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Commercial multi-family real estate other than (but similar to) 37th Parallel

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  • Commercial multi-family real estate other than (but similar to) 37th Parallel

    I have been diversifying some of my portfolio into commercial multi-family offerings.  At this point just with 37th Parallel Properties - two of their apartment complexes in separate investments.  I really like their approach and from my limited knowledge at this point I *think* they seem well researched and on the conservative end of things, but at the cost of slightly less returns than others may expect.  However, I am comfortable with this trade off/approach and it fits my goals.

    However, I would like to diversify away from just one company.  I have no reason to doubt them, but I hate to have all non-REIT/index investments all in one company.  I am not in a position to be a property manager/landlord and really don't have the time or aptitude to dive into the crowd funded real estate sites like realtymogul or fundrise.

    I *think* what I'm looking for is basically another 37th Parallel Properties type of set up for commercial multi family real estate - someone else does the research, etc.  Can someone point me in a direction of another company I could look into or any other options that may be available?  I do have some REIT Vanguard funds but these seem to be light on family/residential holdings and I'd like to continue to dive into rental/family housing instead.

     

    Thanks for any suggestions.

  • #2
    With 37th parallel you are invested in a single property. That property may under (or over) perform relative to their other properties. If you want to diversify I would suggest a fund where your money is invested in a large number of properties. Origin fund is one example. There are many others as well.

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    • #3
      With 37th Parallel, it is my understanding that the tax benefits of direct ownership flow through to each of the owners.  That tax benefit is not the case with REITs.

      I am sitting on tremendous appreciation of equity and I am running out of paper losses.  I am interested in shifting from my current portfolio of directly owned residential investment properties into commercial size multi family, either through direct ownership or through syndication.  I’m just starting to educate myself about the options out there.  I want to do a 1031 exchange from existing properties into new investments to avoid excessive taxes.

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      • #4
        MLG Capital is a similar type setup. I don’t invest in Origin (no reason why, just haven’t researched them enough) but I believe they are similar.

        If your looking for a fund as opposed to single property investing, MLG Capital, Watermark, Origin and Mara-Poling are some that come to mind with good reputations.

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        • #5
          I am in the same boat. I invested on a deal with 37th parallel earlier this year and got an email today about another MF apt complex they are acquiring soon. I dont feel very comfortable throwing 50k on another single property at this stage. On the other hand, i like the idea of investing in funds (better diversification) but i am not clear on the tax implications and how income from various properties in different states would affect my taxes. Does anyone have good resources for understanding tax implications of these kinds of CRE investments? I can (and probably will) hire a CPA but i would like to know the basics myself.

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          • #6
            As a counter point to my previous comment, with a structure like 37th parallel you are invested in a single property usually in Texas which has no state income tax. That make me taxes relatively easy. In a large fund that invests in multiple states, you *might* end up having income in many states and have to file multiple separate state tax forms which can really complicate it. You won’t usually owe taxes due to depreciation but you might have to do 5-10 additional separate state tax forms.

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            • #7
              I think the funds mentioned (Origin/MLG) look appealing.  Thanks all for the input.

               

              I know for the 37th Parellel individual properties there can be tax advantages (ie the depreciation).  For these funds I *assume* a similar depreciation calculation/deduction can be utilized?

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              • #8
                Yes. Depreciation is the same. All the tax advantages apply for the RE funds. I really like origin. They are currently accepting reservations for their next fund. All previous ones have been a 20% IRR. If you ever want to get in on the debt side, I really like broadmark. It’s a debt side fund. Good cash flow returns but less tax efficiency.

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                • #9




                  I think the funds mentioned (Origin/MLG) look appealing.  Thanks all for the input.

                   

                  I know for the 37th Parellel individual properties there can be tax advantages (ie the depreciation).  For these funds I *assume* a similar depreciation calculation/deduction can be utilized?
                  Click to expand...


                  The ones I invest in pass on depreciation to the investors, but not all do. MLG and Watermark do pass this one. If you are looking to invest, make sure you look for this in the PPM or directly contact the sponsor.

                   

                  Also, some depreciate over the standard (I believe) 39 years, some accelerate this by ordering a cost segregation study. Given that you will not hold these properties for 27 years through a syndicator/sponsor, the accelerated depreciation will usually be a better route for you. It is especially useful if you have multiple CRE investments as you can offset gains from some investments with depreciation from others. Something else to consider when looking into these investments.

                   

                  https://costseg.com/commercial-property-depreciation/

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                  • #10
                    I am a current Watermark Partners investor and they do use cost segregation to create much greater front loaded depreciation and shield the low-teen cash on cash returns (much higher IRRs) they have been paying out for the last few years . Also, they do consolidated tax filings in the relevant states and pass on the net returns so investors don’t need to do individual state filings.
                    Interestingly they also have the capability to do 1031s within the funds to create an even longer income stream in a tax efficient manner.
                    I just got off a call with one of the partners and they are extremely accessible.

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                    • #11
                      Watermark invests in the lowest level of housing at very low price points, and low rents. A lot of their renters get section 8 housing. The problem with all of these companies is that they’ve opened their door to less wealthy accredited investors just in the past decade, when housing has appreciated yearly. Clearly a portion of the IRR is from appreciation of the underlying property. A housing downturn is coming. I can’t say when, but year over year increases substantially above inflation can not last forever. When properties stop appreciating, the industry will be disrupted. Imagine the IRR on a property with positive cash flow but in an environment where rents are stable, or decreasing, and the same apples for the underlying property. When this happens, the good companies and poor ones will be weeded out. A rising tide lifts all ships. Watermark feels they are less susesecptable to an inevitable downturn as they are already at the cheapest possible point and their renters can’t downsize to a lower rent property. They also feel the government doesn’t want mass homelessness and will increase section 8 finding in the event of an economic downturn coupled with a housing downturn. That is their niche. Whether you believe it or not is a different question. If section 8 is cut, watermark will get killed. They will have mass evictions with people who can’t afford their rent. I think everyone should do sufficient due dilegwnce on all these companies and not focus on past returns in the greatest economic expansion of our generation.

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                      • #12
                        These companies have made a killing With the new rules allowing lower income (but accredited) investors to participate. These are the “it” investments right now because the housing market has been going up for a decade. And the boom of new less sophisticated investors and heavy demand has allowed these companies to charge higher fees than if they were only available to institutional investors. They also advertise heavily. The more demand they have for their fund, the higher fees they can charge. These companies aren’t out to give you free money. They leverage the high demand to charge high fees and maximize their own income. I invest in this field but they are highly illiquid and require substantial investments so I would urge everyone to be prudent. People often jump into RE at the tail end of an expansion.

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                        • #13
                          DCDoc-Are you invested with them? I think you may have a few inaccuracies with regards to Watermark. I have a small investment with them, but don’t think they’re the end all and be all of real estate investments. I like them as a sponsor, whether or not a recession hits them hard is difficult to say.

                          They do invest in workforce housing (probably B-/C+) type properties. They are section 8 approved, however do not have any section 8 renters. They specifically got this designation in order to have flexibility in case of a recession, which makes sense to me. Also, if you look at the fundamentals, this type of housing was hit less (not more as you describe) during the previous two recessions.

                          Obviously if you’re not loving their strategy or the class of housing, then don’t invest in it. I just feel that accuracy of what they are and are not trying to do is important.

                          I agree with your general sentiment that people should do their due diligence and not hop on the bandwagon at the tail end of the cycle. That makes perfect sense. I also agree with you that investing in real estate is easy in very positive economic conditions (the same goes for most investments).

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                          • #14
                            For those invested in debt CRE deals in funds like Broadmark, are you using a Roth IRA for your investments?

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                            • #15
                              There are some very good sites to help educate those interested in both crowdfunding RE and private equity non-publicized deals, both on the equity and debt side.  Check out www.506investorgroup.com as well as Therealestatecrowdfundingreview.com; this latter one has great educational pages.  Some of the above companies are explored and reviewed in detail, both by the folks that run the site and many other investors.  For instance, 37th parallel drew some of the following points:  they haven't had full-cycle experience so were not around during the 2008 downturn, have a higher than average fee structure, an internal lawsuit, and missed proformas on some of the prior deals.

                              There's also a lot on some of the debt funds like Broadmark, etc.  And DCDoc's points are well taken.  Must be fairly conservative and not just throw money at any crowdfunding deal without knowing the risk and that particular market.

                               

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