Speaker 1 00:00:08 What's up, everyone. Welcome to the finance for physicians podcast. I'm your host, Daniel Raimi. Join me as we dig into what it looks like for physicians to begin using their finances as a tool to live better lives. You can learn more about our
[email protected] let's. Jump into today's episode. What's up guys. I'm excited to join you today again for a conversation about real estate. And I have brought on Hugh today to talk with me. Welcome
Speaker 2 00:00:35 Hugh. Hey Daniel, how's it going?
Speaker 1 00:00:37 It's going well. We're, uh, I'm in a, the middle of an ice storm in Kentucky right now. So that's kind of exciting, but other than that, not much going on here.
Speaker 2 00:00:47 Yeah, we got the same thing going on here. Carrie got an extra tele med day, so that's always upstairs right above me. Don't tell him that.
Speaker 1 00:00:55 Nice. Nice. Well, yeah, so there's a lot to talk about with real estate. I thought we would talk just kind of high level real estate and talk about some of the things that you guys might be hearing or thinking about, and maybe talk about kind of big picture. What are some of the different avenues are to invest in real estate and maybe share some, um, you know, experiences we've seen with, with our clients and you is, uh, I would say, you know, a little bit more knowledgeable than myself in specifically real estate investing, you know, some of the specific areas, especially when you start getting into like syndications and those sorts of fun deals, but we'll try to keep it more general for today, I think would be good. And then we'll kind of see where it goes. So maybe a good starting point would be you if we could talk about like the landscape, because I always hear people, it seems like when they're wording the question, it's like, Hey, I want to invest in real estate. How do I do it? And that's the question. So what is real estate?
Speaker 2 00:02:02 Yeah, most of the time when you hear people say, I want to invest in real estate, it's because they've maybe had a friend who's had some success in it, in that might be rental properties. That might be other forms of passive real estate that you hear about all the time, like a syndication or a, could be a private, real estate fund that invests in rental properties or big multifamily apartment complexes. But most of the time when you hear people say, I want to invest in real estate, those are typically the things that they're talking about.
Speaker 1 00:02:39 Yeah. And it's usually from a word of mouth or like a buddy or hurted on something or,
Speaker 2 00:02:46 Oh yeah. Um, maybe I was reading a blog and heard about a doctor that reduced their hours, or maybe they're completely out of medicine now and they are living off of passive income. Yeah. Like
Speaker 1 00:02:59 Making six figures of, uh, passive income, not lifting a pinky on real estate.
Speaker 2 00:03:06 That's right. That's typically what, what they've heard. Right.
Speaker 1 00:03:10 Cool. Well, we'll talk about that more than not, not always as easy as you sometimes hear, but, um, the other thing might be good to clarify. So the average person, I don't think realizes that they probably already own real estate
Speaker 2 00:03:27 That's right. If you own, um, a total stock market index fund or in S and P 500 index fund,
Speaker 1 00:03:36 There is some target retirement date fund.
Speaker 2 00:03:38 Exactly. There is some real estate exposure in that. Um, your primary residence, you know, a lot of people don't think about that as maybe an investment asset, but
Speaker 1 00:03:49 Yeah, if you're a client of our planning firm, you have real estate, uh, if we're managing your investments, you have real estate as part of that asset allocation, there's actually a pretty decent, I mean, it's, you know, give or take depending on the client, but it's, you know, a decent, like 10% ish range give or take a few percentage points in real estate.
Speaker 2 00:04:10 Yeah. I would say if your goal is just to have some exposure to real estate, let me describe an investment for you. So there's an investment that has 170 companies in it. So it's not one single property. It's 170 companies within those 170 companies. One of them is Amazon's largest landlord. That's a pretty good business to be in. One of them owns hundreds of apartment complexes across geographically, diversified in all the hottest markets in the us. And there's another one that builds single family homes then rents them out and they are all over the country. They make it really easy to move from one city to the next and rent a property under that same umbrella. That is the Vanguard real estate ETF. It has very little expense. You can buy it, sell it, click of a button. You don't have to, there's no holding period. So that's a form of real estate exposure as well.
Speaker 1 00:05:20 Yeah. And that's, that's the one we typically use, uh, in our client accounts. And that's a really, really, so I think the good foundation to, if you're going to take away anything is that that is a excellent way to own real estate. It's extremely low cost. Like you were saying, it's extremely liquid as in, you can sell and buy, which is not the case with a lot of real estate tends to be very efficient, very competitive when we compare it to other people's real estate in some of these other categories, we'll talk about a lot of times, this thing we're talking about has done better than it. And so very efficient, very low costs. When in doubt, that's always the place to start, I think. And you should also be comparing to that. I think so a lot of people are like, you know, I want to get into these other things that we'll talk about and they could be great, but like, how do you measure whether it's great? I think a lot of people struggle with that. And so I think this is a good kind of foundation of like, what is the real estate market kind of, what's a good floor of a benchmark, I guess, is the right word of what the real estate market is, is doing. And most cases, people should really only be doing this.
Speaker 2 00:06:37 Yeah, I would say, you know, if we just kind of think about our typical clientele, let's kind of divide it into two segments. You might have someone who is in training still, or a few years removed from training. Probably don't have a ton of assets built up yet. You probably need that liquidity to be able to buy and sell or access that money relatively quickly. You might be buying house, you know, lots of things going on at that stage of your career. There's also just by law. Most of these are only for accredited investors. And when I'm talking, what I'm talking about is the real estate syndications or the private real estate funds that you might hear typically you have to be an accredited
Speaker 1 00:07:19 Investor. What is an accredited investor?
Speaker 2 00:07:21 Yeah. So you either need $1 million of net worth excluding your household, excluding your primary residence, um, or $200,000 of income. If you're single $300,000 of income, if you're married, those are the baseline.
Speaker 1 00:07:40 So these are for the other real estate options. We haven't really got into, um, well, not all of them, but like, you know, syndications in most private, real estate, like they, they, they're going to require private investments like that often almost always require you to be an accredited investor. And that's just the requirements for that.
Speaker 2 00:08:00 That's right now, if you're someone maybe a little bit later stage in your career, you are an accredited investor, maybe for one reason or another, you want to take some money and allocate to say, you know, multi-family housing, you want to get into these sort of private investments. I think that's all fine. And well, as long as you kind of do it in a manner that aligns with your portfolio allocation, your target allocation just carve out it, carving out a port, a percentage of your portfolio for that specifically. And also just being aware of how long that money's locked up.
Speaker 1 00:08:40 Yeah. So I guess first takeaway is probably most people, at least for starters, think about like this Vanguard total stock market fingered real estate fund as like a what's the ticker on that. Do you know the ticker? What it,
Speaker 2 00:08:56 Oh, it's are some regulators.
Speaker 1 00:09:00 I know the ticker for the, uh, yeah, it might be, there might be some regulations you go, you guys can Google that it's finger auto Vanguard, Vanguard real estate index fund Google that if you want to see the, the, the fund itself, but look at that as like your floor baseline of real estate investing, you might realize that you already own some of it, or you might realize that in itself is a sufficient investment. It's, it's, it's really, truly passive, especially if you're early career and you're kind of starting to build up, get started, that sort of thing. Now, if you're kind of wanting to take the next step, or maybe it's not a next step, it's more of just like a, you know, go a different direction. Um, and you have your accredited investor. You you've kind of later career stage, you have assets, you have lots to invest. That's when we start talking about these other forms of real estate, whether it be like syndications, like you were saying, or private real estate, and maybe before we get into what those look like, what makes for a good person that should be doing that, or thinking about that, like, what's the type of person that might ought to think about that. I know what I'm thinking, but I'm curious,
Speaker 2 00:10:12 I'm thinking of the type of person who can afford to take that risk for a higher return. Really. They might just have interest in this type of thing, right? Like you're all fine. And well uncovered. You're let's say you're financially independent already. You don't necessarily need to work. Maybe that's the case. Maybe your kid's college funding is secured. Right? All of your base level goals are taken care of at this point, or very close to, and you say, Hey, this is something I'm interested in. I want to carve out 5% or 10% of my portfolio and try to get a higher return.
Speaker 1 00:10:53 Yeah. I was gonna say, I think you kind of already said it, but like a passion for it is the best. I think that's the best scenario is if you really have some interest in it, or you have this like unique area you want to like, you know, like a passion project you want to get into. And, um, it's so it's basically, it's not, I think it works best if it's not about, or you don't need it to perform, you know? So it's not about, it's always about the numbers to some extent, but it's not like you're, you're not relying upon the performance of it to meet XYZ goal. I think that's a good kind of foundational starting point because I see a lot of people that are saying like, um, they're equating it to a goal or they're using their retirement plan to fund it.
Speaker 2 00:11:38 Yeah. I would say don't look at investing in real estate as the goal nine out of 10 people. Um, that's probably not the goal. It's, you're looking at it as a tool to reach a goal that you've heard someone else reach, that you want to also reach and you heard they reached it through real estate. That's probably pretty common. And how this comes up, you know, just a quick mention kind of like a bonus or a cherry on top for somebody who this could work for is maybe, you know, most of our listeners listeners are physicians, but maybe your spouse is in the real estate business and has real estate professional status that opens up some other tax benefits.
Speaker 1 00:12:22 Well, but even then, it's still big time. Caution is like, don't do it for the money. I think it's, it's not even really for anything. Like, I think it's risky to, or I would exercise caution going after it strictly for the money that tends to result in like issues later down the road, don't go in it to become rich or something. I mean, it's gotta be some other reason or
Speaker 2 00:12:49 Yeah, that's always good. And a lot of these things are not small minimums, so you don't necessarily want to, uh, put all of your, say a hundred thousand dollars in this, something like this hoping. And I really hope I get this back in five years or seven years when the quote-unquote
Speaker 1 00:13:07 Okay. So what are the, so let's talk about, uh, the different alternatives where we're hitting around that. So syndications and private real estate, wherever you want to start, let's talk about those.
Speaker 2 00:13:17 I guess let's start with a syndication that's fairly easy. So what is that actually? So you have someone who is, what's called a sponsor or in other words, a general partner and they want to buy a property and they want to then print it out. So they go to the bank, let's just say the property's a million dollars for easy numbers. They go to the bank, they get a $700,000 loan for it. And then they need to raise $300,000 for the rest. And so they go out and raise money from investors, otherwise called LPs or limited partners. So that would be typically the type of person we're talking about. And that's, that's essentially what it is. Now. There are lots of things to consider when you're evaluating these deals. There could be it, you want to look at the strategy. So as this type of strategy where they're just buying it, not doing a ton of renovations, maybe just a little bit and just renting it out.
Speaker 2 00:14:25 So it's kind of like a straight yield deal. So they're just looking for some basic return on the investment, could be a value add strategy where they're going in, they're doing a ton of work, a ton of revamp renovations, and then hoping to make more on the backend. So those types of things, you would not expect to get any distributions in the first year or maybe two, although they're doing all this renovations, they need the, to go in there and do all that. So those that's just kind of a, I guess, a little bit of a high level overview on what a syndication is.
Speaker 1 00:15:00 Yeah. Let's so let's compare it back to the Vanguard real estate index fund. So syndication versus grant Vanguard, real estate index. I mean, there's some overlap, but it's,
Speaker 2 00:15:12 So I guess high-level comparison. One is more diversified. You can buy it, sell it and regularly the dividend on it. I'm talking about the Vanguard real estate ETF would be it's somewhere around 3% right now, way more liquid with the syndication. That's a little bit more, at least I would think of it as higher return potential, but probably also higher risk,
Speaker 1 00:15:43 Way less liquid.
Speaker 2 00:15:45 Right? So once you put your money into these types of things, there's really nothing you can do until the fund closes. All the work is done upfront, deciding on if this is something you want to invest in or not,
Speaker 1 00:15:58 Um, back in the day, or maybe they still are, but like, they're a big kind of like junky product financial advisors use to sell or maybe still do is like these real estate deals. They would, they would just prop or put, add in a bunch of commissions on them. That's what I mean. And then people buy them and then they'd be like, locked in. Can't get rid of it. And just garbage deals. The reason they suck so bad is because there was so much expense. Like it's kinda like buying whole life. It's like whole life is not that bad. I mean, it's okay. It's just, when you add so much expense to something, anything's gonna look like trash, but there's that those aren't don't seem to be as common anymore. Maybe they, I bet they still do exist out there, but, but at the, I guess the point I'm making is it's extremely illiquid. Like as in you can't get to the money, there's also some, um, it's not necessarily like it's kinda more the wild wild west. So when you start talking about private investments, like you're, you know, you could, they could steal the money. I mean, or they could just be terrible real estate people, and maybe that's probably more common, but it's on you to figure that out.
Speaker 2 00:17:11 Yeah. I mean, I would, I mean, it's definitely, like you said earlier, like we were saying earlier, it's definitely for a certain type of person. It can definitely work. It can definitely be getting, you can definitely get a nice return from this. It's just for a person who we were talking about earlier, built up enough assets, you're a high net worth. You've got, if you've got $5 million and you want to throw a chunk of your portfolio in this, that is all fine and well,
Speaker 1 00:17:40 And you have a taste for it and you'd liked the idea of it. And yeah, now there, there are some, um, tax benefits to it a little bit. There's a, we're not going to get into that too much today. I don't think we should get into that too much today, but if y'all want to, if y'all want us to dig into that, we'll do, we'll let us know and we'll cover it in another episode. But, but there are just for the sake of today, there are some unique tax aspects of owning syndications that don't, you don't get from having these in these publicly traded like Vanguard ETF type vehicles, but they're not, uh, that's not a reason to do it. I guess it's just a kind of a compliment to doing it. If you feel driven to go down that path. So how do you, I think the biggest thing about it is, um, if you are the type that kind of wants to try that out is how do you start to go about like finding a deal, Google,
Speaker 2 00:18:36 Um, you can look up credible sources. I mean, there, you probably can find some on the white coat investor. I know there are some, there, there are many, it seems to be a lot of physician blogs that you can, uh, you can find these types of deals from
Speaker 1 00:18:53 Word of caution about that. I learned this lesson I used to act well. So just keep in mind, the more you're seeing something, the more likely there is money being implanted into it, being seen by you. So this is the case with real estate, especially for syndications. Cause it's sometimes hard to figure out what's the expenses are, there might be a reason you've seen it 55 times. And that might be that because the real estate fund is like pumping some money, serious money to these people that are promoting it. And that, that can be okay. I mean, you got to market your stuff. So like part of that is okay, but like at the end of the day, it also could be terrible. Like he could kill your turn like that, that in itself might be a deal breaker. Just the fact that they spent so much money on, you know, putting it in front of
Speaker 2 00:19:46 Yeah. I mean, it's, it would be, it's always tough to tell because you really don't know how it's going to work out. I mean, there is a decent amount of element of unknown here going into these types of things. So whenever I'm looking at the four clients or whoever, if you can kind of think about it, there's a framework for vetting these as looking at the people. So who's running this who has their finger on the trigger. What's the company like the terms of the deal as sort of like the second stole or like the stole and then the property in the market that it's in. So when you're looking at the person or the sponsor, who's running this one quick tip that I learned just from Peter Kim's, uh, passive real estate academy course that I took on how to vet these is just first step is you can just Google the sponsor's name and either add either lawsuit or fraud. You may find some things, things there that will turn you off from that. So that's a very quick first step where you don't have to waste any time talking to anybody. So that's an easy, first step you want to know, do the principals of this business have their own personal money in this deal. That's another way to evaluate, do they have skin in the game here? Are they the personal guarantor on the loan? That's another way to look at, do they have skin in the game here?
Speaker 1 00:21:12 That means they have to personally pack it if it blows up the letter.
Speaker 2 00:21:17 That's right. So in general you can kind of look at our incentives aligned here, along with track record and how many deals they've done. Have they ever lost investors principle? That's something you should be able to find on the track record, or you can ask would also be important to know if they were around during the financial crisis, you can ask them, what was their experience during this?
Speaker 1 00:21:43 How many bankruptcies did they have or
Speaker 2 00:21:45 Something like that, or, you know, just in general, I mean, for most of them, it was probably a great learning opportunity. Yeah.
Speaker 1 00:21:53 You're kind of just looking for package and, or, I mean, really you're looking for people that are rock stars. You're not, you're trying to make sure they're not only like, not crooks. You don't want to obviously have a Crick, uh, but you really want to have like the best of the best, because if they're just average, like go buy the Vanguard real estate, it's like, that's the whole thing. I think at least that's how I've used indications or just real estate like this in general, when we start talking about picking the winners and the losers. So we're talking about actively investing. That's like when I say active, I mean, we're trying to pick the winners and avoid the losers. So when we're talking about picking the winners and avoiding the losers, the whole idea behind it is you have to be really good at picking the winners. Otherwise it's pointless because you can just go by the average, that's what the Vanguard real estate fund is. It's just kind of like more of just the average of all the big, big works.
Speaker 2 00:22:50 Yeah, that's right. So if you have incentives aligned and they've got a long track record of good performance, that's probably one to look more into. If this is something, you know, a route you want to go. Yeah.
Speaker 1 00:23:04 On the other hand, if you're hearing that, just, this is like the tiny, tiny surface. If you're hearing this and you're like, ah, I don't want to have to screen people. I didn't know that was part of it. Or like, I don't know about that part or then that's a deal breaker in itself. I would say go just don't passive through the real Vanguard real estate index, because that's the, you know, if you're going to say the most important part, that's the most important part is you gotta be able to screen the deal and probably education too. Like I would say that's important. Right? You, what do you think? Like educating yourself? Cause this is like, you're responsible if you're, if you're investing in syndications, like you're the guy picking the deal, right.
Speaker 2 00:23:47 That's right. I mean, really the only work there is to be done is you vetting it upfront. And then, you know, like I said earlier, these are not small minimums. Most of the time a syndication can be smaller, maybe 25,000 or 50,000. But most of the funds, which is basically just multiple syndications within one fund or multiple properties, there are 50 to a hundred thousand, but you're right. If you're not willing to do a few hours of work upfront, it's probably a good screen that maybe it shouldn't.
Speaker 1 00:24:22 Yeah. So that's one little frustration, I guess it's just a technicality. Like a people will call it passive. And I don't think it's, it's a PR it's less passive. It's not purely passive. When we start talking about, if we're comparing it to the Vanguard real estate option, like that's as passive as you can get, this is starting to get you dipping your toe into like actually having to do some work. I mean, it's not owning a real estate, uh, direct. You're not like buying a house and renting it out yourself. That's very much active. Um, but this is definitely a step in the, you have to spend some time and have some headaches to deal with potential, uh, directions. So
Speaker 2 00:25:02 Yeah. Yeah, that's
Speaker 1 00:25:03 Right. And some people aren't really interested in that. Yeah.
Speaker 2 00:25:07 The other thing to evaluate us the property itself and the market that it's in. Um, one of the things that I find interesting is looking at does does the property is the property in a rent control area, an area that has a rent control laws, or if it's a fund, does this person who is managing the fund plan to invest in any areas that might have rent control while others or the surrounding areas have rent control laws. And those are laws where rent increases can be kept. I mean, the laws can be very different depending on the area and what that actually is. But if I was investing in an area buying a property, I would want to know that there is not some kind of cap on the amount of rent that I can charge. Now, I'm sure it comes from a good place like these laws, but I would at least want to know that if I plan to buy a building, go in and put a ton of money into it, renovate it so that, you know, maybe a higher income type of person could rent it. I would want to be aware of what those laws are.
Speaker 1 00:26:14 Yeah. That's a good one. I also, uh, one thing I just thought of how it died. I didn't hear you. You, I haven't heard, you mentioned yet about, um, looking at future projections or proposals as a way of screening deals. Yes.
Speaker 2 00:26:29 That's obviously super important,
Speaker 1 00:26:31 But the problem is, have you ever seen a real estate deal that doesn't have great projections?
Speaker 2 00:26:36 No, it's typically not on the sales flyer where they're aligned. Well,
Speaker 1 00:26:42 We're probably going to be mediocre
Speaker 2 00:26:46 Five, 6% Navy. Um, yeah, that's the projections are always going to look good. Otherwise the person wouldn't be buying it and they wouldn't be bringing this deal to you if they couldn't, you know, conjure up a, a good looking sales flyer. Um right.
Speaker 1 00:27:03 But do all of them, the question is, do they meet their projections?
Speaker 2 00:27:08 Yeah. I mean, you're, at this point, you're really just taking their word for what they're able, what they're saying. They're able
Speaker 1 00:27:15 To think they might be able to do
Speaker 2 00:27:18 That's right. So, you know, if they say they're going to be able to cut costs by some percentage you, I mean, it's at least in my mind, it's all fair to ask. What evidence do you have that you can do this? Is there another property that you can show me the books on that you were able to do this? You were able to cut costs by this amount, or if they say, well, we're going to be able to increase rent by X amount. Great. Let's look at the, you can Google other properties in that area and look at the comparable rents in F they're saying that they're going to be able to get, you know, way over the, all of the comps you might want to ask what makes us a luxury or a premium apartment or whatever it is that you're going to be able to charge this. Yep. You also want to look, if they're going to do big renovations to increase rent. In other words, have value, add strategy. Are they also increasing their maintenance costs in the projections? Because if you're using higher cost materials, you're probably going to have higher cost and maintenance going forward.
Speaker 1 00:28:29 Yeah. Fancy stuff costs more to fix.
Speaker 2 00:28:31 That's right. If they're keeping all of that flat, that might be a good question to ask.
Speaker 1 00:28:36 Yeah. Yeah, no there, and so I think you're, we're just scratching the surface real really with all these, uh, kind of questions to ask, there's a lot of, um, areas to dig into, to screen these kinds of deals. But I, if we're talking about the big picture takeaway, I think it's that you need to be in a position where you're comfortable knowing how to screen a deal. And if you have a hundred of them to choose from, you can kind of like you, you know what to do to ask the right questions, to get, to help you identify what the better options look like. And that's where the challenge is with syndications. I think that's, but that's also where the opportunity is that's right. Everybody thinks though, you know, everybody's like, yeah, I got this. I mean, people are overconfident. That's like a human nature thing. So, but it's definitely, you know, has plenty of upside and it's a good potential avenue to go down. How does syndication differ? You talk about private real estate funds. So maybe we could talk a little bit about like that as a
Speaker 2 00:29:47 Alternative. Yeah. So a private real estate fund would be similar to a syndication except it's multiple properties. A lot of times they have not purchased the property yet. So in some ways you have actually less to, to vet, you may only have the person and, um, the general deal terms to vet, you don't know what the property is. So it's a little bit of a blind trust in that aspect. You're more so trusting the person and their track record and that they can execute on that. But another, another thing to, uh, at least think about with these funds is sometimes if you're just investing the minimum in, let's say this fund is investing in 15 different properties all across the U S just geographically diversified. You will have a state tax return for each one of those states. So it could eat into your costs a little bit. If you're having to file a ton of state tax returns and just headache to if all you're investing is the minimum. So that's kind of some, a little bit of a, maybe that's a small thing to think about, but something to be aware of when you are investing in funds that you're going to get a K one and you're going to have to file state taxes and all those states.
Speaker 1 00:31:07 Yeah. I mean, that's a, that's a pain in the rear. I mean, like, or it's, it's either a pain you're going to have to deal with, or you're going to have to pay your account and like a lot more in fees to kind of which that, that's a, that's a cost. You probably aren't thinking about like accounting fees, but that's a pure costs because you don't have to pay accounting fees to invest in the Vanguard real estate index
Speaker 2 00:31:30 Fund, if you're doing your own taxes.
Speaker 1 00:31:34 I mean, I mean, yeah. So that's how I, like, anytime I'm thinking about this, I, I always go back to the index, like buying an index fund and in real estate is how does this compare to that Benchmark? But private real estate is a little bit more like, so it's kind, kinda like, you know, more diversified, I guess, in theory, but typically more diversified than just buying into one syndication. Uh, so it's a step, the direction of the Vanguard real estate index, but you know, how diversified did these things get? I mean, what kind of, I mean, are they like a tiny step that direction or did they typically have a whole lot of
Speaker 2 00:32:17 It depends. There could be some that maybe they're only buying three to five properties and it's all in the same location generally, or it could be, you know, all spread across, you know, maybe the Southwest and the Southeast. And in that sense it's more diversified. Yeah. There's definitely a range there. They're not all equally as diversified. Yeah.
Speaker 1 00:32:41 Right. Anything private like this, like I was saying earlier, it's like the wild wild west. So you get a much wider scope of possible choices and there's less regulation, less transparency. Sometimes you end up having to do a little bit more like homework on things. Um, then that's where the active part, that's where the time, you know, commitment comes into play.
Speaker 2 00:33:06 Yeah. Definitely want to examine those deals pretty thoroughly and know what am I actually going to get paid from this? Like, what's the structure, you know, how do I get paid? You will probably see something, at least really depends on the deal. They're all different. But a lot of times you'll see something called a preferred return and how that works is before the general partners or the company itself participate in the profits. Of course that's after their fees, right? So that might have a one to 2% asset management fee associated with the deal. And then there might be something called an acquisition fee where there's a percentage they get for every property they acquire. And then there are performance incentives. So you might see something called a preferred return. Usually it could be somewhere around 8%. And that means you get that before the general partners participate in the profits.
Speaker 2 00:34:05 So how it could work is maybe the first year it's, they're going in renovating. There's really no profits from that. Maybe don't get anything. And then maybe the next year they make 8% and then you get up, you get all of that as a limited partner, they don't keep any. Now it could also be cumulative. A cumulative preferred return means you get 8% per year. So if you don't get any profits in that first year, they still have to make up for that year before the general partners get to participate in any profits down the line. So that's what the preferred return is. If you see that, that's what it's talking about now, after that, there may be something called a profit split. And so, or you also might see the term waterfall structure. So what that is just an example, it may be you get the 8% preferred return beyond that maybe you get 70% and the general partner gets 30% up to 15% of the in that's usually measured by the internal rate of return or IRR. And then there might be another hurdle where after that 15%, the split is 50 50. So the general partners are incentivized to get a higher return. That's a fairly typical structure that you might see in these deals. Now, if they get there, I mean, the, Hey, that's great, but you don't necessarily know that they're going to hit those numbers.
Speaker 1 00:35:37 How would you measure success in this kind of thing? Like what is a, uh, what's a good deal versus a not good deal?
Speaker 2 00:35:43 Well, I would say you can't necessarily just look at whichever one is telling you the, the highest targeted IRR on the sales flyer. Right? I think it depends on what your goal is going into this. If you're just looking to maximize returns, you still have to go through the vetting process and make sure everything makes sense here in this deal. You like the person, the deal itself makes sense on paper. It doesn't seem like there's any unreasonable projections, maybe the market itself that it's in. You want to look at that and look at what's the unemployment rate there, what's the population growth. Is there job diversity, diversity, or is it maybe one employer is kind of like the only show in town you want to look for? That sort of thing really depends on what your goal going into this.
Speaker 1 00:36:32 Yeah. And I think the best, like I said earlier is if you're doing it like passion project kind of thing. So if you have like a, for instance, like an type of area that you have an interest in, or you want to help a certain population, or you want to do things a different way than has been done in the past, and you're able to get in on something where they're doing that, that's a home run because then you don't have to worry so much about like, you know, I mean, you still want to look at the returns and that kind of thing, but it's like, you're doing it for other reasons and that can, that's going to provide motivation. But going back to the, I keep going back to the Vanguard real estate index. Um, I was, I was looking at the, um, I'm not gonna say the, maybe we can talk generally about the returns, but like this fund has done really well. Like if I put this fund on a flyer and started selling it as this indication, people will buy it all day long,
Speaker 2 00:37:30 Charge an extra 1% on top
Speaker 1 00:37:32 Of it. Yeah. And throw in a 1% fee. Cause I made it look pretty. I mean like the baseline option is pretty solid, so you need to have a really good reason, um, for doing something other than it, I think because if you can earn, so like I'm looking at the end of year returns for 2020 ending 2021. And it's, we'll just say it's above 18%, uh, return, uh, over the three-year period. The one year is like above 40% returned before taxes. So this fund as what real estate overall has done fairly well. And so it's not this fund it's special. This fund is just like the market of real estate. It owns it's meant to be kind of an index, you know, the collection of the markets. So check the fund out and you'll see kind of what I'm talking about. Like it does pretty well.
Speaker 1 00:38:26 And so I think that's a good measure of like, if you can own this fund and not spend a minute of your time and earn the same as this is investing in some of these other deals, that's I wouldn't be interested in doing that personally is just kind of a waste of time. Now, if you have a passion for it and you want to get into it and learn about it, then you're, it's worthwhile to spend time on it. Cause you're going to, you got to learn. That's the other thing, I think if you do have an interest in it and you do want to get into it, um, I wouldn't beat yourself up. If you have like a crappy deal, the first deal, like some of these deals, you got to have good expectations going in, you might have a terrible deal. The first deal that you break even on or lose some money on or something like that. Or maybe you lose a lot of money on, I mean, that's what you're getting into, right?
Speaker 2 00:39:15 Yeah. I think a lot of people get into them because they see the income component of it. So they might see 8% preferred return. So I'm going to get 8% per year as a distribution. And they might think about that as a way to maybe replace their income, whether it's, they want to scale back at work or for one reason or another, but maybe also not thinking about, well maybe instead of the form of a dividend, you could also just sell down a chunk of whatever investment is like the Vanguard fund or whatever, and just kind of do essentially the same thing, but in a little bit of a different form. And then they also probably hear about the tax benefits to which, you know, insert tax disclaimer, but,
Speaker 1 00:40:04 Um, talk to your accountant.
Speaker 2 00:40:06 Yeah. If you don't have real estate professional status, you know, these losses that might show up on your K one, even though you actually got money in the form of a distribution, your K one tax form shows a loss because of the depreciation or the expenses they incurred during a renovation or whatever it is, you don't actually get to deduct that from your wages, unless you have real estate professional status, all those losses get suspended for future use to write off when you have actually a net gain for the year.
Speaker 1 00:40:42 Yeah. It's still a pretty, it's a good tax. There are some tax benefits, but it's not like, uh, it's a home run. If you're a real estate professional status, like it's a very good tax benefit. That's right.
Speaker 2 00:40:57 'cause if you didn't have that, I mean, you could, you know, maybe one way you could do that is maybe instead of putting everything that you were going to put into this type of vehicle at once, and let's say you're five years from retirement. Maybe you do half now, half in two or three years. And then maybe by the time you actually start to get that, that income taxed and those losses are all suspended. Well now you're no longer working. Maybe you're in a lower tax bracket. You can potentially do some interesting things there tax wise.
Speaker 1 00:41:36 Yeah. I think that's where it works. Well, um, if I'm generalizing, it's like the more you're going in the direction of like, I want to make this a pretty serious business or side hustle or, you know, eventually a full-time gig, AKA real estate professional status, the better it's going to work. Cause mainly cause you're going to be able to dedicate time to it. You're going to be able to get a lot better at it. You're going to also get all these tax benefits, you know, if you're a real estate professional status. So, uh, on the other hand, if you have like one property or one deal every 10 years or something, it's going to be hard to be on your game when you're doing one of anything every 10 years. Right. Awesome. Well, I think that's a good kind of high level overview. Um, anything, any parting thoughts on your end here you can think of?
Speaker 2 00:42:29 I think just the only word of advice is to just not throw money at any deal that's put in front of you really do some workup.
Speaker 1 00:42:38 Yeah. I think that's really good. Don't trust marketing proposals.
Speaker 2 00:42:45 Yeah. You can't, uh, can't believe everything you see on the,
Speaker 1 00:42:48 I remember remember that they're all going to look good and the people are huge. The people is, I would say they're the people involved is probably the number one,
Speaker 2 00:43:00 Reach out to them. You know, come up with some questions that you want to ask them beforehand and reach out to them and ask questions before you put any money into something they're willing to, to answer questions. So do that
Speaker 1 00:43:13 First step. If you work with a financial advisor or if you work with us, talk to us beforehand, don't just be like, Hey, I got a deal I'm done because you know, we can kind of help poke holes in it with you kind of ask you some questions to think about as you approach it. Um, but getting, uh, multiple sets of eyes on it is can be helpful. And, or have you involve your spouse or whatever that, that sometimes works pretty well.
Speaker 2 00:43:40 Yeah. I mean, I've done joint meetings. If you don't want to ask the questions and you work with us, no, you don't want to be the one asking the tough questions. We can do that for you.
Speaker 1 00:43:51 Yeah. We'll be the bad guys. Alright. Well, thanks for coming on here. I appreciate it as always try to stay safe. It's crazy.
Speaker 2 00:44:04 All right.
Speaker 1 00:44:04 You too, as always, thank you so much for joining us today. If you found this valuable, please give us a review on iTunes and share with a friend. Also check out our
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