The frequently asked questions below we trust will help in your investment decisions. Feel free to contact us via the Invest With Us form to register for investment opportunities, or should you have additional questions.
FAQs are separated into 2 sections to facilitate navigation; MF Investment Terms which explains common investment terms, and Syndication Information which provides information on how syndications work with Texas Growth Capital.
What is passive vs active investing?
Passive investing is the process of placing one's investment funds into a syndication (for example) and having all the work done by the General Partner. Active investing is where you personally do all the tasks for the investment; from planning, research, demographics, property selection and negotiation, due diligence, assembling the team, raising capital, applying for loans, managing the construction, marketing, lease up management, operations, maintenance, staff payroll, etc. It is a complicated and stressful process best done by a general partner team who do this full time. Active is hands on, passive is hands off.
What are the benefits to passive investing in a syndication?
There are many benefits, including;
passive investment - access to high returns without the work and stress
syndication structure is designed to be a win-win for LP and GP investors
LP investment has a much lower risk than GP as capital and profits are paid out ahead of GPs.
cash flow - regular distributions directly into your bank account
tax benefits - accelerated depreciation
being able to access high returns at low risk with a relatively small amount of capital
What are the downsides to investing in syndications?
Every investment has its downsides, here are some to consider;
investing in a syndication is a passive investment by its structure, thus there is no control or decision making by the LP investor
it is not a liquid investment, capital is committed and utilized together with the capital from all the other investors for a given period as defined in the PPM. I.e. usually until a capital event such as a refinance or sale.
the need to be an accredited investor for certain offerings.
MF Asset Class
MF assets (buildings and amenities) are classed by their age, location and rents. There are also + and - classes on the main classes below, which are slightly higher or lower classes. E.g. a B class property can be rehabbed to become a B+ property. CAP Rates vary per class.
A+ class; newest with luxurious amenities (resort style pool, gym, business center, dog park, etc), high quality finishes, excellent locations.
A class; newest with modern amenities, best location, highest rents. These properties are very stable, have low maintenance, and are generally bought by institutional investors - who are ok with lower returns as the risk is also low.
B class; older with some facilities, generally in good locations, can be in good to moderate condition. Value-add potential in some cases, goal is to lift rents to A class.
C class; old, low rents, usually minimal or no amenities, in average neighborhoods, often with problems (buildings, management, tenants). Demand is strong due to low rents. High potential for value-add (rehab) but also high risk.
D class; very old, high vacancy, dangerous neighborhoods. High risk to rehab and as an investment.
A multifamily syndication is an alliance in which multiple individuals pool together their equity and resources to purchase or construct a multifamily asset. Multifamily syndications generally have two parties: the multifamily syndicator (GP) and passive investors (LPs).
Private Placement Memorandum
A Private Placement Memorandum (PPM) is a legal document given to prospective real estate investors (individual or LLC) who invest in a private syndication in order to explain the investment, risks, requirements, fees, etc, and comply with federal securities law (SEC). It will comprise of the following sections:
Introduction; summary of the offer, property description, offering period, investment minimums, investment risks, suitability standards, and fees / commissions payable to the sponsor.
Disclosures; this section outlines the capabilities of the sponsor, project costs, use of proceeds and gross sale revenues, and includes a projected budget (proforma). It also outlines the risks associated with the investment opportunity.
Legal Agreement; this is the operating agreement for the entity (LLC, LP, or SPV) which owns the property (investors will own share in this entity). It will outline the management plan, rights of members, ability modify ownership, termination, and accounting rules.
Subscription Agreement; agreement to the terms of the PPM, details the number of shares the investor will purchase. All investors will be required to submit funds at this time to close on the offer.
A Limited Partner (LP) is a passive investor in a multifamily syndication. The passive investor's role is to bring equity. Once the multifamily complex has been acquired the passive investors will, in most cases, collect passive income from the property and receive a return upon the sale of the asset.
A General Partner (GP), also known as a Sponsor or Syndicator, is responsible for finding the multifamily opportunity or land, due diligence, underwriting the deal, sourcing equity, arranging the financing and streamlining the transaction process until the deal closes. The GP then manages the full multifamily construction process, including entitlements, civil engineering, permitting, architectural design, construction, legal, administrative, marketing and other functions. Once the complex has been acquired or construction is complete, the sponsorship team is responsible for marketing and operating the asset until refinance or exit (sale). The GP is also an investor contributing significant funds into the syndication alongside LP investors.
A waterfall is used to describe how LPs and GPs are repaid through a share of the multifamily asset equity distributions, from operating profits and refinance or sale. It is commonly based on a type of return hurdle that must be met in order to progress to the next part of the waterfall. In a basic waterfall structure passive investors (LPs) will receive for example up to an 8% preferred return, and once the preferred return has been met, the rest
of the profits will be restructured as shown in the example below. This structure is designed so that GPs are incentivized to maximize returns for the investor.
8% preferred return (100% to LPs, 0% to GP).
Split remaining profits 80% LP - 20% GP until passive investors (LPs) receive a 10% internal rate of return (IRR).
Then a 70% LP - 30% GP split until LP investors have reached a 12% IRR.
Finally a 50% LP - 50% GP split of remaining profits.
Most MF projects / investments require loans to construct / purchase and operate. The investment return is paid out in order from the bottom of the stack. Risk is proportionate to return. For ground-up MF construction a typical capital stack is:
Common equity; lenders usually require developers / sponsors to contribute some of their own funds as common equity in order to have 'skin in the game'. The sponsors who develop and operate the property hold this stock, and it is considered the riskiest yet potentially the most profitable portion of the capital stack.
Preferred equity; similar to common equity but with superior payment rights. LP investors hold this equity.
Mezzanine debt; this is secondary debt paid back after the senior debt. It is not always needed thus not present in every deal.
Senior debt; usually comprises 75% of the total raise. Funds are from banks and institutions thus the lowest return (interest rate) along with the lowest risk. It has the first claim to funds in the event of a foreclosure and retains the property itself as collateral.
A lease is a written agreement between the landlord and tenant to occupy / utilize an apartment for a certain period for a certain monthly payment. This is a legally binding contract detailing all terms and conditions. Leases are generally 12 months in duration, and can then renew or switch to month to month.
Who is an accredited investor?
An accredited investor (per SEC Rule 501 of Regulation D.2) is an individual who has an annual income exceeding $200,000 ($300,000 for joint income) for the last two years with the expectation of earning the same or a higher income in the current year. An individual must have earned income above the thresholds either alone or with a spouse over the last two years. A person is also considered an accredited investor if they have a net worth exceeding $1 million, either individually or jointly with their spouse. An entity is considered an accredited investor if it is a private business development company or an organization with assets exceeding $5 million. Also, if an entity consists of equity owners who are accredited investors, the entity itself is an accredited investor. Definition reference here.
What are the common types of real estate offering types?
To allow real estate investors to raise capital without doing a full public offering through the SEC, Regulation D was added to the Securities Act in 1982. Rule 506 provides an alternative to prior methods of selling securities which were costly and had stringent requirements. The two important sub-regulations concerning private real estate offerings are:
506b - allows raise of unlimited capital from accredited investors and up to 35 sophisticated investors, but no public advertising
506c - allows raise of unlimited capital from accredited investors only (must verify), and allows public advertising
Net Operating Income
The Net Operating Income (NOI) or profit of a revenue generating property is the revenue minus expenses, but does not include debt service as an expense.
Capitalization Rate (CAP Rate) is the return on a property when there is no loan (all cash). CAP Rate = NOI / Sale Price or Value. E.g. if the property value or sales price is $10 M, and NOI is $500 k, then the CAP Rate = 5%. Usually CAP rates are known for an area and asset type, it can then be used to calculate the sale price.
Cash-on-Cash (CoC) Return is also known as the Return on Investment (ROI). It is equal to the annual cash flow divided by the down payment. E.g. annual cash flow is $10000, and the down payment is $40000, then the CoC return is 25%. The investment would be fully returned in 4 years in this example.
Debt Coverage Ratio
Debt Coverage Ratio (DCR) is the amount of cash flow remaining after covering the mortgage. DCR = NOI / Annual debt. E.g. If NOI = $1 M and annual debt service is $800 k, then DCR is 1.25. This number is used by lenders to determine the strength of the deal and repayment ability, a higher DCR is better.
Price per Unit and per Sq Ft
MF investments are often analyzed by looking at the price per unit. E.g. if the property has 20 units selling for $5 M, then the price per unit is $250 k. Price per Sq Ft is the total area (sf) of all units divided by the sales price. E.g. in this example if the units total 25000 sf (1250 sf per unit), then the price per sf = $20. These values allow for comparisons between deals. It is important to know these numbers for a submarket where an purchase offer is to be made.
What is a preferred return and what is your rate?
A preferred return or 'pref' is a fixed percentage projected return paid to LP investors on their capital, paid from project operational or sale proceeds ahead of any returns paid to the GP sponsors. This lowers the risk on LP returns vs that of GP returns. As a general guide we project returns of 8% to Class A-1 shareholders and 9% to Class A-2 shareholders.
An equity multiple is a measure of the total return for an investment over the total investment period. E.g. investing $100000 with a preferred return of 8% for 5 years and receiving a $60000 distribution from the asset sale gives 5 x $8000 + $60000 = $100000. The equity multiple here is 2X, as the investor doubled their money.
Internal Rate of Return
IRR is defined as the discount rate that makes the Net Present Value (NPV) of all cash flow equal to zero. Another way to says this; it is the time-weighted, annualized return on equity invested. It is considered the best investment metric as it takes into account the time value of money. It incorporates both cash flows and sale proceeds.
A basis point (bp) is 1/100 of a percent. For example 25 bp is 0.25%.
What about single vs multi-family investing?
Single family (SF) investment (rental) can work well in high appreciation areas if the 1% rule is followed. In many population centers, including major cities in Texas, it is becoming very difficult to find a good deal to rehab. Cash flow in many cases only covers expenses and does not leave any profit. The main problem with SF investment comes with scaling up. The management and maintenance is very frustrating and time consuming once 10 or so houses are in a portfolio. A rental management company can be used however they are notorious for not caring, poor communications, and letting issues and bad tenants prolong. One vacancy of s SF house is a significant loss, whereas 1 vacant unit is not so impactful within a MF asset. Investing in a MF syndication removes any time and stress involved due to the efficiency and professional management of the operation.
What makes a good market for new construction of a MF asset?
It is a combination of both asset performance factors and construction factors, as maximizing the sale is what drives investor returns.
Job growth and job type diversity
Projected future income growth
Neighborhood median household income of $50k or above
Poverty level well below 10%
Unemployment no more than 2% above city average
Landlord friendly state
Reasonable cost and availability of construction materials and labor
The demographic hurdles help to minimize bad debt for the asset once in operation, thus making it more attractive for institutional buyers.
Why do you only offer investments in Texas?
Because We Love Texas!!
And . . . of course because Texas has such strong investment fundamentals: employment, net migration and company relocation, tight housing supply, affordable living, has no state income taxes and is business friendly. Please review the Why Invest in Texas section for more detailed facts and figures.
The other big reason is that we live and work here (Houston, San Antonio), thus know the market well, and would not risk investor capital in markets we do not thoroughly understand.
How much are sponsors investing?
Sponsors (GP) will generally invest 5% of the required capital raise or $500 k minimum as Class B shares. Thus if the project is budgeted at $40 M, the raise from investors will likely be $10 M (with a 75% LTC loan) and sponsors will contribute at least $500 k of this, alongside LP investors. Yes sufficient skin in the game provides confidence to all parties and ensures GP and LP interests are aligned.
Will there be capital calls?
Careful planning and financial risk analysis are designed to avoid capital calls. However they are possibility when circumstances are unforeseen or beyond our control. To further mitigate this risk we add monetary and time buffers (reserves) to our construction budget, schedule and project financials. We use fixed price contracts for construction, which may not achieve the lowest price but does protect against price rises.
How much is budgeted for reserves?
Budgeting for a reserves account to deal with shortfalls, unexpected expenses, etc, is $250 per unit per year. Each investment will vary, however additional capital may be held in the operating account for a limited period to mitigate risks which could affect the overall investment or it's performance. These include costs higher than planned, for example due to slow lease up, construction delays, utility or other vendor cost increases.
What is the minimum investment?
This will depend on the project and total capital raise, but is usually $50k or $100k.
How is my capital protected?
It is important to acknowledge that there are risks to both capital and returns when investing in real estate, as outlined in the PPM you will review and sign if you choose to invest with us. However we take a number of steps to minimize these physical asset, investor capital and performance risks, for example:
assets are held in a stand-alone entity owned by Limited Partners (investors)
full value builders risk, liability and income protection insurances to cover potential loss
construction contracts drawn up by expert contracts attorney to ensure performance and protect assets
conservative underwriting to absorb construction or material supply delays
What are the worst case scenarios and how are you prepared?
All investments come with certain risks of capital or income loss, so no 100% guarantees can be made. There is always a correlation of risk vs returns, as per the capital stack. The worst case scenarios and mitigation plans are:
Asset loss through fire, flooding, hurricane, freezing storm, theft or other destructive event. Mitigation is firstly via prevention and minimization of damage through engineering design, sprinkler systems, fire resistant materials, drainage, freeze resistant plumbing, etc. The protection against loss of capital is via insurance. During construction this is builders risk and general liability, and during operation this is general liability to protect against claims, property insurance to protect the physical buildings, and business income coverage to maintain lease cash flow.
Asset value decrease below loan value or cash flow goes negative. This is unlikely with the demand in the current market and due to the development spread. Worst and unlikely case is that a capital call may be needed to resolve this, a refinance, or complete exit through sale. However each project however undergoes careful financial sensitivity analysis, there is a capital preservation plan, and reserves are put in place to cover most scenarios.
Is there cash flow during construction?
As there is no income during construction we are not able to provide distributions during this period. Catch-up distributions are paid to LP investors as soon as there is sufficient cash flow in excess of expenses from operations (lease revenue) and / or a sale is made. The investments / funds which offer this either need to raise this additional funding to then immediately pay out again (which may lower investor base and thus returns) or needs to take out a separate loan to fund these distributions (adds cost to the project) - both are undesirable situations.
How often are cash flow distributions made?
Frequency of distributions will depend on the specific project, but will either be monthly or quarterly.
What is the timing from project initiation to exit?
After land is selected, due diligence, capital raise, design, permitting and construction will usually take from 18 - 24 months. Potential delays include city / county permit approval, weather, material and labor availability. The next phase of lease-up (90%+ occupancy), also known as stabilization, will normally take 6 - 12 months. Factors here are the amount of prebookings (wait list), and market strength + advertising affecting lease-up rate. There may or may not be additional time to a sale (exit) as some buyers may make an offer before stabilization. Thus overall investment duration will likely be 24 - 36 months.
Why do you focus on new construction vs value-add?
Both have their advantages and disadvantages. Both our experience with value-add properties (a nice way to say rehab) and the numbers point to the same conclusion; that new construction multifamily wins out! Please see our detailed explanation here.
What funding sources can I use to invest?
In general any liquid funds can be used from the investor (personal or company). Some examples are:
Cash in your bank accounts, CDs, stocks, mutual funds or other liquid sources.
Funds from sale of assets (particularly if non-performing) such as real estate, time-shares, land, vehicles, collectibles, no longer used items such as boats, RVs, etc.
Qualified retirement accounts; these include solo 401k, self-directed IRA (e.g. Roth), and taking a loan from an employer 401(k) account (interest rates are quite low). It is surprising to learn how many self-directed retirement accounts hold significant funds, yet are not invested, thus devalue due to inflation.
Home equity loans - many investors have significant equity in their home, which can be accessed through a home equity loan (HELOC) currently at very favorable rates. Low interest rate funds earning high returns in a syndication (with regular mailbox money to make loan payments) - an excellent arbitrage opportunity!
Whole life insurance policies - you can borrow against the cash value in this account at great rates, with no obligation to repay until the final benefit is paid out whereby the loan and interest is deducted.
Borrowing funds from friends, family or other sources. Your CPA may be able to provide further advice and recommendations.
I am a foreign investor, what are my options to invest?
We welcome foreign investment, and know exactly how difficult it can be. The main item to consider is that all funds going into and out of our syndications must come from a US bank / institutional account, as we are not able to accept funds from an overseas institution. The syndication cannot become involved with investor taxation (US or international) for compliance reasons. Opening a checking account in the US can be a challenge as most banks require account applicants to have a social security number. However a number of major banks offer checking accounts to foreigners who have an Individual Taxpayer Identification Number (ITIN), which can be applied for through the IRS, or if forming an LLC then after the employer identification number (EIN) is issued. The above is not taxation or legal advice, please consult a CPA and / or attorney for guidance.
How does taxation work?
Each investor is responsible for their own taxation reporting to the IRS. Our syndications will annually provide each investor with a K-1 statement reporting the investor’s share of the partnership’s earnings, losses, deductions and credits from the business and any contributions or distributions made during the year. Please consult with your CPA for taxation advice related to syndication investment.
What are the fees in this investment?
Fees are set to be within industry norms. Actual fees are specific to each project. Please contact us to receive this information using the Invest With Us form.
What type of reporting can I expect?
Investors will receive regular project status reports through the investment platform. These reports include construction or operational status, actual and expected changes to the schedule and / or budget, site photos and video, operational financials once leasing begins, and any other news. Reports are generally done on a monthly basis. We pride ourselves on communication and keeping our investors in the know.
Why should I invest?
We recommend seeking the advice of a CPA as each investor's situation is unique. However having been actively involved in both commercial and residential real estate investment for over 30 years, we have seen the ups and downs, positives and negatives, and keep coming back to real estate for its wealth building power.
As an employee it is important to put your money to work, to generate above average and low risk returns. One cannot scale our own employment (multiply), however we can scale our investments. This gives us the freedom and choice to work as long as we choose, retire early or use the funds however we wish.
As a retiree reducing the stress about what you can spend money on, or how long your funds will last is important. Investing in a syndication provides the peace of mind that comes with low risk returns, without the stress of managing a MF property. Retirement should be enjoyable!!
If we could do it all again what would you do differently?
This is a loaded question :) Yes you guessed it . . . invest in real estate at the earliest age possible. In our experience it is the best savings tool (self discipline) to get into some assets and grow a portfolio, which will over time appreciate and provide a dependable monthly income. We don't depend on the government for our retirement livelihood, we create our own freedoms and choice in retirement through real estate investment. And further to this, why depend on your job? Use it to make some money, make that money work, make it multiply, and then retire when you want knowing you have a secure income.