You will be a limited liability owner of the property which comes with all the benefits like depreciation and cash flow, meaning the property is owned by a “Property LLC” for which that property is the only asset (reduces liability). You in turn will be a direct shareholder in this Property LLC so in essence you are part owner of the company that owns the property. This allows for a direct flow-through of cash flow, depreciation, and allows you upon sale of the asset to realize long term capital gains.
The exit strategy for these investments is generally five years, although it may vary depending on the property and specific business plan being executed. Changing economic circumstances can also affect the original hold time, so passive investors do need to place a certain level of trust in the management team to make decisions that will maximize all investor’s returns. Original timelines will be adhered to as much as is possible to protect everybody’s investment.
We won’t want to sell in a down market. The goal would be to continue to pay the preferred return minimum and hold on until the market is healthier to achieve a better price at sale. Class B/C value add properties tend to hold up much better in downturns because folks need a place to stay and rents are more in line with the market / service economy demographic that is typically still employed in downturns versus the class A renter making $100K/yr. whose jobs are more at risk.
Typically, 8% is what I see most. This favors the limited partner. It essentially means that the first 8% return on an investment (distributions from cash flow or capital events such as refi proceeds or sale) will go entirely to the limited partner, nothing to the general partners. This is not a guarantee but the next best thing.
The split is investment returns that go to the investors in the portion of the split. So, if the split is 70% to the limited partner and 30% to the general partner, after the preferred return is paid (if there is one), then the partners split all other proceeds from distributions or capital events 70/30. That split can change if a certain hurdle (or waterfall) is achieved. Example: A split could be 70/30 then go to 50/50 once the IRR hits say 18%. Any returns higher than 18%, will then be split 50/50 LP/GP. That is a waterfall.
Funds can be wired directly into the subscription account of the fund, or sent by check. The funds are trypically held in an escrow account in the name of the LLC until the closing of the property. HVR Investments never takes possesion of your funds.
Similar to a 1099, a K-1 form is an accounting of the tax income for the year. Each investor receives one per investment. K-1 forms are most commonly used in partnerships and in real estate ownership.
No. By their nature, real estate investments have a longer term time horizon than that of liquid stocks or bonds.
The answer to this question will vary by Sponsor; each has their own history and business structure, and thus a different track record. To speak to our Sponsors specifically, we only partner with what we firmly believe to be the most top notch Sponsors in their niche who hold high values, place focus first and foremost on Limited Partners (LPs) (i.e. capital preservation and downside protection), and have a strong history of performance.
The most common answer to that question is yes. Sponsors will invest alongside LPs in their own deals to show alignment, not to mention they are also interested in the strong returns they are projecting. As to small investment amounts; some of our Sponsors annual deal flow is very strong, they’re not only doing one or two deals a year like most individual investors are, they might be doing 5 or 10! $50K in 5 or 10 different deals in a year equates to $250-$500K over the year! That’s not exactly a small amount. Another aspect to consider is that many Sponsors are the guarantor on the secured loan for the property, thus facilitating the need for a liquid personal balance sheet.
All of our Sponsors structure their deals as a waterfall. The first “hurdle” in the waterfall is the 8% preferred return (pref), where LPs receive 100% of profits until they reach an 8% return. After this hurdle, most of our deals are structured at a 70/30 split (you may see different splits with other Sponsors), where all profits after the 8% pref are split at 70% to the LPs and 30% to the General Partner (GP). You will sometimes see a second IRR hurdle, where after XX% IRR (typically 15-18%) the split goes to 60/40 or 50/50.
First and foremost, all fees are separate from return projections. What that means is that fees will have no impact on the return projects you will see in any of our deal decks; the LPs are not paying any fees “out of pocket.” That being said, Sponsors most often make their money in three ways. (1) The acquisition fee (1-3% of purchase price) which is paid at close and covers all costs associated with finding and putting the property under contract. (2) The asset management fee (1-3% of monthly revenues) which covers costs associated with executing the business plan; overseeing the property management company and construction management company, identifying and implementing value-add strategies, improving operational efficiencies, etc. (3) The equity split of profits after the pref; most common here is 70/30 (70% to the LPs and 30% to the GP), but you may also see 60/40, 80/20, etc.
$50,000 with increments of $5,000.
We do quarterly and monthly distributions. Quarterly is the most common, with monthly being a bit more aggressive/work intensive on behalf of the Sponsors, but investors love this for obvious reasons. I’ve also heard of, but never seen, annual distributions.
You cannot 1031 in to our deals since you are purchasing units of our Limited Partnership and not actually the property itself. However, although not guaranteed, there is potential to 1031 from one of our deals in to the next, given the right timing, thus providing the extremely powerful benefit of tax deferred growth.