These are exciting times for those who wish to invest in multifamily real estate and the apartment industry overall.
“Three Ways to Personally Invest in Technology and Real Estate,” a webinar produced as part of the AIM Conference webinar series, sponsored by Cox Communications, discussed alternate investments that can be made through individual retirement arrangements (IRAs).
- Sean Luthy, Managing Director, Hamilton Zanze Real Estate Investments
- Matt Knight, Founder, PropTech Angel Group
- Grady Brennan, Business Development, Pacific Premier Trust
- Jen Ambrosius-Singer, private investor and real estate management professional (moderator)
Alternative investments present opportunities to invest directly, indirectly or within a group via private equity real estate and non-exchange-traded assets.
There are tax benefits to using an IRA to invest in alternative assets. By holding them in a qualified retirement account, investors can receive the same tax deferral – or tax-free growth for Roth accounts – that they enjoy with more traditional investments.
Expanded investment choices are available. To meet individual risk and return objectives, investors can go beyond what’s traded on the exchanges by investing in real estate.
Because alternative investments don’t typically correlate to the returns of exchange-traded stocks and bonds, they may reduce a portfolio’s overall volatility and provide valuable diversification.
For example, attendees learned how to invest in steady, cash-flow producing properties, exciting new and innovative PropTech companies and gained insight into firms that can manage the property on behalf of the investor. In one case, Brennan spoke of a client’s recent $10,000 investment in land that quickly was sold for $250,000. (No additional details were available).
Ride the Tortoise
Luthy explained that his company Hamilton Zanze Real Estate Investments is not a growth investment play, but instead a reliable cash-flow source for long-term investors.
“In a tortoise vs. the hare scenario, we’re a tortoise,” he said. “We look for predictable and steady cash flow. We invest in long-term upside. Apartment investing is attractive because it’s an asset-backed investment -- and everyone needs a place to live. There’s a lack of affordable housing in the United States and new supply is concentrated in A class property.”
Capital markets provide abundant, low-cost capital through Fannie Mae and Freddie Mac, Luthy said, and multifamily real estate remains relevant during various economic cycles. Demographics and lifestyle choices continue to shift demand toward the need for more apartments.
There are several most-common approaches investors can take: REITs, private investment and direct investment, each with their own set of pros and cons, based on the investor’s goals and purpose.
Once invested, a real estate sponsor is recommended.
“You can hire someone to do the work (passive), or manage the property yourself (active),” Luthy said. Passive investors earn less income than active investors.
Before committing to a sponsor, investors can do their due diligence about the firm by asking several key questions: How much has the sponsor invested in the deal? How have their investments performed in the past? What is the long-term plan of the company? What was one of their worst investments, and what did they learn from it?
Hamilton Zanze Real Estate Investments own 90 properties, mostly B+ and A- types. Hamilton Zane His capital is through the 506b rule in Section 4(a)(2) of the Securities Act, which exempts from registration transactions by an issuer not involving any public offering.
“We don’t have to market our offerings,” Luthy said. “Once we get to know our investors, if we see an opportunity for them, we let them know. But they aren’t required to make the investment. We are always investing. We don’t try to time the market.”
To become a client, our minimum investment is $50,000.
Luthy said that because interest rates are so low right now, there is increasing interest in multifamily, and that’s driving up valuations.
He says the average hold on their assets is about six years; however, “we expect that some of our recent A- acquisitions will be held for seven to 10 years.”
Luthy said his clients can expect a minimum annual distribution of 5 percent with an internal rate of return (IRR) of 10 percent to 12 percent – though the average IRR for the 100 properties that it has sold is about 15 percent.
For long-term holders, 1031 Exchanges also can be considered. This structure enables the owner to sell and reinvest in new properties and delay the capital gains taxes. Luthy recommends that investors consult their CPA to determine tax efficiency.
In 2017, the Tax Cuts and Jobs Act was written to benefit real estate investors when it comes to cost segregation analysis, fast-tracking some of the tax benefits related to appreciation to the first year of ownership.
The Next Multifamily ‘Disruptors’
Knight’s angel investor group has been in business for about a year. An angel investor (also known as a business angel, informal investor, angel funder, private investor or seed investor) is an individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. Angel investors usually give support to start-ups at the initial moments (where risks of the start-ups failing are relatively high) and when most investors are not prepared to back them.
The group is member-based, comprised of investors who are interesting in PropTech or innovative new companies that serve the apartment industry. Many who join do so based on referrals, but McKnight will consider any accredited investors who reach out to him.
PropTech Angel Group requires investors to be accredited, as defined by the Security Exchange Commission: Individual investors must have earned $200,000 for two consecutive years and their home must be worth $1 million. (Joint investors must have earned $300,000 per year the past two years.)
Knight said his firm’s minimum investment is $10,000; and $50,000 for non-members.
“We want members who have experience in the multifamily industry,” Knight said. “We like to have a diversity of housing types, such as including student and affordable.”
These investors then weigh products and services that are “pitched” to them, and often those products and services are tested in pilot programs by apartment operators before being considered for greater implementation. His group includes veteran apartment professionals and founders of start-up companies with tech investment backgrounds who can “sniff out BS” about what products or services have potential.
“We continue to receive about five to 10 start-up company proposals each week,” Knight said. “A lot of these companies are interested in joining the property management software space. To that I say, ‘you want to try to tackle Yardi?’ [Of those who have], we’ve seen plenty of dead bodies strewn along that road.”
Knight said the next phase of multifamily disruptors is coming from ‘tenant engagement’ products and services. There also has been interest in developing technology to improve air quality in buildings, he added.
And the short-term rental space (such as Airbnb-type operators) continues to be interesting, he said. “There was a bloodbath of players in this space from the summer who offered a master-lease model, and it just didn’t work out,” Knight said. “For us, this would be more of a financial play than a tech play.”
Knight in June shared his angel investing forecast in a blog “The Dawn of PropTech 3.0”:
Thinning and consolidation. Expect to see fewer PropTech-only funds, but expect them to be bigger and/or stratified.
Silicon Valley jumps in. I expect one or two of the traditional venture capital firms are going to start dedicating a pool of capital exclusively to PropTech. Expect them to be the dominant lead investor in PropTech in the 2020s. They have the track record and underwriting/support resources to do so whenever they decide to actually focus on it.
Corporates move back to LPs only. Expect these large real estate funds to give you the old “back to our core competency” bit and simply become passive investors (LPs) with specialists who manage funds. It happens every cycle. It will happen now that we are entering a recession.
Growth of Growth. Expect to see more growth-equity funds play in this space.
A ‘Crew to Hire’
Brennan’s Pacific Premier Trust has been in business for 31 years. It offers full-service assistance for real estate investors as a custodian.
“We are an experienced custodian and administrator within this ‘non-traditional investment world,’ and our goal is to help you avoid a taxable event,” Brennan said.
There are several ways that individuals can use their IRA account to invest in real estate. One, a self-directed structure, is a component of an IRA.
Brennan likens his firm as “a crew to hire,” he said. “You hire us, then tell us what you want to do, and we have the expertise in place for all aspects of real estate management. In that way, we’re like a one-stop-shop.”
Hiring an experienced firm is beneficial because it helps investors to avoid “rookie” mistakes. Brennan describes the process like a “checkbook IRA,” where investors can get into it quickly. He says opportunities come up, but can close quickly.
“Clients can position themselves to be able to act quickly when ideal investment opportunities are presented if they form their single-member entity operating agreement correctly such as having a narrow objective, or having one that is wide-open, as long as they are within the rules.
“Once in place, to take advantage (and get in) more time than the amount of time you need to do your due diligence on the opportunity.
The maximum amount you can invest via the various IRA accounts are 401(k) ($18,000); IRA or Roth IRA ($6,000); Simple IRA ($18,000); SEP or Step IRA ($56,000).
A Simplified Employee Pension (SEP) Individual Retirement Arrangement is a variation of the Individual Retirement Account. SEP IRAs are adopted by business owners to provide retirement benefits for themselves and their employees. There are no significant administration costs for a self-employed person with no employees.
“If you are going to invest in a start-up, for example, and the minimum buy is $25,000, then you are limited on ways to make that happen.”
Unlike 1031 exchange transactions, if you cash out of the investment, you could end up paying as much as 37 percent in taxes on the profit.
Here is the replay: