I am interested in opinions on large-scale tenancy-in-common arrangements, where real estate investors, as part of a group of investors, purchase multi-million dollar properties such as office, retail, or apartment buildings. Many are now using this vehicle to rollover gains in 1031 exchanges.
Most potential properties I have seen, sponsored by companies such as Triple Net and Passco, are returning 5-8% of invested principle, much of which is sheltered by depreciation. Other than the complete loss of liquidity, I cannot see a reason not to take advantage of this opportunity, as it takes the headaches of managing property away.
Anyone familiar with or have opinions on this investment vehicle?
Look at the total dollars raised and the actual dollars invested in real estate. I think you will find that about only 50 % of the funds actually goes to buying the property. The other money goes to fund raiser, developer, syndicator, realtors etc. Also when you need or want out what are your options. Is there a market for your shares. I know a lot of REIT stock is traded on several of the stock exchanges but not sure about this stuff. May have to sell at discount and take a long time to do so.
Just a few questions ideas to hopefully help
Thank you,
Ted P. Stokely Jr
11505 Sw Oaks
Austin, Texas 78737
I’ve looked at about 2 dozen of these and plan on using some self directed IRA $ for a couple that I liked the best. A 5% cash on cash return seems pretty low. Most I’ve seen pay 8 - 10% depending on the degree of risk and whether it’s all one class of investor or if there’s a preferred and secondary class structure (secondary has more risk, gets greater % of the end result).
Liquidity is a major drawback, although if set up properly you can 1031 out of one of these when the property is sold. Most syndicators have a procedure for selling your units if you Must get your cash out–but expect to sell at a discount to the original investment. (This is a great way to buy into one of these).
The overall return to investors also is lower than you might create for yourself, which is a tread-off against not having to do anything beyond your due diligence. Most have 4 - 7 year projected holding periods. Read the prospectus carefully as there’s sometimes so many ‘weasel clauses’ that the syndicator can basically do whatever they want and you’re along for the ride.
All in all, not a bad idea if you’re time starved and cash rich and/or have a 1031 exchange that’s about to go outside the 45/180 day time limits and you need a quick alternative to avoid the cap gains tax.
Thanks for your thoughtful reply. The company I’m considering going with is called US Advisor, based in Napa (I’m in San Francisco). On any given property, they hold the Master Lease, and guarantee an 8% return on cash investment. So I guess as long as they’re solvent, investors get their 8% return. Then when the property is sold (4-6 yrs), investors share in the proceeds, for a total return of 12% or more.
They apparently have around 2,000 units under management across Texas and Florida. The apartments they deal with are A Class, i.e., have swimming pools, gardens, gyms, etc.
Would you mind sharing the companies your considering? The more well-known ones are Triple Net, Passco, Argus, and RK, but most of these have higher minimums than I can do at this point – they’re in the range of 300k and up.
I think we probably attended the same BAIES meeting earlier this month where US Advisors presented their projects. I’ll admit to being impressed with their approach relative to others I’ve seen, although I have not done any due diligence or read their prospectus to see how much of the deal they’re taking.
One downside is their desire for the investment to be via LLC. Since you live in CA, even if you create the LLC in another state you’ll still get tagged for the $800 CA franchise tax each year (unless they’ve found some creative way around that). This fixed cost eats up a big chunk of the cash flow if you’re making a small investment. Also, make sure you’re actually in a position to take the depreciation each year to offset the income (check with your CPA).
One thing I’d strongly suggest is to take a look at some independent research on the apartment market conditions in whatever market and sub-market a project is located before taking the plunge. Their Houston project made me nervous based on my perceptions of the rental market being saturated and the building being on the edge of moving from class A to class B. You can get free info from some of the larger commercial brokers on their web sites. Hendricks & Partners and CB Richard Ellis are great resources although 2-3 quarters dated, realfacts.com and economy.com often have relevant stuff as well.
I’ve looked at Triple Net and dropped them, have not researched any projects from the others you mentioned although Argus is on my list. I’ve also looked at a couple of projects that Greg Biershack(?) represents. Greg pitches something at almost every BAIES and BAWB meeting regarding IRA investment & had a couple of syndicated deals with attractive terms, although I didn’t like the location and property type (strip mall) in those cases.
There’s also a smaller local firm called Lynch Investments (http://www.lynchassociates.com/) that I’ve considered due to lower minimums and a two tier equity structure. If you want extra safety, they offer a preferred class that gets paid first, albeit at a lower rate. I also recently met with a guy named Adiel Gorel, who’s best known for preaching buy & hold for single family houses (my primary strategy for 1/2 my capital base). He’s also launching a syndicated venture for multi-family with lower minimums. His firm’s web site is www.icgre.com. Beyond the above, you’ve probably done more research than I have.
Actually the way I heard about US Advisor is through a company called 1031 Exchange Options. Is BAIES a Bay Area investment club or organization? When & where are the meetings? The downside you mention with regards to US Advisor and their desire for the investment to be via LLC is something I haven’t heard of, and frankly, don’t see the point of for someone in my position (individual, comparatively small chunk to invest) – particularly in light of the franchise tax you mention.
I had a question about your comment re depreciation. By “being in a position to take the depreciation,” do you mean having a large enough income that prevents taking passive losses against income? As I understand it, an individual’s share of the depreciation (commensurate with their share of the investment) can be used to offset the monthly cash payout, just like with a typical rental. Since this is done “above the line” on the 1040, it shouldn’t pose a problem – unless, as I mentioned, depreciation EXCEEDS the payout and the loss cannot be taken because adjusted gross income exceeds 150k.
I agree with your feelings on researching each market – thanks for the heads-up on various resources. The numbers in the deals I’ve seen make sense to me, but I have this nagging concern that I don’t know the individual markets well enough to pull the trigger.
I’ve heard of Adiel, and actually had some of his information sent to me, but then my attention was turned to this TIC idea – I really like the idea of not having to actively manage properties.