Accredited Investor: A person that can invest in apartment syndications by satisfying one of the requirements regarding income or net worth. The current requirements to qualify are an annual income of $200,000, or $300,000 for joint income, for the last two years with the expectation of earning the same or higher, or a net worth exceeding $1 million either individually or jointly with a spouse.
Active Investing: The finding, qualifying and closing on an apartment building using one’s own capital and overseeing the business plan through its successful execution.
Amortization: The paying off of a mortgage loan over time by making fixed payments of principal and interest.
Appreciation: An increase in the value of an asset over time. The two main types of appreciation are natural appreciation and forced appreciation. Natural appreciation is when the market cap rate naturally decreases over time, which may be a natural occurrence for inflation but not always a given. Forced appreciation is when the net operating income is increased by either increasing the revenue or decreasing the expenses.
Capital Expenditures (CapEx): The funds used by a company to acquire, upgrade and maintain a property. CapEx is for both interior and exterior renovations. Capitalization Rate (Cap Rate) – A rate of return on a real estate investment property based on the expected income that the property will generate. Capitalization rate is used to estimate the investor’s potential return on his or her investment. This is done by dividing the income the property will generate (after fixed costs and variable costs) by the total value of the property. Cash Flow – Cash generated from the operations of a company, generally defined as revenues less all operating expenses. Cash-on-Cash – A rate of return often used in real estate transactions. The calculation determines the cash income on the cash invested.
Calculated: Annual Dollar Income Return / Total Equity Invested = Cash-on-Cas
Cash Flow: The revenue remaining after paying all expenses. Cash Flow is calculated by subtracting the operating expense and debt service from the collected revenue.
Debt Service: The annual mortgage amount paid to the lender, which includes principal and interest. Principal is the original sum lent to a borrower and the interest rate is the charge for the privilege of borrowing the principal amount. Debt Service Coverage Ratio (DSCR) – It is the multiples of cash flow available to meet annual interest and principal payments on debt. This ratio should ideally be over 1. That would mean the property is generating enough income to pay its debt obligations.
Distributions: The limited partner’s portion of the profits, which are sent on a monthly, quarterly or annual basis, at refinance and/or at sale.
Due Diligence: The process of thoroughly confirming that a property is as represented by the seller and is not subject to environmental or other problems. For multifamily syndications, the general partner will perform due diligence to confirm their underwriting assumptions and business plan.
Equity Multiple (EM): The rate of return based on the total net profit and the equity investment. The EM is calculated by dividing the sum of the total net profit (cash flow plus sales proceeds) and the equity investment by the equity investment.
Exit Strategy: The general partner’s plan of action for selling or refinancing the apartment community at the conclusion of the business plan.
General Partner (GP): A GP is usually a managing partner and is active in the day-to-day operations of the business. In multifamily syndications, the GP is also referred to as the sponsor or syndicator and is responsible for managing the entire apartment project.
Holding Period: The amount of time the general partner plans on owning the apartment from purchase to sale. Investor Average Annual Return, excluding disposition – The average return per year during the investment hold. This calculation does not include the return of invested capital. Investor Average Annual Return, including disposition – The average return per year including profits from disposition. Internal Rate of Return (IRR) – The rate of return that would make the present value of future cash flows plus the final market value of an investment opportunity equal the current market price of the investment or opportunity. The higher a project’s internal rate of return, the more desirable it is to undertake the project.
Limited Partner (LP): A partner whose liability is limited to the extent of their share of ownership. In multifamily syndications, the LP is the passive investor who funds a portion of the equity investment.
London Interbank Offered Rate (LIBOR): A benchmark rate that some of the world’s leading banks charge each other for short-term loans. Also referred to as LIBOR. The LIBOR serves as the first step to calculating interest rates on various loans, including commercial loans, throughout the world.
Metropolitan Statistical Area (MSA): A geographical region containing a substantial population nucleus, together with adjacent communities having a high degree of economic and social integration with that core. MSAs are determined by the United States Office of Management and Budget (OMB).
Multifamily Syndication: A temporary professional financial services alliance formed for the purpose of handling apartment building transactions that would be challenging or near impossible for the entities involved to handle individually, which allows organizations to pool their resources and share risks and returns. In regards to apartments, a syndication is typically a partnership between general partners (i.e. the syndicator or GP) and limited partners (i.e. the passive investors or LP) to acquire, manage and sell an apartment community while sharing in the profits.
Net Operating Income (NOI): All the revenue from the property minus the operating expenses. Also referred to as the NOI. Operating Agreement: A document that outlines the responsibilities and ownership percentages for the general and limited partners in an apartment syndication. Return on Equity (ROE) – The amount of net income returned as a percentage of shareholders equity. ROE is expressed as a percentage and calculated as: Return on Equity = Net Income/Shareholder’s Equity Passive Investing: Placing one’s capital into an apartment syndication that is managed in its entirety by a general partner.
Preferred Return: The threshold return that limited partners are offered prior to the general partners receiving payment.
Private Placement Memorandum (PPM): A document that outlines the terms of the investment and the primary risk factors involved with making the investment. The PPM typically has four main sections: the introductions (a brief summary of the offering), basic disclosures (general partner information, asset description and risk factors), the legal agreement and the subscription agreement.
Ration Utility Billing System (RUBS): A method of calculating a tenant’s utility usage based on occupancy, unit square footage or a combination of both. Once calculated, the amount is billed back to the tenant.
Sales Proceeds: the profit collected at the sale of the apartment community.
Sophisticated Investor: A person who is deemed to have sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity.
Subject Property: The apartment the general partner intends on purchasing.
Submarket: A geographic subdivision of a market.
Underwriting: The process of financially evaluating an apartment community to determine the projected returns and an offer price.
Value-Add Property: A stabilized apartment community with an economic occupancy above 85% and has an opportunity to be improved by adding value, which means making improvements to the operations and the physical property through exterior and interior renovations in order to increase the income and/or decrease the expenses.
You’re an international investor and you want to add US-based real estate to your investment portfolio. This is great news for the both of us! Trueheightscapital.com and the internet have great content about why investing in U.S. real estate is a smart move.
Here are the steps you’ll need to take to invest*:
Find a CPA who is well versed in helping foreign investors and is knowledgeable about the operation of businesses in the US.
Incorporate. Usually, a limited liability partnership (LP) is best for international investors, but a knowledgeable CPA will advise you on what the best entity is for your situation and country.
Apply for an Employer Identification Number (EIN) & register your entity with the proper agencies–again, a knowledgeable CPA or attorney will be of great value here in guiding you through this process.
Apply for an Individual Taxpayer Identification Number (ITIN).
Open US-based bank accounts. With an EIN, LP operating agreement, and ITIN, you’ll be able to open a US-based bank account, ideally a global bank with easy online access.
File tax returns. The LP will need to file returns, as will the partners. You’ll receive a schedule K1 from us each year, which usually contains significant tax benefits to reduce or eliminate the cash flow you’ve received during the year.
Take advantage of tax treaty benefits. A cross-border tax specialist or CPA that is familiar with the tax treaty benefits between your country and the US will be invaluable here to minimize any taxes you have to pay. Trueheightscapital.com works with foreign investors from various countries around the world. We’re more than happy to refer you to someone in our network of knowledgeable professionals.
* Disclaimer: We are not certified public accounts (CPAs) or attorneys, nor do we play one on the internet. The following is intended as helpful information to get you started, but a qualified US-based CPA or an attorney will be necessary for you to ensure you are set up properly, maximizing potential returns, and minimizing tax liability.
