Frequently Asked Questions
What is a commercial real estate syndication?
CREI Partners provides opportunities for investors to grow their wealth in purchasing or developing multi-family apartments, RV/Boat Storage, and build-to-rent communities. We bring investors together to purchase bigger projects, reduce risk, and provide greater returns. This form of investing is called a syndication. Each investor owns a percentage of the equity in the property depending on the amount invested. Once the property has been acquired CREI Partners immediately begins the value-add strategy through operational and building improvements. We will increase the value through renovating the building, increasing income, and reducing expenses where possible while maintaining a safe and comfortable environment for our residents. Our investors enjoy the passive income while CREI Partners handles the day to day decisions.
What are the risks of investing?
Multi-family, storage, and build-to-rent communities is considered stable and safe among various investment asset classes, however, with any investment there are inherent risks. As part of our efforts to mitigate risks we find off market opportunities by leveraging our relationships with local brokers and owners. We build strong partnerships with highly capable experienced property management companies to optimize income, reduce expenses, and provide a positive touchpoint for our residents. There are no guarantees in investing, however, CREI Partners invest our personal capital and time in the deals to have aligned interests and goals in executing the investment strategy.
Can I invest through my IRA, LLC, LP, or Trust?
Yes. Investors can invest through their traditional self-directed IRAs. Investors are also able to invest through their LLC, LP, or Trust. Please contact CREI Partners if you have questions about how this works or need help selecting a custodian.
What is the minimum investment?
$50,000 is the minimum to invest in a project depending on the investment property. Learn how to invest using your current IRA/401K money without penalty from a third-party self-directed custodian company. Please contact CREI Partners for more details.
Can I visit the property?
Investors are allowed to visit the property before investing and during the life of the project.
What is the structure, return and benefits?
Investors receive a return on investment through passive income and tax benefits in a number of ways. Once the project is renovated and stabilized CREI Partners provides quarterly distributions to our investors. CREI Partners focuses on forced appreciation through renovating the building, increasing rents, and reducing expenses to increase the value of the property. Equity increases with residents paying down the loan of the property. Investors typically pay little to no taxes on these distributions due to depreciation of the asset. Lastly, investors will receive a percentage of the profits from sale set up in the equity structure of the investment.
Every commercial real estate investment is different and there is never a guarantee on an amount of return on investment. However, we typically strive to achieve a double-digit IRR (internal rate of return) with no guarantees over the life of the investment, which comes from cash-flow, forced appreciation from adding value, and the profits from the disposition of the property. CREI Partners invest our own capital into these properties and seek every opportunity to maximize investor returns. We discuss the business plan, projected returns, and equity structure with investors for each investment property.
How long do I commit my money to this investment?
The time period varies for each specific business plan, but typically we see an 18 month to 7-year hold period before we employ an exit strategy, such as a refinance or sale. Economic conditions can impact this strategy. Initial timelines will be communicated to investors at acquisition of the property, and will stay updated through our online portal and quarterly call updates. CREI Partners will strive to meet or exceed our initial projections and will prioritize greatest returns for all investors.
Can I cash out of my investment at any time?
No. Commercial real estate investments are longer-term in nature than traditional liquid stocks and bonds. Investors would receive a projected hold period timeline from the beginning of the investment and consistently throughout the life of the project. Cash distributions are done through cash flow from the property during the holding period of the asset, and many times investors may not receive their full principal investment back until the property sells and investors cash out from the profits upon disposition. CREI Partners makes no guarantees of investor returns.
What exactly are the funds used for?
Investor funds are used for the total acquisition cost of the property. This includes but is not limited to the actual purchase price of the property, acquisition fees, legal and transaction costs, capital projects, and reserves.
What are the requirements?
You must qualify as an “accredited” or “sophisticated” investor. These designations are to ensure that investors possess a certain level of financial and investing competence.
An accredited investor, in the context of a natural person, includes anyone who:
- earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
- has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
There are other categories of accredited investors, including the following, which may be relevant to you:
- any trust, with total assets in excess of $5 million, not formed specifically to purchase the subject securities, whose purchase is directed by a sophisticated person, or
- any entity in which all of the equity owners are accredited investors.
In this context, a sophisticated person means the person must have, or the company or private fund offering the securities reasonably believes that this person has, sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the prospective investment.
For more information click here.
COMMON INVESTOR TERMINOLOGY
Accredited Investor
An accredited investor is an individual who qualifies to invest in real estate syndications by satisfying one of the requirements of an annual income of $200,000—or $300,000 for joint income—or a net worth of at least $1 million (not including primary residence). More information by the SEC click here.
Active Investing
This is the opposite of passive investing. An active investor does all the work of finding, structuring, managing, and exiting investments.
Bridge Loan
Typically, short-term loans enabling investors to leverage equity in one property to finance another or access cash for a down payment on a new acquisition.
Capitalization Rate
The cap rate. Calculated by dividing net operating income by current market value of a property to determine an expected rate of return.
Cash-on-Cash Returns
A rate of return calculated by dividing the cash flow being produced by a property by the initial cash investment.
Closing Costs
Costs required to close on a real estate or financing transaction. May include origination, application, processing, underwriting, appraisal, and recording fees.
Debt Service
The amount of loan payments required to be paid back to a lender. Also used to calculate the DSCR for qualifying for commercial real estate financing.
Distributions
These are the funds paid out to investors. These profits may be paid monthly or quarterly or upon a successful exit.
Earnest Money
An earnest-money deposit is placed into escrow by the buyer of an apartment building to demonstrate their commitment to execute on the purchase contract. Will be credited toward the acquisition cost at closing.
Equity Investment
The cash put into an investment. In an apartment building syndication this capital may be used toward the down payment, closing costs, borrowing costs, funding an operating account funding, along with any compensation earned by the general partners.
Exit Strategy
This is how the syndicator plans to cash investors out of their investment in the future. This may be by selling the property, purchasing their shares, or refinancing them out.
Gross Potential Rent
The hypothetical amount of revenue if the apartment community was leased at 100 percent occupancy year-round at market rental rates. Also known as “GPR.”
Gross Rent Multiplier
This calculation shows the number of years it would take for the property to pay for itself based upon the gross potential rent. This is calculated by dividing the property purchase price by the annual gross potential rent.
Interest Rate
The cost charged by a lender for using their funds to finance a deal.
Internal Rate of Return
The IRR is calculated based on all future anticipated cash flow, principal pay down of debt, and proceeds on the exit of a property.
Key Principal
A key principal in an apartment syndication is a vital person to the ongoing success of the investment. It is someone who should be insured to compensate for any interruptions if something happens to them.
Limited Partner
In contrast to the general partner, a limited partner’s liability is limited to the extent of their share of ownership. In a typical real estate syndication, a limited partner is a passive investor who puts in capital.
Loan-to-Cost Ratio
The LTC ratio shows the value of the anticipated loan amount against the total costs (acquisition and renovations).
Market Rent
The market rent refers to the market value of a rental unit for lease based upon comparable rental rates for similar units in close proximity to the subject. Used to calculate value, cash flow, and potential loan amounts.
Net Operating Income
The NOI of a property is calculated by adding up all of the incoming revenue from a property and subtracting the operating expenses.
Operating Expenses
Operating expenses are what it costs to run and maintain an investment property. In apartment syndications, these operating expenses usually include payroll, maintenance, repairs, contractors, marketing, admin, utilities, management fees, property taxes, insurance, and capital reserves.
Passive Investing
The strategy of placing your capital into a real estate syndication that is managed for you.
Preferred Return
Investors with preferred shares or preferred returns receive their distributions and returns up to an agreed upon percentage before the sponsor. This holds them accountable and ensures interests are aligned.
Price Per Unit
The price per unit of in an apartment building. For example, a 100-unit building for sale at $100,000 would have a price per unit of just $1,000. It is a method of comparing competing properties, assessing value, and weighing returns between investments.
Property Management Fee
A recurring cost for having a professional property management company manage day-to-day operations of a property.
Recourse
In contrast to a non-recourse loan, this is the right of a lender/creditor to pursue the debt owed to them. A full recourse loan can expose liability to personal assets beyond the collateral in the case of a default on the loan.
Rent Premium
A rent premium can be earned upon completing upgrades and renovations.
Sales Comparison Approach
The typical method for estimating a property’s value based on recent similar sales in the area.
Syndication
Apartment syndications are essentially real estate partnerships pairing passive investors, capital, and a syndicator (sponsor or active partner and promoter) who organizes the deal, puts it together, and manages it.
T-12
A T12 is a profit and loss statement showing the actual reported numbers for the last 12 months.
Vacancy Loss
How much potential revenue and cash flow is lost due to vacant units.
Acquisition Fee
Compensation earned by the general partner in a syndication for sourcing, screening, arranging financing, and closing on a investment asset.
Asset Management Fee
Typically, a recurring fee paid from property revenues to the general partner for asset management.
Capital Expenditures
These expenses are funds used by the managing company or partners to acquire, improve, or maintain a property. Also referred to as CapEx. It specifically applies to when these funds improve the useful life of a property.
Cash Flow
Remaining liquid profit after deducting operating expenses and any debt service payments.
Cost Segregation
This is the process of identifying assets and costs, and their classification for tax purposes. Applies for reducing current tax liability and deferring taxes.
Debt Investment
A debt investment is the investment in debt. For example, a mortgage loan. Debt investors typically earn interest until the debt is fully repaid. There may be an option to convert to equity.
Debt Service Coverage Ratio
The DSCR is the the ratio commercial mortgage lenders use to evaluate and qualify a deal for financing. The DSCR measures how much cash flow will be available to cover debt service. A DSCR ratio of 1 means the cash flow should cover the debt payments. Lenders typically expect a minimum DSCR of 1.2 in order to get a loan. A better ratio may qualify the borrow for better terms.
Due Diligence
Due diligence describes a group of tasks to screen and evaluate a property and to satisfy lender underwriting requirements. May include appraisals, surveys, inspections, and title work.
Effective Gross Income
The EGI is the effective income derived by subtracting losses due to vacancy, concessions, employees, model units, and any bad debt.
Equity Multiple
The EM is a way to calculate a rate of return on commercial investment property. This is calculated by dividing the total cash distributions (cash flow and cash on exit) by the equity investment made.
Floating Interest Rate
This is the same as a variable or adjustable interest rate loan. The interest rate — and typically the payments — will float and change with the market.
Gross Potential Income
The potential income a multi-family property could produce if it had no vacancies and all leases were signed at market rates — plus any other revenue.
Holding Period
The holding period is the amount of time the sponsor plans to hold the property.
Interest-Only Payment
A monthly mortgage payment that only requires interest, not the principal balance, to be paid. The balance may be due on sale, refinancing, or at the maturity of the loan.
Joint Venture
A “JV” is a partnership between two or more investment partners who collaborate on a deal.
Letter of Intent
An LOI is a non-binding agreement drafted by the buyer proposing their purchase terms. Typically used as a faster method to make an offer, without being tied into the deal.
London Interbank Offered Rate
The LIBOR is a benchmark interest rate that is often used to calculate loan rates and interest rate adjustments on a variable rate loan.
Loan-to-Value Ratio
The LTV calculates the ratio of the loan amount divided by the apartment building’s appraised value.
Metropolitan Statistical Area
A MSA is a geographic region with a substantial population. These are cities pooled together with neighboring communities that have high degrees of integration. An example is the Miami Metropolitan Area. This MSA actually encompasses Miami, Fort Lauderdale, and West Palm Beach, three counties, dozens of cities, and even more neighborhoods.
Non-Recourse Loan
A non-recourse loan is a loan on which the borrower is not personally signing a guarantee. The lender generally has no recourse to pursue the borrower in a default, beyond the pledged real estate collateral the loan was made on.
Offering Memorandum
Also known as the private placement memorandum, this document lays out the risks, terms, and objectives of an investment, as well as documents the syndicators’ business operations and condition.
Permanent Agency Loan
This is a long-term mortgage loan guaranteed by government-sponsored agencies Fannie Mae or Freddie Mac. Loans may be amortized for as many as 30 years.
Prepayment Penalty
A penalty for paying off a loan balance early. These clauses can be especially complicated calculations in commercial mortgage lending.
Pro-forma
A projected financial statement for estimated revenues and expenses. Often detailed for one and five years.
Ratio Utility Billing System
A RUBS system is a way to bill tenants back for utility costs. Can be based on occupancy or square footage leased.
Refinance
Replacing a debt obligation on a property with a new loan, often with different terms.
Rent Roll
The spreadsheet or document detailing each of the units in an apartment community. A good rent roll will include unit numbers, unit types, square feet, tenant names, market rents versus actual rent, deposit amounts held, move-in dates, lease-start and lease-end dates, and current status.
Sophisticated Investor
An individual “determined” to have enough experience and knowledge to assess the risks and merits of an investment opportunity for themselves.
Subscription Agreement
A document that is a promise by the LLC that owns the property to sell a specific number of shares to a limited partner at a specified price — and a promise by the limited partner to pay that price.
Underwriting
A process of evaluating an apartment building community to determine the status, value, risks, and potential.
Vacancy Rate
The percentage of vacant units in a multi-family community.
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