Real Estate Syndication, Historic Tax Credits, Off-Market Deals!

Hey there, 👋!

Thanks for reading the newsletter. Today, we’re doing some medium dives into deal finding, investing, and subsidizing renovation costs.

We talk about:

• Real Estate Syndication

• Historic Tax Credits

• Off-Market Deals

Real Estate Syndications

A lot of investors want to buy larger properties, but are limited by their personal funds.

Enter real estate syndications. Syndication is when an individual investor pools money to buy larger properties.

Pooling Resources: The Bigger Picture

Syndications are all about collaboration. By pooling resources, you're not just buying a property; you're accessing deals that are usually reserved for the big players.

Think of it as a “strength in numbers” play in the real estate world.

Instead of settling for a $200k single-family home, why not team up and aim for that large $2mm apartment building?

Syndications also allow you

Diversify to Multiply

Putting all your eggs in one basket? Not with syndications. Spread your capital across various properties, locations, and strategies. Want a mix of steady cash-flow, potential value-adds, and manageable risk?

Syndications let you craft a portfolio that ticks all your boxes. And with diversification comes a safety net against market ups and downs.

Choosing the Right GP

While syndications offer a world of opportunities, the success often hinges on the manager leading the project.

Dive deep into their track record, understand the business plan, and analyze projected returns.

It's not just about the property; it's about the brains behind the operation.

Understand the fee structure, incentives, and what is the upside and downside of the deal. Try to ask them what assumptions they have when they underwrite the property.

Make sure their projections are realistic and backed with data. Costar, Yardi, and local brokers all have great data and can help any investors understand assumptions.

Make sure the syndicator aligns with your long term goals and isn’t just some salesperson who is there to collect fees.

Balancing Control and Convenience

Here's the trade-off: with syndications, as an investor, you may not be in control.

The syndicate manager/general partner or “GP” or their team usually calls the shots. For many, it's a blessing—reaping real estate rewards without the daily grind. This requires a lot of trusts.

It’s great to assume most GPs are acting ethically as stewards of capital, but there have been times in recent history where it’s been rife with fraud.

Most recently, Nightingale Properties diverted $60mm of funds from crowdsourcing company Crowd Street. My own family invested 6 figures into a sponsor which turned out to be an alleged Ponzi scheme (can do a separate article on this).

Make sure you due to your due diligence on the sponsor.

Syndication isn’t bad…

Real estate syndications are more than just an investment; they're a strategy.

They offer the potential for robust returns and a diversified portfolio with a hands off approach. For some investors, this bodes quite well. This is truly a “passive income” vehicle where you get mailbox money.

This doesn’t mean you shouldn’t do your own deals. If you have a very time consuming job and don’t want to own properly directly and deal with property managers, syndications could be a great way to get some income.

Boosting Profits and Preserving History with Historic Tax Credits

Historic Buildings

This segment is inspired from my friend, John Blatchford who renovates buildings in OH and leverages historic tax credits.

Historic buildings are absolutely gorgeous, no doubt about it. But it is often littered regulation for how to renovate them while maintaining historical accuracy.

Beyond their aesthetic appeal, these structures can be gold mines for savvy investors, thanks to historic tax credits.

Tax Incentives To Subsidize Cost

Renovating these old buildings is quite expensive. And when you renovate them, you have to preserve the exterior look of the building to ensure it mimics the accurate vintage.

In order to incentivize builders/developers to maintain these old buildings instead of letting them fall into disrepair, the government introduced historical tax credits.

These tax incentives are the government's way of saying, "Hey, help us keep history alive, and we'll help you with those renovation bills."

But, as with all things tax-related, there's fine print. Expect a long, drawn out process of approvals and a maze of requirements. Several

But the payoff? Potentially turning renovation expenses into juicy tax credits.

Converting Restoration Bills into Benefits

Renovating a historic building isn't just about slapping on a new coat of paint. It's a delicate process, often with a hefty price tag. But here's the silver lining: the government's tax credit program can cushion the financial blow.

Stick to the restoration rulebook, and you could see significant tax credits that lighten your tax load. And if you're feeling generous, you can even sell these credits to other investors looking to trim their tax bills.

However, a word of caution: the rules of the game can vary. Typically, the building needs a spot on the National Register of Historic Places, and your renovation plans need a nod from historic preservation bigwigs.

Striking a Balance: Profits and Preservation

Diving into the world of historic buildings isn't just about the money (though that's a sweet perk). It's also about preserving a slice of history, adding value to the community, and potentially boosting local property prices.

But, as with any investment, there are challenges. Renovations need to respect the building's historic integrity, which can be a pricey affair. And while you might be smitten with the building's charm, finding tenants or buyers who share your enthusiasm might take a minute.

Take New York State, for instance. They've got a “Historic Homeowner Tax Credit Program” that covers 20% (capping at $50k) of rehab costs for historic homes.

But there's a catch: the property needs to be in a historic district, fall within a qualified census tract, and you've got to spend at least $5k on renovations.

Unearthing Opportunities with Off-Market Real Estate Deals

Venturing Beyond the Traditional Market

Off-market deals—real estate deals that aren't publicly listed for sale—represent a wealth of opportunities for a well connected investor. Known as "pocket listings," these properties are out of the public eye, meaning fewer people bid on them.

Fewer bidders = lower competition = lower prices. This means you can get a steal on properties.

They may not usually be “turnkey”, but are great opportunities for a broker to work with pre-vetted buyers to ensure a closing. It’s usually less work for a broker as well.

If a property goes to market, them sometimes, there could be higher offers, but those people may not close. If you are hoping to get off-market deals, you have to show the broker/seller that you can perform as a buyer without many hiccups.

The easiest way to do this is to build rapport with a broker and do a couple of deals. Alternatively, you could have a broker you work with give a recommendation to another broker.

For example, I had picked up 3 buildings “off-market” aka they weren’t listed on the MLS. I ended up paying below market for all of them. If they had gone to market, the prices would have increased and the economics would not have made as much sense.

The reason why I was able to do it was because I had worked with that previous broker before and proven I can close. He knew I had a team in place and was able to perform.

Capturing Value Off-Market

Just because a property is off-market doesn’t mean it’s bad. This could be because of death, divorce, or liquidity crisis.

That's where you come in. As an investor armed with insider knowledge and a network of contacts, you can access this hidden market and potentially secure properties at below-market rates.

However, off-market deals are not without their challenges. They require a well-connected network and an eye for assessing property value without publicly available comps.

Additionally, off-market deals may require a larger degree of due diligence as there may be a reason the property isn’t being sold on the open market, such as potential legal issues or structural problems.

A bit of flexibility might be required. The deal might need to be structured creatively and might not conform to a traditional lender’s lens.

Example

For example, you might find a divorcee that needs to quickly sell the house to pay for legal bills. The house is a nice 3/2 with a market value of $320,000 if it was renovated.

You offer $200k cash and a quick close of 30 days. You estimate it needs $25k of work and then you can refi your $225k out of $320k (70% loan-to-value). You could either fund this with a high interest hard money loan or pay cash for it and have a clean BRRR.

A traditional bank wouldn’t lend on this due to the amount of work required and it needs to be a speedy timeline.

Building Networks for Success

Accessing off-market deals largely relies on cultivating strong relationships with real estate professionals, including brokers, CPA’s, investors, lawyers, or other investors.

Word of mouth and personal connections often uncover the best opportunities.

Moreover, patience and consistent follow up is key to remain top of mind. Off-market deals might not appear on a regular, predictable schedule.

But when they do exist, they can offer substantial rewards to the investor who's ready to seize the opportunity. The way to do this is to cold-call, do direct marketing, or have good relationships with brokers.

I hoped you enjoyed this newsletter! I appreciate you reading this far and hope you gain some valuable/actionable knowledge from it.

Thank you for reading and please email me if you have any feedback or want any topics to be covered.

PS: If you are looking for some off-market deals, I can have one of my cold callers call on your behalf. Email me if you are interested and we can chat specifics.

Happy investing,

Mo