🗞🚨 NEWS ALERT: Why Real Estate Investing is A Better Retirement Plan Than Your 401(k)

Probably, you grew up with your parents stressing the importance of you getting a good job with good benefits, and a retirement plan is always falling into the category of “good benefits”. Starting your 401(k) or IRA is a modern American right of passage. You are officially a responsible adult planning for your future 30 years in advance. This is top tier “adulting”.

News flash, we, at Dwellynn, are here to tell you that the traditional 401(k) retirement may be damaging your retirement plans of watching the sunrise on the beach or the sunset in the mountains, even before those plans are finalized.

Most articles or blogs that were written over the past 30 years that go over how to save for retirement, will encourage you to maximize the contributions that you make to your 401(k) to help ensure that you are saving, to receive tax deductions, and to possibly get the company you work for to match your 40(k) contributions (aka “free” money).

To be clear, we are not saying that 401(k)s are inherently bad retirement models; however, there are several major issues that we want to raise about 401(k)s.

• 2/3 of 401(k) accounts were directly or indirectly invested in equities at the end of 2015, according to the Employee Benefit Research Institute, consisting of mutual funds and other pooled investments. This means that more than likely, your retirement savings are tied to market volatility, political climates, and market sentiment, amongst other things.

• Your investment options may be fully valued or, even worse, overvalued at the time the contributions are made.

• It's highly unlikely that the portfolio managers who currently manage your investment options will be the same portfolio managers managing them 10 or more years from now, meaning the “long-term” investing strategy for your retirement savings may change as often as the portfolio manager changes.

• 401(k) plans come with many compliance issues that need to be monitored with constant oversight and administration costs, creating participant fees, asset-based charges, and other fees.

• You create an enormous tax liability on deferred taxes.

There are many perks of investing in real estate vs a 401(k): higher returns, appreciating tangible assets, no hidden fees, predictable cash, forced asset appreciation, and inflation hedging.

With a self-directed IRA, you have significantly more control over the type of investments that you fund through your retirement plan. With a self-directed IRA, you can passively invest in multi-family syndication deals by simply choosing a syndication deal and having the custodian of your IRA to invest the capital for you. The returns that you make from investing in multifamily syndication will be put right back into your IRA account, and you can roll it over into your next investment.

Two Different Scenarios: 401(k) vs Investing in Syndications

Scenario #1: You put $100,000 into your 401(k) and add $10,000/year for 30 years with average annual returns of 7%

• When you retire after 30 years you will have around $1.8 million in retirement savings

• When you take into consideration an average inflation rate of 3.22%/year, your retirement fund will be worth less than $900,000 in today’s money

Scenario #2: You put $100,000 into your self-directed IRA to invest in real estate syndication deals, with 5-year hold times and 2x equity multiples

• With a 2x equity multiple [EM] and a 5 year hold time, every 5 years you will have doubled your initial investment.

• When you retire after 30 years you will have around $6.4 million in retirement savings, without taking into account the additional $10,000/year that you put into your retirement savings. If you include the additional $10,000/year, you’d have an additional $50,000 to invest every 5 years, which will bring your total retirement savings to around $9.5 million.

The Winner: Real Estate Investing for Retirement

As you see, $100,000 + $10,000/year goes A LOT further if that money is invested in real estate syndications, as opposed to just sitting in a 401(k). The difference between the two scenarios is $7.7 million in retirement savings. Of course, this is a simple projection that doesn’t take into account major market shifts or failed syndication deals that may impact your earnings and annual returns, however, if you took just half of the $7.7 million difference between the two scenarios, you’d still be looking at $3,850,000 more in your retirement savings through investing in real estate syndications.

If you paid close attention to the scenarios, both scenarios assumed 30-year timeframes for investing in your retirement plan. This means the longer you wait to decide to invest in real estate, the older you will be when you reach your retirement plan goals. The difference between a few years can be hundreds of thousands of dollars, so it is very beneficial for you to do your research, ask as many questions as you need, and educate yourself on real estate investing and multifamily syndication deals so that you can jump-start your retirement savings plan.

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🛠 🔩 Building "Sweat Equity" with 🏚 Value-Add Apartment Syndications

Getting Your Hands Dirty with Value-Add

We have all seen the shows on TV where people will take a run-down or neglected house, renovate it, and put it back on the market to sell it at a higher price, oftentimes for a profit. As you know, this strategy is referred to as flipping houses, in which you find an opportunity to renovate a property to create additional “sweat equity”. This same strategy applies in the world of apartment investing, but on a much larger scale.

Using the value-add strategy in apartment investing, an investor, or investment group, will find an older apartment community, identify a shortfall in the asset to capitalize on, purchase the property, and renovate the property to increase the rents, lower expenses to increase the net income of the property, and eventually put it back on the market to sell it at a premium.

A value-add property will have cosmetic issues such as poor landscaping, outdated cabinets, peeling paint on the building, etc. Adding value can also come in the form of decreasing expenses and making adjustments to property management, driving some of the quickest growth in net operating income. One thing you don’t want to do is confuse deferred maintenance (extensive roofing issues, replacing all the siding, etc.) with value-add opportunities because even though these issues may make the property look less attractive and impact occupancy, fixing these issues may not result in a predictable and direct increase in rental rates. Addressing value-add issues that make financial sense, will not only provide the tenants with better housing, it will also increase the owner and investors’ bottom line.

How A Value-Add Apartment Syndication Works

1. Purchase the Property: The syndicator will start locating apartment communities in their target market with the help of local real estate professionals, do underwriting and due diligence on the apartment community of interest, propose the deal to investors and raise funds, and then acquire the asset.

2. Add Value: This is where the fun (and sometimes stress) begin. If a new property management team is part of the business plan, then they will be put in place and then the renovations will start. Renovations will start almost immediately after the property is purchased, starting with the vacant units and exterior and/or common areas, if that is part of the business plan.

   As leases on the occupied units come to an end, tenants will be offered an upgraded unit if available, however, the business plan and projection should take into account a temporary increase in vacancy during renovations. This process can last anywhere from a couple of months for lighter renovations, to 12-18 months for heavy value-add projects.

3. Refinance (Optional): Once the majority of the value is added into the property, and revenues are increasing, sponsors will often seek a refinance. Based on the new revenues, the property will likely receive a higher appraisal value. A supplemental loan can then be put in place for that additional equity, which means investors get a chunk of their original capital returned.

   For instance, if you invest $75,000, and 20 months go by, and the property is refinanced, the passive investors receive 40% of their initial investment, which mean that you get $30,000 back out of your initial $75,000 investment within the first 20 months. The best part is that even after getting 40% of your initial investment back, you still get cash flow as if you still had $75,000 invested.

   Refinances are not guaranteed and many syndicators don’t include this in their business plan, using it as an added bonus if they do choose to refinance.

4. Hold the Property: In this stage, the partnership will “sit” on the asset and collect cash flow, as one would a regular, stabilized apartment. The typical hold period from acquisition to sale in multifamily syndication is 5-7 years, depending on the deal. The partnership will capitalize on the common 2-3% market rent increases to increase the revenue and appreciate the property.

5. Sell: The property is sold, either on the market or off the market, return the investor’s remaining initial capital and their distribution of any profit generated at the sale of the property. Investors will then have their initial investment plus profit to roll over into other syndication deals.

An Example of the Numbers Behind A Value-Add Deal

• Dwellynn buys a 130-unit apartment complex for $7.6 million

• Most of the units are rented out at $730/month

• Comps show market rent for similar newly-renovated apartments to be $850-$950/month

• We plan to renovate each unit for $5,500/unit and raise the rent to $830/month

• Once the units are renovated the gross income, taking into account vacancy, will be around $1,245,000 ($830 x 125 rented units x 12 months)

• If $560,250 or about 45%, of the gross income, goes to operating expenses, the net operating income (NOI) will be $684,750.

• If you divide the NOI by the average cap rate for a similar property in the same market, let’s say 7%, the new property value would be around $9.7 million, which is an increase of $2.1 million. If the cost of the renovations was about $720,000, the net profit would be $1.38 million.

Identifying the Risks and Limiting Your Exposure to the Risks

As with any investment, there are some risks associated with passively investing in value-add apartment syndications:

• Falling short of the target rents

• Higher vacancy rates than previously expected

• Renovations running behind schedule or going over the planned budget

How you limit your exposure to risk when you invest with Dwellynn

• We make capital preservation and protecting your initial investment our #1 priority

• We create plans for multiple exit strategies

• We collaborate and recruit experienced real estate and related professionals to be on our team

• We use conservative underwriting to evaluate our deals before we offer them to our investors to ensure that the deal won’t fall short of expectations, we don’t use aggressive projections, and we make sure to take into account the “worse case scenario”

• We use proven strategies and business models, such as focusing on affordable apartment communities and using renovated units at the subject apartment community to gauge the rental potential

• We raise the money needed to renovate the project upfront, instead of depending on the cash flow produced by the property

Let Us at Dwellynn Get Our Hands Dirty While You Collect the Checks

The team at Dwellynn makes it a priority to thoroughly analyze market data to identify markets and submarkets that have property values in which rental rates are affordable and projected to grow, by looking at population growth, job growth, income growth, and other factors. But value-add properties do not only rely upon continued rent growth. We know that the key to having successful value-add syndication deals is to have local, experienced team members and partners with strong market knowledge and proven track records to be the boots-on-the-ground.

We only take on deals that fit our overall business model and investing strategy and focus entirely on replicating and perfecting the process. The outcome is a value-add syndication deal in which the total project cost is lower than the purchase price of a similar newly-built or stabilized property. The renovated property will have comparable value to stabilized assets in the target market, resulting in value and profit being created for our investors.

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