MULTIFAMILY FAQS

History has repeatedly demonstrated multifamily properties to be less volatile during economic downturns. Real estate value increases with inflation while the buying power of the dollar decreases. Your investments are managed by a team of professionals so the process is essentially hands-off. Unlike single family properties, which tend to require more time and money from the investor, multifamily properties easily generate enough income to cover overhead and have a steady cash flow returned to investors.

Class A – Newly built or remodeled, high-income tenants, little to no maintenance issues
Class B – Older properties, middle-income tenants, some maintenance required
Class C – Oldest properties, less desirable areas, lower-income tenants
Movement between properties is dictated by the economy. During recessions, residents of Class A properties may seek lower rent in Class B properties. On the other hand, when the economy is strong, residents in Class C will seek housing in Class B properties with better amenities and neighborhoods that are more desirable. We invest in a variety of classes to ensure a diverse portfolio that creates passive income regardless of the economy.

A pool of investor capital with a business plan managed by investing experts.

Because multifamily real estate is syndicated, the process is more hands-off than other avenues of investing. Essentially, you must trust the investing managers to have your best interests in mind. However, you can rest assured that’s exactly the attitude our team has when it comes to our clients’ financial futures. Also, invested money is no longer a liquid asset. However, cash will only decrease in value as inflation rises. Real estate actually benefits from inflation. So, while you have less cash in your pocket in the short term, you’ll end up with a stable financial future in the long term once your investments return a profit.

Generally profits are distributed quarterly. They will also be distributed during a refinance or reposition.

These vary based on property type and location. Tax benefits may include: accelerated depreciation, possible 1031 exchanges, property tax, and repairs and upkeep.

Yes! Our team will be happy to discuss how to make the most of your IRA or 401k during your initial consultation with us.

INVESTING 101

Familiarize yourself with investing terminology by clicking on the tabs below!

In the U.S., the term is used to refer to investors who are financially sophisticated and have a reduced need for the protection provided by regulatory disclosure filings. Accredited investors include natural high net worth individuals (HNWI), banks, insurance companies, brokers, and trusts.

Sometimes called a bank fee or administrative fee, this is a fee that leasing companies charge to arrange the lease. Acquisition fees may also refer to charges and commissions that one pays for the acquisition or purchase of property, such as closing costs, real estate commission, and development and/or construction fees.

Essentially, an apartment syndication is the pooling of money from many investors for the purpose of buying an apartment building and executing the project’s business plan. This process is similar to investing in a mutual fund.

Appreciation is an increase in the value of an asset over time. The increase can occur for a number of reasons, including increased demand or weakening supply, or as a result of changes in inflation or interest rates.

A management fee is a charge paid to an investment manager to compensate them for their time and expertise for selecting and managing real estate properties.

The amount of uncollected money a former tenant owes after move-out.

The occupancy rate required to cover all of the expenses of an apartment community. This rate is calculated by dividing the sum of the operating expenses and debt service by the gross potential income.

A mortgage loan used until a person or company secures permanent financing, which are short-term – generally three years or less. They tend to have a higher interest rate and are almost exclusively interest-only. Bridge loans may also be referred to as interim financing, gap financing, or swing loan. This type of loan is often used when repositioning an apartment community.

Capital expenditures, typically referred to as CapEx, are the funds used by a company to acquire, upgrade and maintain an apartment community. An expense is considered to be a capital expenditure when it improves the useful life of an apartment and is capitalized – spreading the cost of the expenditure over the useful life of the asset. Capital expenditures include both interior and exterior renovations.

Usually referred to as “cap rate.” The rate of return based on the income the property is predicted to produce. Calculated by dividing the property’s net operating income (NOI) by the current market value or acquisition cost of a property.

The revenue remaining after paying all expenses. Cash flow is calculated by subtracting the operating expenses and debts from the collected revenue.

Cash-on-cash (COC) return measures the annual return the investor made on the property in relation to the amount of mortgage paid during the same year. Calculated by dividing annual pre-tax cash flow by total cash invested

Credits, in this case money, given to offset rent, application fees, move-in fees, and any other revenue line time, which are generally given to tenants at move-in.

Cash that is required to cover the repayment of interest and principal on a debt for a particular period.

The debt service coverage ratio (DSCR) measures the cash flow available to pay the debt obligation. DSCR is calculated by dividing the net operating income by the total debt service. A DSCR of 1.0 means there is enough NOI to cover 100% of the debt service.

Distributions are the limited partner’s portion of the profits, which are sent on a monthly, quarterly, or annual basis, at refinance, or during repositioning.

The rate of paying tenants based on the total possible revenue and the actual revenue collected. Calculated by dividing the actual revenue collected by the gross potential income.

The Potential Gross Rental Income is calculated by taking the Potential Gross Income from an investment property, adding other forms of income generated by that property, and subtracting from it vacancy and collection losses.

A unit rented to an employee at a discount or for free.

Upfront costs for purchasing an apartment community including: down payment for a loan, closing costs, financing fees, operating account funding, and the various fees paid to the general partner for creating a business plan. Sometimes referred to as the initial cash outlay or the down payment.

Equity Multiplier (EM) is the rate of return based on the total net profit (cash flow plus sales proceeds) and the equity investment. Calculated by adding the sum of the total net profit and the gross cash flow and dividing it by the equity investment.

Plan to execute the sale of an apartment building at the end of the business plan, once it has generated a profit.

One-time, upfront fees charged by lender for providing debt service. Generally, financing fees are 1.75% of the purchase price.

The gross potential rent (GPR) is the maximum amount of money an investor can make from a rental property during a specific time period.

Owner of a partnership who has unlimited liability. Usually a managing partner and active in the day-to-day operations of the business. For real estate investing,GP is also referred to as the sponsor or syndicator and is responsible for managing the whole apartment project.

Hypothetical amount of revenue if the apartment community was fully leased year-round at market rates plus all other income. Similar to Gross Potential Rent, but also includes other means of revenue besides rent. For example, if an apartment complex charges residents $100/month to park their vehicles, the Gross Potential Income would include the revenue from rent and parking fees in its calculations.

The gross rent multiplier (GRM) is the number of years the apartment would take to pay for itself based on the gross potential rent (GPR). Calculated by dividing the purchase price by the annual GPR.

Fee paid to a loan guarantor at closing for services rendered. Generally, 0.25% to 1% of the principal balance of the mortgage loan.

Amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of their funds.

The internal rate of return (IRR) is a metric used to estimate the profitability of potential investments. It is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.

The monthly payment on a loan where the lender only requires the borrower to pay the interest on the principal, as opposed to the typical debt service, which requires the borrower to pay principal plus interest.

The limited partner (LP) is a partner whose liability is limited to the extent of the partner’s share of ownership. Basically, the LP is one of the passive investors who funds part of the equity investment.

Loss to lease (LtL) is the revenue lost based on the market rent versus actual rent. Calculated by dividing the gross potential rent minus the actual rent collected.

Amount a landlord might reasonably expect to receive, and a tenant might reasonably expect to pay for a tenancy. This is calculated by analysing and comparing rent charged at similar apartment communities in the region.

Determined by the United States Office of Management and Budget (OMB). Metropolitan statistical areas usually consist of a core city with a large population and its surrounding region, which may include several adjacent counties. The MSA is marked by significant social and economic interaction.

A vacant apartment unit shown to prospective tenants to showcase how their actual apartment would look.

Net operating income (NOI) is all revenue from the property minus operating expenses. Does not include capital expenditures and debt service.

Reserves fund is separate from the price of the apartment unit. It is meant to cover unexpected decline in occupancy, lump sum insurance or tax payments, or higher than expected capital expenditures.

Costs of running and maintaining a property and its grounds.

A long-term mortgage loan secured from Fannie Mae or Freddie Mac and is longer-term with lower interest rates compared to bridge loans.

The rate of occupied units, calculated by dividing the total number of occupied units by the total number of units.

The threshold return that limited partners are offered before general partners receive payment.

Clause in a mortgage contract that states a penalty will be assessed against the borrower if they significantly pay down or pay off the mortgage before term.

Cost of purchasing an apartment community based on purchase price divided by number of units.

Profit collected at the sale of the apartment community.

The private placement memorandum (PPM) is a document that outlines the terms of the investment and the primary risk factors involved with making the investment. The PPM contains a summary of the offering, the basic disclosures, including general partner information, asset description and risk factors, the legal agreement, and the subscription agreement.

Document outlining detailed information about revenue and expenses of apartment community over the previous 12 months. Also referred to as a trailing 12-month profit, loss statement, or T12.

Property and neighborhood classes is a ranking system of A, B, C, or D given to a property or a neighborhood based on a variety of factors.

Property Classes

  1. Class A: new construction, highest rents in the area, high-end amenities
  2. Class B: 10 – 15 years old, well maintained, little deferred maintenance
  3. Class C: built within the last 30 years, shows age, some deferred maintenance
  4. Class D: over 30 years old, no amenity package, low occupancy, needs work

Neighborhood Class

  1. Class A: most affluent neighborhood, expensive homes nearby
  2. Class B: middle class tenants, some amenities
  3. Class C: low-to-moderate income neighborhood
  4. Class D: high crime, least desirable neighborhood

Ongoing monthly fee paid to the property management company for managing the day-to-day operations of the property. Generally ranges from 2% to 8% of the total monthly collected revenues.

Ratio Utility Billing System (RUBS) is a method of calculating a tenant’s utility bill based on occupancy, apartment square footage, or a combination of both.

Replacement of an existing debt obligation with another debt obligation with different terms. In apartment syndication, this is generally performed after a property has been renovated or improved. Proceeds from refinance are used to return a portion of the limited partner’s equity investment.

Fee paid for the work required to refinance a property.

Process of analyzing similar apartment communities in the area to determine market rents. Used to determine the rent for the subject property.

The increase in rent after performing renovations, internally or externally, to an apartment community. It is an assumption made by the general partner during the underwriting process based on rental rates of similar units in the area or previously renovated units.

Document containing detailed information, such as summarized income, on each of the units at the apartment community.

The profit collected upon the sale of an apartment community.

A person who is deemed to have sufficient investing experience and knowledge to weigh the risks and merits of investing in particular real estate.

The apartment the general partner intends on purchasing.

A geographic subdivision of a market.

An agreement between a company and investor(s) that spells out the price, terms of a purchase of shares, and the rights and obligations associated with the share purchase.

Process of financially evaluating an apartment community to determine the projected returns and an offer price.

The amount of revenue lost due to unoccupied units.

The rate of unoccupied units. Calculated by dividing the total number of unoccupied units by the total number of units.

Some frequently asked questions about Multifamily investing. Don’t see your question here? Please reach out to us.

We currently support personal investment accounts, joint accounts, and certain entity accounts (Trusts, Limited Liability Companies, Limited Partnerships, C Corporations, and S Corporations). For more information on IRA accounts, see below.

Yes, you can invest through your IRA. If you currently have a self-directed IRA, please check with your current custodian to ensure that they will allow you to place your investment with Smart Capital.

As a partner in the LLC that purchases the properties, you will receive a K-1. A K-1 is a tax form used by partnerships to provide investors with detailed information on their share of a partnership’s taxable income. Partnerships are generally not subject to federal or state income tax, but instead issue a K-1 to each investor to report his or her share of the partnership’s income, gains, losses, deductions and credits. The K-1s are provided to investors on an annual basis so that each investor can include K-1 amounts on his or her tax return.

Investor funds are used for the total acquisition cost of the property. This includes but is not limited to the actual purchase price of the property, acquisition fees, legal and transaction costs, capital projects, and reserves.

An accredited investor, in the context of a natural person, includes anyone who:

  • Earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
  • Has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).

On the income test, the person must satisfy the thresholds for the three years consistently either alone or with a spouse, and cannot, for example, satisfy one year based on individual income and the next two years based on joint income with a spouse. The only exception is if a person is married within this period, in which case the person may satisfy the threshold on the basis of joint income for the years during which the person was married and on the basis of individual income for the other years.

In addition, entities such as banks, partnerships, corporations, nonprofits and trusts may be accredited investors. Of the entities that would be considered accredited investors and depending on your circumstances, the following may be relevant to you:

  • Any trust, with total assets in excess of $5 million, not formed to specifically purchase the subject securities, whose purchase is directed by a sophisticated person, or
  • Any entity in which all of the equity owners are accredited investors.

In this context, a sophisticated person means the person must have, or the company or private fund offering the securities reasonably believes that this person has, sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the prospective investment.

Distributions are planned quarterly.

Yes. Investors are allowed to visit the property before investing and during the life of the project.

No. We currently have investment opportunities that are open to accredited and non-accredited investors.