What does it look like when we take the 4 Pillars of Passive Real Estate Investing to create one of our diversified funds? Let’s look at Ironton Capital’s National Diversified Fund 5 (NDF5) for an example of how this diversification works.
Here is how the distribution of four pillars looks like in our NDF5:
This is a long-term investment with an expected horizon of 5-6 years. You’ll see that we’re spread across a good deal of the US. We’re in 4 different asset classes that are advantageous in the current and projected market conditions. We’re working with more than eight Sponsors deployed in 2 different Strategies.
Now, let’s look at the projected returns:
This chart shows the investments are made mostly in 2022, and most of the returns are expected in 2025 and 2027.
NDF5 expects to generate annualized returns of 17-20% per year (IRR, internal rate of return), after all fees and expenses, for our investors. The fund was launched in the fall of 2022. As of this writing (June 2024), one of the eleven investments has already been realized. Its return of 22.7% was slightly ahead of pro-forma.
We made eleven investments. Some of the investments have multiple assets. For example, the first one is a developer of new workforce housing apartments. Most new construction for apartments is in the luxury class. Typical residents have rather high-end, high-income jobs. Not everyone can afford this. Workforce housing is designed for people at the area median income. Typical residents are firefighters, teachers, and police officers.
Despite being aimed at lower, median-income residents; the units are still quite nice.
The developer will build about 25 apartment communities (of 200-300 units in each community) across three different states.
– Geography: Florida, South Carolina, Georgia
– Asset class: Multifamily
– Strategy: New construction
Three of the investments are with a multifamily Value-Add specialist. Each investment is in one large apartment complex. In each case, the prior owner neglected the property, leading to deferred maintenance, poor unit quality, and suboptimal management. The Sponsor renovates the unit interiors, fixes deferred maintenance, and makes investments in common area upgrades.
A new management team combined with new digital and social media strategies greatly increases the flow of prospective new residents. Rents, which are $400-500 per month below market, have increased, greatly improving the cashflow performance.
– Geography: Plano & Fort Worth, TX; St Petersburg, FL
– Asset class: Multifamily
– Strategy: Value-Add
As a final example, another Sponsor is building six new hotels. They are focused on the budget, extended-stay segment. Nationally, about 18% of the nights in hotels are for stays over a week-long (which is the definition of extended stay). Yet only around 10% of the hotels in the US are configured for the needs of these types of travelers (e.g., have a small kitchen in the room). The Sponsor did a study to find where the needs of extended travelers are most underserved and picked six of the best markets.
The focus is on the budget segment for several reasons:
– These hotels are easy to operate with just a few employees.
– They are quick to achieve break-even economics.
– The break-even occupancy point is relatively low.
– They are quick and easy to build.
– There is a lot of demand among institutional buyers to purchase these types of hotels once they are completed and have a year or so of operating history.
– This budget segment is the most recession-proof within the hospitality industry. In a recession, luxury travelers will trade down as their budgets are constrained.
There’s another compelling reason for the budget extended stay segment. Many of these guests travel regardless of the economic situation. According to our partner Sponsor, here’s the national guest mix for 7+ night stays:
– 28% are traveling workers. Traveling nurses are the most famous example. They fill short term staffing shortages at hospitals and clinics.
Another example is utility workers. When a large snowstorm knocks down power lines, utility works from several states will send in a swarm of workers to help get the lights back on. Often several weeks are needed to make the repairs. Recession or not, these workers are on the road.
– 17% are relocated workers. While they wait to close on their new home or move into their new apartment, they will spend some time at an extended stay hotel.
– 17% are home transition. A family might sell their old home and plan to immediately move into a new construction home. If there is a delay in construction, the family ends up in an extended stay hotel for a time.
There are other segments, but this illustrates it well.
– Geography: Texas, Alabama, Florida
– Asset class: Hospitality
– Strategy: New construction
Overall, NDF5 has just over forty commercial properties in ten different states. It’s well diversified to manage risks while still generating strong returns.
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