Investment Strategy

Multifamily Real Estate

At Clear Mind, our primary goal is to preserve our investors’ initial investment while providing larger than normal cash on cash returns. We accomplish this by investing in value-add, B & C level multifamily apartment buildings that are in emerging markets and positioned to appreciate in 3-7 years, and we buy with an exit strategy already in place. You may be wondering… why multifamily?

Historically, multifamily apartment buildings have been one of the strongest and most reliable investments due to their ability to remain strong during economic uncertainty. When real estate markets crash, often multifamily investments still perform well due to a rising desire or need to rent. The trend speaks for itself: millennials want to rent rather than own. Due to the lack of supply of multifamily properties, the future holds a rental market shortage which makes these properties even more valuable, serving as a powerful investment vehicle.

Within multifamily real estate, we focus on three main investment strategies.

Our core focus is value-add opportunities. These assets are typically well occupied at takeover but rent below market or have a clear value-add play, such as implementing utility bill-back. By implementing revenue-generators, curing deferred maintenance, adding and improving amenities, and taking steps to improve property appearance, we can usually continue to increase rents and generate substantial cash flow for investors. A typical value-add play is $5,000-$9,000/unit in rehab budget.

Stabilized properties are typically well maintained and have high occupancy at takeover. These assets typically provide strong cash flow from day 1, and have an opportunity to increase value through moderate interior upgrades. The rehab budget is typically on $1,000-$3000/unit.

These assets tend to have lots of deferred maintenance and suffer from high vacancy. With a strong rehab budget, these assets can typically be turned around and brought back to stabilization in 12-24 months, afterwards providing significant cash flow or value for investors. The typical rehab budget is $6,000 to $15,000+ per unit.

Investment Criteria

How do we find the right investment opportunities? By evaluating the following criteria.

The Right Property

  • 100+ units
  • Range from $10MM – $30MM
  • Offer “Value Add” components leaving significant cash flow opportunity
  • In emerging markets (great job and population growth)
  • Provide a 7-10% cash on cash return and a minimum DSCR (Debt Service Coverage Ratio) of 1.25
  • C- to B+ neighborhoods and condition

The Right Location

  • Job Growth: Is the local government committed to attracting jobs and making it easier for companies to grow?
  • Population Growth: Are there attractive reasons why people would choose to uproot their lives and families and move there?
  • Rising Rents: Are rents continuing to increase as more jobs are created and more people move into the area?
  • Rising Property Values: Have property values shown a consistent trend of increasing over time?

The Right Time

  • Area is on the verge of explosive growth and/or in the middle of a steady climb
  • Before a large company is going to open up operations in that city creating more job opportunities
  • When a property has deferred maintenance and poor management making the price lower and the opportunity greater
  • Before a property hits the market

Investor Returns

Passive multifamily investments typically generate two types of cash returns, Cash Flow and Profit at Sale/Refinance, and potentially one type of tax benefit, Depreciation. Click below to learn more about these advantages.

The term Cash Flow refers to the payments made to investors during the investment hold period at some regular interval. Payments are typically made quarterly, but it could be more or less often. The amount of cash flow available for distribution is directly related to the operating performance of the property. Each year, the property generates income, pays some of it out for basic operating expenses (taxes, insurance, property management, etc.), pays some of it out for large renovation projects (often called “Capital Expenses”), and pays some of it to the lender in the form of monthly mortgage payments (often called “debt service”).

Assuming there is money left over after paying operating expenses, capital expenses, and debt service, the leftover income can be used to pay the investors and the operators. The better the property performed in the previous period, the more cash flow investors should expect.

Varying Cash Flow

Many multifamily projects will require significant renovation in the first year or two, which in addition to the direct costs of the construction work will also lead to greater tenant turnover and likely higher vacancy. For this reason, cash flow is often lower in years one and two than in later years, and in some cases, projects won’t pay any cash flow for 12-24 months.

Properties that expect to provide lower cash flow earlier in the project – or potentially throughout the entire project – will often make up for it in other ways. For example, low cash flow early in the project may be replaced by high cash flow a couple years into the project. Or, the heavy construction that often leads to low cash flow can pay off later at refinance or sale.

While regular cash flow payments are obviously great, the large cash return is generally seen at the time the property is refinanced (a new – bigger – loan replaces the original loan) or the property is sold. If there was a large renovation on the property, this renovation likely helped to increase the rents which will directly lead to a higher sale price.

When a property is sold, the profits generated between purchase and sale get distributed to the investors and the operators. Assuming the operators were successful at carrying out the business plan, the profits at sale can provide a large portion of the returns investors will see. For this reason, projects that have more renovation involved tend to have a greater increase in value at refinance or sale. Large renovation projects are more risky, but also potentially a lot more profitable.

Literally speaking, depreciation means a reduction in the value of an asset over time. As you might expect, the physical structure in a real estate investment (as opposed to the land it sits on) will deteriorate over time. The IRS recognizes that there is a cost associated with maintaining the physical asset, and they compensate investors in the form of a tax deduction known as depreciation.

If you own a piece of real estate, a percentage of the value of the physical structure can be used as a deduction against the property’s income each year. In many cases, this deduction can completely (or nearly completely) offset the income the investment is generating, making that income nearly or completely tax free.

Many multifamily investments will pass this depreciation benefit on to investors, allowing them to offset the income they generate from the regular cash flow payments. That said, there are two important things to understand about depreciation…

Two Notes on Depreciation

First, depreciation is a short-term benefit. It puts extra money in your pocket every year while you own the property. But, when the property is sold, previous depreciation deductions taken from the property will have to be repaid to the IRS. Depending on your financial situation, the amount repaid may be the same, more or less than the amount you originally were able to save through the deduction.

Second, if you are investing through a tax-advantaged account – like a self-directed IRA or Solo 401k – you may find that you can’t utilize the depreciation deduction, as you’re already avoiding or deferring taxes on the income you’re generating.

For both of these reasons, it’s important to speak with a good CPA, accountant or tax adviser to understand how a particular investment will impact your financial situation.

What Sets Us Apart

Our strategy goes beyond real estate. We prioritize relationships.

Partners

We pride ourselves on the relationships we have built with brokers in strong and vetted real estate markets to get their “pocket listings,” in addition to our partnerships with banks to gain access to bank-owned properties (REO) that are far under market value. Each asset undergoes our thorough due diligence process to ensure it’s the right property, in the right area, at the right time.

Investors

Next to selecting the right property, working with the right investors is at the heart of our success. Rather than simply chasing down funds, we seek to partner with investors who share our philosophy and have proven to be the right fit for multifamily investments. We are committed to investor success and always invest personally in our own deals to affirm our confidence in the opportunity.

Discover the Power of Multifamily Real Estate Investment

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