I always consider eight factors as I’m planning my investments:
1. Ask about the tax implications of real estate investments, including deductions, depreciation, and potential capital gains taxes.
2. Discuss the investment’s alignment with your financial goals and risk tolerance.
3. Ask about the expected returns, including both income and appreciation potential, as well as any associated fees or expenses.
4. Ask about their track record with similar investments.
5. Inquire about the investment’s liquidity and exit strategies in case you need to sell your stake.
6. Seek clarification on the due diligence process, including property evaluations and management procedures, to ensure the investment aligns with your overall financial plan and objectives.
7. Finally, when it is time to make the investment, check with your advisors on how to hold title.
8. Fund the investment.
Let’s spend a moment exploring each facet of the pre-planning and due diligence process.
1. Tax. Real estate investments come with various tax implications that can impact your financial outcomes.
– Deductions such as mortgage interest, property taxes, and operating expenses can help reduce taxable income from real estate investments.
– Depreciation allows you to deduct a portion of the property’s cost each year to reflect its wear and tear, lowering your taxable income further.
– Additionally, when you sell a property, you may be subject to capital gains taxes on any profits earned.
– However, certain tax strategies, such as like-kind (e.g., “1031”) exchanges or investing through tax-advantaged accounts, can help mitigate capital gains taxes.
Understanding these tax implications and seeking guidance from a CPA or financial advisor can optimize your tax efficiency and overall investment returns in real estate.
For Example, at Ironton Capital:
– The National Diversified Fund (NDF) will have an option to generate depreciation you can use to offset your capital gains and/or passive losses with other investments.
– The Short Term Income Fund (STI) is taxed as a REIT (Real Estate Investment Trust). For most investors, that is a lower tax bracket than their marginal ordinary income rate.
– Choose your time at http://irontoncapital.com/gopassive to learn more about how our funds might help with your situation.
Only you can decide, but usually the CPA is the better resource. Many financial advisors have deep training and extensive experience with stocks and bonds, but very little exposure to real estate. As a result, they often will be reluctant to offer much advice on real estate. Since they don’t have much exposure to real estate, real estate advice may be seen as a higher risk to them, so this set of activities is led nearly exclusively by the passive investor.
2. Alignment. When considering an investment’s alignment with your financial goals and risk tolerance, it’s essential to assess how it fits into your overall financial plan and creating generational wealth.
– Evaluate whether the investment helps you achieve specific objectives, such as building wealth, generating passive income, or diversifying your portfolio.
– Consider your risk tolerance, or how comfortable you are with potential fluctuations in the investment’s value.
– Higher-risk investments may offer the potential for greater returns, but also come with increased uncertainty and volatility.
– Conversely, lower-risk investments may provide more stability but offer lower potential returns.
For Example, at Ironton Capital:
– The National Diversified Fund (NDF) will have dozens of properties in a diverse portfolio. As a result, it’ll be lower risk, but have less opportunity to achieve above (or below) its 17-20% annual target return. Of course, prior performance is not a predictor of future performance.
– Ironton periodically offers single-investment, focused funds. Due to the lack of diversification, we’d expect more volatile returns. It is like selecting a single stock vs. a mutual fund.
– Ironton’s income funds like Short Term Income (STI) and Medium Term Income (MTI) are based on hundreds (or more) of small debt instruments, which really diversifies risk.
– Consult with your financial advisors as you evaluate options from us or other private equity funds.
– Choose your time at http://irontoncapital.com/gopassive to learn more about how our funds might help with your situation.
By aligning the investment with your financial goals and risk tolerance, you can make decisions that suit your individual circumstances and aspirations while balancing potential rewards and risks.
This set of activities is mostly led by the passive investor. The Sponsor or GP (General Partner) will be able to provide some input to you and your advisory team.
3. Returns. When inquiring about expected returns for a real estate investment, it’s crucial to consider both income and appreciation potential.
– Income refers to the regular cashflow generated from the investment, such as rental payments from tenants.
– Understanding the expected rental income helps assess the investment’s ability to generate ongoing returns.
– Appreciation potential refers to the property’s expected increase in value over time. This could come from factors like improvements to the property or overall market trends.
– Additionally, inquire about any associated fees or expenses, such as property management fees, maintenance costs, or administrative expenses.
Understanding these costs allows you to evaluate the investment’s overall profitability and ensure it aligns with your financial goals.
For Example, at Ironton Capital:
– NDF is designed to have minimal income and have most of the returns characterized as long-term capital gains. NDF is not liquid and requires a 4–6-year commitment.
– STI is designed to have maximum liquidity and has tax-preferred treatment as a REIT. Principal preservation is a high priority. As a result, it has lower returns in the 8-9% range with predictable quarterly dividends.
– MTI has an intermediate level of liquidity, and accordingly, an intermediate level of returns. The target is 11-13% annually, paid in equal quarterly installments.
– All these return projections are net of all fees.
This set of activities is initiated by the Sponsor or the GP. They should have a very detailed business case, examining several economic scenarios. If not, that is a red flag. If you have the business skills, time, and interest, ask for a copy of the XLS (Microsoft Excel) model. If you lack the skills and you have a family member or business associate you trust that loves Excel, consider enlisting such help.
Ironton Capital always welcomes the opportunity to educate our prospective investors on our business analysis models. The more we can teach you, the more comfortable you will be, and that’s what you should expect from your GPs.
Ask the Sponsor to show you the high points of the model and how it works. Which variables have the most impact on the profit? For developing a new apartment complex, you might find these variables are most impactful:
– Rents and occupancy rates upon completion
– Finishing on time and on budget
– The assumptions for the sales price when complete and stabilized
Ask the Sponsor to share the research they used to guide the assumptions in the model.
For example:
– What rents are comparable existing apartment complexes near the new project getting? How do the amenities and features of our project compare? Since yours will be new and shiny, your project will usually outperform similar but dated properties nearby.
– What is the Sponsor’s track record for construction management on prior projects with a similar scope? Is there a fixed cost bid for the construction? Does this local government have a good reputation for being business friendly and expediting the permitting and construction approval process?
– What recent prices have sales of similar projects achieved in the market? Are the assumptions of the sale reasonable in comparison?
Ask how the Sponsor/GP has managed these key variables in the past. This isn’t nosy or “bad behavior” on your part. A good Sponsor will welcome these questions from a passive investor. If you are curious, explore this in depth. If you have the passion for this, this will be the most time-consuming element for you. If you are not that curious, it’s ok to review this at a high level if you otherwise feel comfortable with the Sponsor.
4. Track Record. Be sure to ask about the track record of prior investments. This isn’t as easy as asking a public stock mutual fund manager about their history, however. A private equity fund manager may be reluctant to share their track record of performance for several reasons.
– One primary concern is confidentiality and competitive advantage. Sharing detailed performance data could reveal proprietary investment strategies, deal flow, or other sensitive information that the manager prefers to keep private to maintain a competitive edge in the market.
– Often, a large part of the outperformance is that the GP has negotiated private favorable economics with the Sponsors they invest in. There are strict non-disclosure agreements (NDA) surrounding these arrangements.
– Of course, if the fund’s performance has been subpar or inconsistent, the manager may be hesitant to disclose this information to potential investors, as it could negatively impact fundraising efforts or reputation.
– Furthermore, regulatory restrictions or compliance concerns may limit the manager’s ability to share performance data, particularly if it includes sensitive financial information or conflicts with securities laws.
Overall, the decision to share track records of performance is complex and may involve weighing confidentiality, competitiveness, regulatory compliance, and investor relations considerations. Don’t be surprised if it’s much more difficult to get track record information from some than you’d expect.
On Request, Ironton is happy to discuss prior performance as part of a potential investor’s due diligence process. If you would like to learn more, go to http://irontoncapital.com/gopassive to choose your best time to talk with our team.
5. Liquidity. When asking about an investment’s liquidity and exit strategies, it’s important to understand how easy it would be to convert your investment into cash if needed.
– Liquidity refers to how quickly and easily you can sell your stake in an investment and access your money.
– Real estate investments are typically MUCH less liquid than stocks or bonds, as selling a property can take time and may be subject to market conditions.
– Inquire about potential exit strategies, such as selling the property, refinancing, or participating in a buyout agreement.
Understanding these options allows you to plan for potential financial needs or changes in circumstances and ensures that your investment remains flexible and aligned with your overall financial strategy.
Ask the Sponsor or GP about the liquidity options, if any, for the investment you are considering. Many passive real estate investments will require 4-6 years of commitment with no liquidity. This is what you give up earning up to twice the return you would get in the stock market!
6. Due Diligence. Inquiring about the due diligence process is crucial before investing in real estate.
– Thoroughly evaluate the property and its management procedures to ensure it meets your investment criteria.
– Property evaluations assess factors like location, condition, and potential for rental income or appreciation.
– Understanding the management procedures involves knowing how the property will be operated and maintained, including tenant management, maintenance schedules, and financial reporting.
– How these aspects will be handled and what safeguards are in place to protect your investment.
Conducting thorough due diligence helps mitigate risks and ensures that the investment aligns with your financial goals and expectations.
If you pursue the Syndication option, you will select projects and their Sponsors directly. This is likely building a portfolio of individual stocks based on your own research. In this case, you will have considerable research to do here.
If you pursue the Private Equity fund option, you just need to trust the General Partners of the fund and their strategy. You are then delegating to the GP to research each individual Sponsor and project. This is like investing in a mutual fund to save yourself the headache of research.
Ironton shares extensive details of our due diligence process with our investors as they narrow down their choices of which fund(s) are best for their needs.
7. Hold Title: Talk to your attorney and cpa, they can guide you through this process. For example, You can hold it in your name or jointly with your spouse. You may discover, through estate planning, it makes sense to develop a trust to hold these investments. These are just some possibilities. Your attorney, cpa or financial planner may have other suggestions.
Ask the GP in the Fund if you are allowed to change how you hold title if your estate planning needs evolve over time.
For example, Ironton has flexibility to change how you hold title, and most General Partners should have the ability.
8. Fund the investment. If you are investing with cash, this is as simple as wiring the funds to the General Partner.
If you are using a self-directed IRA, you need to have a self-directed custodian that supports working with real estate investments. Most do not! You can ask the GP of your fund, or your CPA, for recommendations.
Be aware that moving funds from your traditional IRA (such as Schwab, Fidelity, or Vanguard) to your self-directed custodian could take a few weeks. Once your funds are transferred, the new custodian might require a week (or more) to make the investment, once you provide the “Direction of Investment” paperwork. As you are interviewing different service providers, ask them about this. Usually they can move faster, but they may charge expedite fees to do so.
CTA: Isn’t it time your Financial Freedom comes Passively? We’ll review our investments with you 1on1 at https://irontoncapital.com/myreview
