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July 2020 Newsletter

How many of you have ever thought about investing your money into something in order to get a higher return on it than it would otherwise get in your bank account? And do you also recognize the risk of such an investment? If so, then according to the SEC, (Securities Exchange Commission) you're qualified as a sophisticated investor. Which means you can invest into certain multifamily syndications, passively! That doesn't always mean that you should, and you should always consider all of the risks before making any investment. However, you might be here because you currently invest in a multifamily syndication or even multiple syndications. Or maybe you’re here because you have ridden the stock market roller coaster for far too long and are ready to shift your money to more stable assets through real estate investing.

Either way, in this article, we’ll dive into exactly what a multifamily syndication is, why investing in a real estate syndication can be a great way to grow your wealth, how investors should prepare for what’s to come, and how to navigate the long-term impact of COVID-19 in the multifamily syndication space.

What Is A Multifamily Syndication?

Let’s start with the basics. Syndication in real estate, in its most basic form, refers to a pooling of resources. A multifamily syndication, then, essentially means that a group of investors pools together their money to purchase an apartment building together. (Typically this is the target asset, but sometimes syndicators invest into mobile home parks, self-storage, retail, office, etc.)

Rather than having to do all the legwork of finding and managing a rental property on your own, when you invest in a multifamily syndication, you pool your money together with dozens, and sometimes hundreds, of investors to purchase an apartment community together.

How Does A Multifamily Syndication Work?

Think of a real estate syndication deal like an airplane ride. There are two basic groups of people on the plane – the General Partners (GPs) and the Limited Partners (LPs).

General Partners

The General Partners are the real estate syndicators. They are essentially the pilots of the plane. They are the Sponsors and Operators of the real estate syndicate, meaning that they do all the heavy lifting for things like:

  • Finding and underwriting the deal

  • Securing the financing for the deal

  • Negotiating with the seller

  • Completing the due diligence

  • Finding and educating investors

  • Managing the renovations on the property

  • Working with the property management team

  • Executing on the business plan

  • Communicating with the investors

General Partners actively syndicate real estate and have a very active role throughout the lifecycle of a real estate syndication deal. They are critical in the acquisition phase of the deal, as well as the ongoing asset management. They work directly with the property management team to ensure that everything is going according to plan and that investors are getting their projected returns.

Limited Partners

You as the Limited Partner, on the other hand, have a much more passive role in a syndication deal.

Limited Partners are the passengers in the back of the plane. You invest your money to buy a seat on the plane, but then you get to sit back and do whatever you want – read a book, take a nap, etc.

If the plane encounters turbulence, if an engine breaks down, or if any other surprises pop up, it’s the pilots’ job to figure out a solution and keep the plane on track.

As a Limited Partner in a real estate syndication deal, you get to invest your money into a stable and growing asset without having to put in the time and work needed to manage the asset yourself.

You don’t need to deal with the property management team, pore over financials, or review tenant applications. All of that is done for you by the General Partners, meaning you get to sit back and enjoy your cash flow every month.

Multifamily Syndication vs. The Stock Market

As of this writing, we’re about halfway through 2020, and we’ve already seen some of the biggest drops in the stock market that we’ve seen in decades. What this means for those of you who have money invested in the stock market is that you likely saw a big chunk of your net worth vanish into thin air overnight.

Stock Market Investing

When you invest in paper assets like stocks, there are no physical assets to back up your investment. On top of that, the stock market is susceptible to the ups and downs of the economy, meaning stock market investors have very little control over their investments.

Multifamily Syndication Investing

With a real estate syndication deal, on the other hand, even if all else fails and every last tenant moves out of your apartment building, you still have the value of the property and the land to fall back on.

Plus, with a value-add multifamily syndication deal, you are investing in a property that has significant growth potential. Through renovating the property, you can bring the rents up to market value and thus drastically increase the value of the property, independent of the swings of the economy.

This often leads to a win-win for both the investors in the deal, as well as the local communities, which are revitalized in the process.

Why Invest In A Multifamily Syndication?

When you put your money into a savings account or invest in the stock market, your money works for you in just one way. When you invest in a real estate syndication deal, however, your money works for you in multiple different ways.

#1 – Cash Flow

One of the main benefits of investing in a real estate syndication is purely passive ongoing cash flow. What this means for you is that for each syndication deal you invest in, you create a new stream of passive income for you and your family, bringing you one step closer to financial freedom.

#2 – Leverage

Another huge benefit to apartment syndication is leverage, which comes in many forms in a multifamily syndication. Obviously, there’s the leverage through borrowing money to purchase the property.

In addition to that, you’re also leveraging the capital of other investors in the group, as well as the skills and experience of the General Partners, allowing you to get into an investment opportunity that otherwise might not be accessible to you on your own.

#3 – Equity & Appreciation

A big benefit for investors in real estate syndications is equity, which typically increases over time. In addition, through investing in a value-add multifamily syndication, you get to take advantage of forced appreciation through renovating the property and increasing the overall income of the property, thus drastically increasing the overall value.

#4 – Tax Advantages

And of course, we can’t forget taxes. The tax advantages of cost segregation and accelerated depreciation are huge reasons why many investors love multifamily investing. You get to enjoy ongoing cash flow in real life while showing losses on paper, thus helping to decrease your overall tax burden.

How Has COVID-19 Affected Multifamily Syndication?

Now that you know how real estate syndications work and the benefits that they could provide on your path to financial freedom, the big question is whether now is the right time to invest in an apartment syndication, given everything that’s going on with COVID-19.

The truth is, we have only seen the tip of the iceberg as far as the full ripple effects of COVID-19.

COVID-19 Recession Ripple Effects On Multifamily Syndication

Here are the COVID-19 ripple effects to expect in the coming months and years:

  • Unemployment surges

  • Government stimulus

  • Stimulus money dries up, leading to loan defaults

  • Loan defaults lead to bank REOs

  • Foreclosures and other heavily discounted properties hit the market

As you can see, we are only in the early phases of this recession. As unemployment has surged, the government stimulus packages have swooped in to the rescue, providing some temporary relief.

In the next phase, as the stimulus money starts to dry up, we’ll likely start to see more and more tenants unable to pay rent.

Eventually, this will lead to more multifamily owners (many of them mom and pop owners or less experienced operators) defaulting on their loans. Once that happens, we’ll then start to see a wave of bank REOs (real estate owned properties).

This is when the best deals will start to flood the market. That means that if you’re a passive investor, now is the best time to educate yourself. And if you’re a syndicator, now is the best time to prepare your investors for what’s to come.

Should You Invest In A Multifamily Syndication In 2020 Or Beyond?

Now, what does all this mean for you, especially as it relates to the rest of 2020 and beyond?

It means that now is the best time to get started in educating yourself and doing your due diligence to see if real estate syndications are right for you. You should continue to evaluate potential real estate syndication opportunities with strict criteria and view them through the lens of your investing goals.

In many cases, the underwriting assumptions that were used even just a few months ago are no longer relevant, so be sure to stress test deals to check for things like:

  • Low breakeven occupancy (Breakeven occupancy refers to how low can the occupancy get while still being able to cover the mortgage and expenses. The lower the better.)

  • Make sure each multifamily syndication you invest in has relatively low leverage, high reserves, a strong and experienced General Partnership and property management team, and multiple backup plans

Beyond that, be patient. I've already seen a few good deals come on the market, but don’t rush into anything. If you’re a Limited Partner, now is the best time to get your funds ready, and liquid, and educate yourself so that you’ll be ready to invest when the best deals hit the market.

And if you’re a General Partner or thinking of putting together a multifamily syndication of your own, now is the best time to focus on growing your investor base so that you’ll have capital ready when those deals hit the market.

Ready To Get Started In Real Estate Syndications?

If you’ve decided to get off the stock market roller coaster and finally get into real estate, now is the best time to educate yourself & begin getting your investment capital liquid so that you can deploy it when the time is right. Click on the button below this article for more information on how you can get involved with Ferrari Capital! Mobile, AL Market Analysis Manufacturing - A massive employer in the area, with over 4,000 workers at its Mobile-based North American shipyard headquarters, Austal’s press release follows on the heels of a $50 million federal subsidy, also announced last week, for the facility as production lines continue to roll out more LCS vessels for future deployments.

In the Pacific, USS Gabrielle Giffords is strengthening maritime security and regional stability with every port visit, exercise and operation in which she participates. The LCS program has become instrumental to the U.S. Navy fleet as ships deploy from San Diego. We’re looking forward to seeing the USS Oakland and her sister ships follow in the path of the Giffords and Montgomery.

Five small surface combatants are presently under various stages of construction at Austal’s Alabama shipyard.

The future USS Mobile (LCS 26) is preparing for sea trials. Assembly is currently underway on the future USS Savannah (LCS 28) and USS Canberra (LCS 30). Modules for the future USS Santa Barbara (LCS 32) and USS Augusta (LCS 34) are under construction in Austal’s module manufacturing facility, and the future USS Kingsville (LCS 36) and USS Pierre (LCS 38) are under contract.

In total, more than 700 suppliers in 40 states contribute to the Independence-class LCS program.

The Independence-class LCS integrates new technology and capability to support current and future mission capability from deep water to the littorals. It is a fast, agile and focused-mission platform designed for operation in near-shore environments, yet it is capable of open-ocean operation and designed to defeat threats such as mines, quiet diesel submarines and fast surface craft.

Austal is also under contract to build 14 expeditionary fast transport (EPF) vessels for the U.S. Navy. The company has delivered 11 EPFs to date, while an additional two are in various stages of construction.

Real Estate - Across almost all areas of reporting, listing prices found in Baldwin County’s dynamic residential real estate market showed signs of decline last month. It was a region that, until now, seemed to be virtually invulnerable to salvos felt in other regions from the COVID-19 economic shutdown.

Baldwin Realtors’ Multiple Listing Service (MLS) reported a 0.5 percent decrease in average sales price for the Traditional Residential market for May 2020 compared to last year, and a 6 percent year-over-year decrease in average sales price in the Resort/Island-based market.

Additionally, after breaking down the areas of the county even further, only Coastal Condos and North Baldwin County saw an increase in average sales prices in April 2020.

With these dips in pricing and ongoing great interest rates, it makes one question if Baldwin County is entering into a new era of a buyers’ market.

The study went on to elaborate that while many of Baldwin County’s beach rental companies have fully recovered from the lag in business during the statewide shutdown from the coronavirus pandemic, the Resort/Island-based housing market is slower to catch back up.

When comparing May 2020 to May 2019, both average sales price and total number of closed sales saw significant decreases, and the average days on market increased.

Looking farther back, however, numbers from April to May 2020 indicated the potential for future signs of improvement in the market.

The average sales price between April and May 2020 showed a decelerating decline of 0.6 percent.

Average days on market reduced from 101 in April to 85 in May, which indicated an uptick in demand of nearly 16 percent (15.8). Total number of properties sold also increased by nearly 11 percent (10.8) in that timeframe, from 120 units in April to 133 units last month.

Baldwin County’s Traditional Residential housing market for May 2020 also lagged behind when compared to May 2019.

Average sales prices decreased by 0.5 percent and the total number of properties sold decreased by 15.4 percent versus last year.

Conversely, average days on market held up well in comparison to both the previous year and the previous month, at 64 days for May 2020.

When comparing May 2020 to April 2020, average sales price decreased by 5.4 percent, but total number of closed sales increased by 5.7 percent.

Here is additional information on last month’s Baldwin County residential MLS statistics broken down by area:

Central Baldwin

  • Residential properties sold in May 2020: 203

  • Average sales price: $171,817

  • Average days on market: 83

  • Average days on market change from May 2019: decreased by 13.5 percent

Coastal Condos

  • Residential properties sold in May 2020: 82

  • Average sales price: $407,917

  • Average days on market: 63

  • Average days on market change from May 2019: decreased by 18.2 percent

Coastal Homes

  • Residential properties sold in May 2020: 75

  • Average sales price: $397,967

  • Average days on market: 104

  • Average days on market change from May 2019: increased by 14.3 percent

Eastern Shore

  • Residential properties sold in May 2020: 217

  • Average sales price: $304,330

  • Average days on market: 76

  • Average days on market change from May 2019: decreased by 2.6 percent

North Baldwin

  • Residential properties sold in May 2020: 19

  • Average sales price: $185,188

  • Average days on market: 34

  • Average days on market change from May 2019: decreased by 29.2 percent

Aviation - Continental Aerospace Technologies (formerly Continental Motors Group Ltd.) recently announced its CD-170 engine, the newest design and the highest-horsepower engine in the CD-100 series, will soon power Capua, Italy-based aeronautics manufacturer Tecnam’s new P2010 TDI aircraft.

Founded in 1986, Tecnam has two primary activities, according to its website: producing aircraft components for various other manufacturers and manufacturing its own proprietary fleet of light-range aircraft.

Facilitating job security at the plant in an industry that has seen a rash of downsizing in the region recently, all install work will be handled at Continental’s new, state-of-the-art, 225,000-square-foot manufacturing plant and corporate headquarters located at 2039 S. Broad St. at the Brookley Aeroplex in Mobile.

The 170-horsepower engine also reportedly boasts an innovative design that facilitates an improved flying process by utilizing a single lever control, coupled with electronic engine monitoring and redundancy safety features.

“The P2010 remains a modern aircraft for fleet schools and individual aviators,” Paolo Pascale, Tecnam’s CEO, said. “By incorporating Continental’s Jet-A engine, the P2010 TDI is the ideal aircraft, combining a modern, sleek, ‘green’ design with consistent, robust power.”

Roughly three years ago the company completed an ambitious development plan that involved relocating to a modern property away from an older footprint that held 11 World War II-era buildings squatting on some 44 acres of property inside Brookley.

"The ‘greenfield’ facility will modernize our manufacturing processes into a world class, high-productivity, vertically integrated center of manufacturing excellence in the new center of aviation in Mobile, Alabama, USA,” Continental’s Vice-President for Global Operations Michael Skolnik said in a prepared statement from 2017.

“Continental is proud to be Tecnam’s newest aircraft partner, bringing innovative aircraft to aviators around the world,” Robert Stoppek, Continental Aerospace Technologies’ new president, said. “We remain committed to serving our partners and Tecnam’s customers with expert service and support. This partnership reinforces our dedication to provide customers freedom and choice with their engines that only Continental can provide.”

Technology - Mobile-based Hargrove, a full-spectrum technical services firm has announced a partnership with Bedford, Mass.-based Aspen Technology Inc. (NASDAQ: AZPN), an asset optimization software company, to deliver engineering services that create a “digital twin” to better manage the operations and maintenance phase of a plant’s life cycle.

In layman’s terms, the technology provides virtual replicas of physical devices data professionals use to run simulations before actual devices are built and deployed.

According to a recent article in Network World Magazine, as more complex systems become connected with the ability to produce data, having a digital equivalent gives data scientists the ability to optimize deployments for peak efficiency as well as create other what-if scenarios cost effectively.

In the realm of engineering, digital twin technology represents the historical, current and future behaviors of both physical plant assets and the physical and chemical processes occurring within a plant. Lowered operating costs are potentially realized by implementing the technology.

“We are constantly striving to provide more value to our customers,” Karen Griffin, PE, vice president of Controls + Automation for Hargrove, said. “We will now deliver these services to our clients to further improve their operations. AspenTech is an ideal partner for us.” Summary That's all I've got for you guys this month! Stay healthy and stay safe! Don't forget to click on this link to learn how to start investing for greater returns!

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