, all Roth conversions taking place on or after January 1, 2018 are irrevocable. But recharacterizing Roth contributions is still permitted. For instance, a traditional IRA contribution can be recharacterized to a Roth IRA contribution and vice-versa.Prior to January 2018, an investor had four available recharacterization options including: (1) traditional IRA contribution to a Roth IRA, (2) Roth IRA contribution to a traditional IRA, (3) conversion of traditional, SEP, or SIMPLE IRA and (4) qualified plan (e.g., 401(k)-to-Roth IRA conversion to a traditional IRA). Under the new rules, the list of options has been reduced.According to the IRS, a Roth IRA conversion made in 2017 may be recharacterized as a contribution to a traditional IRA if the recharacterization is made by October 15, 2018. A Roth IRA conversion made on or after January 1, 2018, cannot be recharacterized, the IRS says. For details, see “Recharacterizations” in Publication 590-A, “Contributions to Individual Retirement Arrangements (IRAs).”https://www.lordabbett.com/…/roth-recharacterization…
    8. Additions to the Turnkey Rental GuideWhere do I get a loan?
      First off do not go to a big bank lender like Chase, Bank of America, Wells Fargo. Even worse they use the same guy that got them their primary residence. Don’t use those guys cause now you are buying a remove non-owner occupied rental!
      You are getting an investment property that you are not going to live in. It is a going to be a little different and a typical residential owner occupied property and the drone working at those big banks will just mess it up as the file gets passed from the sales guy (the one you interact with) to the underwriters (people who cover the banks butt).
      Not all lenders are created equal. And it always preferred to work with a lender who is an investor too or works with other sophisticated investors to draw the best practices as opposed to it being a blind leading the blind experience.
      If you are serious buyer let me know and I’ll connect you with who we use.Who are you using and I’ll let you know who I recommend.If you would like a referral to a turnkey provider or broker let us know here.
    9. Additions to the Newbie Money GuideSaving rate versus investment returns?Albert Einstein supposedly once said that compound interest is the eighth wonder of the world. But Einstein was an employee never understood leverage in government subsidized real estate loans x compound interest.What matters more: your saving rate or your investment returns?Accumulating Wealth in the Early YearsIf your goal is to achieve a net worth of $1 million (bad goal since it should be more a cashflow per month number) and you invest $10,000 every year and earn a 7% annual return on your investments — which is a reasonable assumption for long-term stock market returns — you’ll accumulate $1 million in about 30.7 years.
      The pixelated chart below shows exactly how long it would take to reach every $100,000 net worth milestone, using the assumptions of a $10,000 annual investment earning a 7% annual return:Notice how each $100,000 net worth milestone takes less time to reach than the last.Take away 1: We are told the normal stock market stuff grows at 8-10% a year. But what happens if you direct invest in deals and make 25-35% a year? What about a conservative 15%?You might find these charts discouraging if you’re someone who has yet to save their first $100,000.The numbers don’t lie: The first $100,000 takes the longest to accumulate. Warren Buffett’s longtime business partner Charlie Munger even once said, “The first $100,000 is a bitch!”I’m not a rocket scientist (did go to Space Camp) but it takes a large portion of the fuel to get the Space Shuttle off the ground a few inches. The rest is just momentum. In a real estate investor’s progression we call this the law of the first deal where its not going to be that great but as you stick to it you learn and more importantly your network grows (or join these others on the journey) and your ability to attract better deals improves.Have you ever tried to court a cat? You need to attract it! That’s how good deals are… they come to you.SimplePassiveCashflow.com is meant for high(er) net-worth, wait correct that… not-broke people who are responsible with their money and hard working professionals. We are real estate investors and you need money to invest.If you are aiming for financial independence (especially while working a full-time job) focus on variables you can control. Those ingrained in the the FIRE (Financial Freedom Retirement Extreme) movement focus on saving money. Never having a $5 Simple Passive Cashflow Latte. We astute investor responsible use debt to maximize returns (and be smart with how we spend money).
      Personally I live by the Fat FIRE life style which consist of:

      1. I don’t buy anything I don’t really need
      2. Focus on experiences and get out of trading time for money
      3. And BTW I drive a Mercedes (only after my cashflow allowed me to do so)

 

    1. Census data for population data – [although I think this information is not too useful because it does not capture inter-state migration]
    2. MHN Multi-Housing News – 19.06.12 – Don’t Wait to ‘Buy the Dip’ in Seniors Housing
      A number of this segment’s investors have sidelined themselves waiting for deeply distressed assets to come to market. Those opportunities may not present themselves.
    3. Housing price index all time highs
    4. REITS buying into Primary Markets like Seattle
    5. MHN Multi-Housing News – 19.06.5 – Senior Housing Demand to Surge Over Next 5 Years – [They expect old people live longer which is good for senior housing]

  1. 19.06.4 – REBusiness Online – Us Economic Expansion Has Clear Runway to 2021 Says Wells Fargo Economist
  2. What is this China Trade War?Potential higher costs for goods.President Trump raised tariffs again on $200 billion worth of Chinese imports, from the previous 10% increase to 25%.Most believe its good in the long run but short term it’s a bit of a head-to-head hunger strike (where the US should prevail)May 13th China put higher tariffs on about $60 billion of American goods.The Dow plunged as much as 700 points. (China impacted stocks Apple and Boeing impacted most) Other Articles: NYT – Reuters – CNBC
  3. US Censes data – in excel format – https://drive.google.com/open?id=1qT5pVVXtDqKTyVig3x-ex9twdk8MsHLb
  4. Sales Volume


    Investment sales volume totaled $36.4 billion in 1Q19, up 1.3% year-over-year, with over 70% invested in non-major markets. Trailing 12-month sales volume rose 8.1% to $175.2 billion. 1Q19 marks the eighth consecutive quarter in which multifamily represented the highest sales volume of all property types.

     

    Cap Rates


    Nationally, cap rates decreased 2 basis points quarter-over-quarter to 5.39%, with major markets increasing 3 basis points and non-major markets decreasing 7 basis points. Yields between major markets and non-major markets compressed to 85 basis points, representing the tightest spread since 1Q13.

     

    Rent Growth


    Annual effective rent growth increased 10 basis points to 3.0%, led by above-average growth in Las Vegas, Phoenix, Orlando, Jacksonville and Tampa. Rent growth was particularly strong in the Class B space, which increased 3.4% year-over-year.

     

    Supply and Demand


    Over the past 12 months, 301,210 new units have been delivered while 299,310 have been absorbed. Dallas, Los Angeles and New York have added the greatest number of new units over the past 12 months, while Nashville and Charlotte have experienced the largest inventory growth rates at 4.2% and 4.0%, respectively.

     

    International Capital


    Direct acquisitions by international capital sources totaled $14.7 billion over the past 12 months, representing a 3.5% increase year-over-year with increasing international interest in non-major markets. Canada remains the top foreign buyer of US multifamily, accounting for 49.5% of acquisitions by foreign buyers.

     

    Debt Markets


    Mortgage debt outstanding for multifamily grew $32.2 billion to $1.4 trillion, a 2.4% quarter-over-quarter increase. Debt outstanding for GSE and Life Insurance lenders rose 11.4% and 9.4%, respectively. $124.1 billion of US multifamily mortgage are set to mature in 2019.

    Download report here.

    Source: http://www.ngkf.com/home/research/us-market-reports/multifamily-capital-markets-report.aspx

  5. The last quarterly newsletter here

 

“It is unlikely for someone to transform from a scarcity mindset to an abundance mindset (without a life altering experience ie. life-death experience, LSD, tribal drugs, or passing of loved one) without reaching or getting on the path to financial freedom. On my journey to financial freedom, I was cheap with my money and time. Somewhere along the way my outlooked changed but it is a process… you cannot just meditate or recite mantras to and obtain an abundant mindset. Perhaps scarcity mindset is the fire under your ass to do something. And beware of “Cheap Easy Free people” (CEF) along the journey because it typically a sign for a scarce mindset. CEFs are usually 1) not very much fun, 2) have lame relationships and friends, 3) looking out for themself first.”

An addition to Reverse Engineering Happy

On a less serious note… check out the engineers who invented Roomba beer pong!

 

No more Passwords!

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Unfortunately, I did not #LaneHack Roomba beer pong but did come up with the following.

8?s to Identify a Real Problem
Why isn’t this problem already solved?
Why am I not where I want to be?
How did this get to be a problem to begin with?
What have been the impediments or constraints that have hindered me from solving this problem? (skills, desire, resources, time, discipline, environment)
If I could only ______ really, really, well, I would have it all figured out
What could I do to make this problem even worse?
What can be done today to improve this situation?
If I only had ____, I could solve this problem.

Change Your Cell Phone Reminders

You can change the sounds your cell phone makes and those sounds can become triggers, reminding you to engage in a good habit. The theme from the movie Rocky can serve as a reminder to stop watching TV, get off the couch and exercise.

You can set your cell phone reminders to anything that serves to remind you to engage in a particular new, good habit.

Post Pictures Where You Can See Them Every Day

Every day, millions wake up, head for the bathroom, gargle and brush their teeth.  The bathroom mirror is the first thing many of us see in the morning.

Pictures are effective in forming new habits, but not so effective in eliminating old, bad habits.

If you want to stop eating, place a picture on your bathroom mirror of the figure you desire to have. This will act as a trigger to exercise (new habit), and exercise is one of those keystone habits that affect other habits, such as eating junk food.

You can also download a picture to your cell phone and make it your background picture, something you cannot avoid seeing every day.

Remove Environmental Triggers

If you have the habit of watching TV after eating your dinner, which triggers sitting on the couch and drinking alcohol, put a sign on your dinner table that says “Read” or “Exercise” of “Go For a Walk”.

If your kitchen cupboard is a trigger to snack on junk food, then remove all of the junk food and replace it with some healthy alternatives.

If McDonalds or Dunkin Donuts is a trigger to eat junk breakfast food, then change the route of your commute to avoid seeing those yellow arches or that big donut sign.

Depending on the study, 40% or more of your daily activities are habits. Since habits are a major factor in determining the circumstances of your life, changing them must become a priority, if your life is not what you desire.

 

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