Factors to Consider When Investing in Multifamily Properties

Investing in real estate areas like multifamily properties has historically been attractive to investors because of its historical relative stability to other asset classes and its potential for higher returns. Other asset classes like office, retail, and hospitality experienced significant problems during the pandemic; for instance, national office vacancy rates in Q2 2021 reached an overall average of 15.6% according to a 2021 Q1 Commercial Edge Report.

In contrast, US Multifamily properties had an average vacancy rate of 4.2%, according to the CBRE US Multifamily report Q1 2021. In a period of employment uncertainty and substantial economic changes, those figures support multifamily as a bastion of potential security.

Outlined below are primary factors analyzed when investing in a multifamily asset. Our investment team at Perch Wealth takes pride in thoroughly underwriting and evaluating potential investments, including Delaware Statutory Trust (DST) multifamily offerings; here is a peak into our assessment process.

Establish “As Is” Value & Going in “Cap Rate”

First and foremost, when looking at a new deal, we determine the “in-place cashflow” of the asset. The rent roll must be analyzed to determine the current in-place rents, occupancy, market rent, and concessions. Next we compare those numbers with the profit & loss statement to determine the in-place Net Operating Income (NOI) of the asset.

As analysts, we normally anticipate changes to the expenses when the asset is acquired, such as an increase to real estate taxes, payroll, insurance, or property management fees. Understanding how cashflows will adjust upon changes in ownership is key to establishing what the Month-1 income will likely be to then determine our going in “cap rate”. Once the adjusted NOI has been calculated, we can determine our expense-adjusted going in “cap rate” by dividing the adjusted NOI by our projected purchase price.

The going in “cap rate” is more important for core/core-plus asset classes where there is less opportunity to immediately increase NOI through adding value to the property. On value-add properties the “Stabilized Return on Cost” is a more important metric to determine, which is the stabilized NOI divided by the total basis in the property.

Going in “cap rates” will vary depending on the quality of the market and asset, where each property must be compared to other sales comparable “cap rates” to help affirm that the investor is making a good purchase.

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Analyze Potential Value and Business Plan

Once the “as-is value” of a property has been determined, the potential of the property must be determined along with a business plan. For example, an older 80's vintage property that has not been upgraded, located near similar properties nearby that have undertaken renovations, would be attractive. If the comps are providing a premium in rents, there is an opportunity to potentially improve the property and charge higher rent, which in turn could increase our NOI and value of the asset.

When drafting the value-add business plan, an investor should consider how much they will spend to charge rental premiums for an improved rental product. The key metric to value this work is called “Return on Improvement Cost”. “Return on Improvement Cost” is calculated by taking the average post-improvement rent increase per unit annualized and dividing it by total improvement cost per unit.

For example, on a recent underwriting transaction by one of our analysts where the proposed spending was $16,358/unit in capital improvements to improve the interior units and common areas of a property, the business plan projected increasing rents $331 per month which equated to $3,729 of additional income per year. $3,729 divided by $16,358 equals a “Return on Improvement Cost” of 22.80%, which is a strong number that helped confirm the value of improving a property.

A good “Return on Improvement Cost” is generally around 18%-20%+, whereas lower numbers than that might not justify taking the time and effort to complete the job and risking additional capital on construction risk.

Savvy investors might also increase the NOI of a deal by improving the operations of a property. One might increase income by charging additional fees for things like pet yards, valet trash services, covered parking, amenity fees, or even laundry services. These help potentially increase top line revenue which in turn could increase NOI.

Expenses can also be optimized by reducing unnecessary services to the property, renegotiating landscaping contracts, installing low use water appliances which decreases water bills, installing LED lighting which decreases electricity bills, reducing payroll if possible, and in some markets, real estate bills can sometimes be challenged in court or with the county and reduced.

Small operating changes made to proper underwriting have the potential to add up and significantly increase returns through the hold period. An investor who digs in and makes the small improvements to operational underwriting could unlock hidden value in the property, afford to pay a higher price, and win bidding processes more often than groups who solely look at the historical operations of an asset.

Conduct Thorough Due Diligence and Capitalize for Deferred Maintenance

Whenever looking at a potential acquisition, it is important to conduct due diligence on the age and quality of the asset and the amount of capital that needs to be budgeted to anticipate repairing deferred maintenance during the hold period.

Primary considerations on a multifamily property deal include the age and quality of the roofs, the existence of poly piping, the existence of aluminum wiring, the age and condition of any elevators, condition of the parking lots, structural quality, age and condition of heating and cooling systems, and many other items. Prospective investors should adequately budget for anticipated capital improvements to the property which will affect how much they can afford to pay when they buy the property.

Choosing the Proper Financing

Different properties will require different types of debt financing to achieve the stated goals of the investment. If an investor anticipates a large capital budget and major revitalization project, they will probably have a tough time securing typical agency financing.

Typically, the best option would be a bridge execution provided by a debt fund. The benefits of going with bridge debt is the potential opportunity to increase leverage over the typical 75% LTV limits, floating rate debt, non-recourse money, and the ability to sell the asset within 3-5 years without a major pre-payment penalty.

Bridge lenders often allow high leverage/additional risk because they concur with the investor’s business plan and see the potential of the property to produce more income. The downside of going with these sort of lenders is that they are commonly more expensive; they will charge higher up front and back-end fees along with a higher interest rate to compensate for the additional risk.

When buying a stabilized core/core+ deal with a longer hold period than 3-5 years, it is generally a good idea to utilize an agency fixed rate deal because of the lower up-front costs and lower interest rates. The common downside to fixed rate agency financing is the lack of flexibility, as well as pre-payment penalties which can be financially burdensome.

If asset prices skyrocket 4 years into the 10-year agency debt term, the pre-payment penalty could be so significantly expensive that it does not make sense to sell, and the opportunity to take advantage of a heated sales environment is lost.

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Hold Period, Exit Strategy, and Returns

The duration of the investment must also be considered when evaluating a potential multifamily properties investment. An investor must ask themselves what metrics are most important to them such as capital preservation, long term cashflow, high IRR, etc. If an investor cares about capital preservation, they would most likely purchase a Class-A stabilized asset with little deferred maintenance, put low leverage on the deal and underwrite a hold period of 10 years.

An investor who favors higher returns could buy a value-add property in a less desirable location, initially place bridge debt financing on the deal, seek to improve the property and increase NOI, and then attempt to refinance the property if it successfully stabilizes in year 3 or 4 and hold the deal 10 years in total for their underwriting purposes.

An investor who prefers a high IRR will search for properties with potentially unlocked value, place short term bridge debt, strive to expedite their business plan, and usually attempt to exit within 3-5 years.

When valuing assets on the front end, investors must always consider who is likely going to buy the property from them and why. Over-improving a property can sometimes be counter-productive. If an investor renovates 100% of an older property, their pool of potential buyers just became a lot smaller because “value add groups” will no longer look at it since there is no “meat left on the bone”.

Likewise, more conservative Class A buyers would likely not be interested, even though the property is now in good condition, because the vintage is just too old for them to stomach. An ideal exit strategy is to leave some potential upside on the asset which can cause future bidders to overpay you for the unrealized value.

The returns of a property should be differentiated by its class, location, and business plan risk. There are no hard and fast rules for these returns and these numbers are constantly changing as real estate cap rates have declined in the past 10 years and recently consolidated even further.

It seems that high level multifamily real estate deal returns should be broken into four categories, including core, core plus, value add, and development. Core deals should command 10-12% IRRs, core plus 13-15%, value add 17-19%, and development deals should underwrite to at least a 22% plus IRR.

Underwriting returns include relying on current data, operational expertise, opinion, and sometimes educated guessing. At Perch Wealth, our job is to analyze hundreds of deals per year, compare the different opportunities and choose what we believe to be the best risk-adjusted deals for our clients’ needs.

Contact Perch Wealth to find out how we might be able to help you assess and decide upon the 1031 exchange solution that we believe makes the most sense for you.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only, and should not be relied upon to make an investment decision. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

• There is no guarantee that any strategy will be successful or achieve investment objectives;

• Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;

• Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;

• Potential for foreclosure – All financed real estate investments have potential for foreclosure;

• Illiquidity – Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.

• Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;

•Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits

Real Estate Syndication in DST 1031 Exchanges

Delaware Statutory Trust (DST) 1031 exchanges are becoming increasingly popular among investors due to the advantages of real estate syndication. Real estate syndication is a key aspect of the structure of DST 1031 investments and is a significant factor in their growing popularity as an alternative investment for accredited investors.

What Exactly Is Syndication?

Syndication refers to the process of bringing together a group of investors or organizations to collectively invest in an asset that requires a large amount of capital. In the context of real estate, it means organizing a group of investors to pool their financial resources to purchase one or more properties. Investors are issued beneficial interests or shares in the property, and profits and losses are distributed according to their percentage of ownership.

This concept is particularly relevant when discussing Delaware Statutory Trusts (DSTs) because they allow for multiple investors to own a property for their 1031 exchange or cash investment, unlike traditional 1031 exchanges which typically involve a single investor.

Additionally, DSTs can have a much higher number of investors (usually up to 499) compared to other group investment structures like Tenant in commons (TICs), which have a limit of 35 investors, making them a suitable option for those looking to invest in larger and more diverse real estate assets. However, unlike regular syndications, the DST property or properties have already been acquired by the DST sponsor before being offered to 1031 exchange investors.

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The Benefits of Syndication:

One of the major advantages of DST 1031 exchange investments for investors is that they eliminate the challenges and responsibilities of active ownership and management. In DST investments, the sponsor creates the trust and takes on the responsibilities of managing the assets and the business of the trust. These responsibilities can include:

-      Underwriting the Deal

-      Conducting due diligence on the property(ies)

-      Arranging financing

-      Creating a business plan for the property(ies)

-      Finding a property management company

-      Coordinating investor relations and potential monthly distribution checks to investors

-      Delaware Statutory Trust syndication provides investors with a passive ownership structure

In exchange for giving up active management, the passive investor of a DST 1031 property will typically receive 100% of their pro-rata portion of any potential principal pay-down from the loan on the property, thereby potentially building equity. In addition, DST 1031 properties are structured so that the investors in the DST receive 100% of their pro-rata portion of the potential rental income generated by the property's tenants.

Other Benefits To DST Syndication:

Get ready to upgrade your real estate game, folks! With a syndicated Delaware Statutory Trust 1031 exchange, you'll have the chance to snag a piece of some seriously impressive, institutional grade assets.

We're talking industrial distribution centers, medical buildings, self-storage facilities, and even massive apartment communities worth $50 million or more! And the best part? With a typical minimum investment of $100,000, regular investors can get in on the action. It's like a VIP pass to a whole new level of real estate investing.

Want to spread your investment wings and fly? Then a Delaware Statutory Trust (DST) is just what you need! With a DST, you'll have the ability to invest in multiple properties, reducing your risk and increasing your chances of success.

Plus, you'll be able to choose from a variety of asset classes, like multifamily, commercial buildings, self-storage, medical facilities, and industrial distribution centers. And, with the ability to invest in multiple geographic locations, you'll be able to diversify your portfolio like a pro! And let's not forget, portfolio diversification is a tried and true economic theory, recognized by none other than Nobel-Prize winning economist Harry Markowitz.

Just remember, diversification does not guarantee profits or protection against losses and that investors should read each DST offerings Private Placement Memorandum (PPM) paying attention to the risk factors prior to considering a DST investment.

Investing in commercial real estate can be challenging, as it requires a significant amount of experience and resources. Even for experienced investors, it can be difficult to source, inspect, underwrite, and close on large institutional properties within the timeline of a 1031 exchange.

However, with a Delaware Statutory Trust (DST) syndication, investors can work with the specialized team at Perch Wealth, a national DST expert advisory firm. They have created a platform, www.perchwealth.com, that provides investors with access to a marketplace of DSTs from more than 25 different DST sponsor companies. Additionally, they have custom DSTs available only to their clients and provide independent advice on DST sponsor companies as well as full due diligence and vetting on each DST investment.

A QI's Contribution to a 1031 Exchange

For all 1031 trades, a qualified intermediary (QI) is necessary. Real estate investors must choose a QI they can rely on and trust given the significance of the QI in an exchange. However, doing so can be challenging because how can an investor tell whether a specific QI is credible? This quick guide will show you how to choose a trustworthy QI for a 1031 exchange.

A QI is what?

An individual or organization that facilitates a 1031, or like-kind, exchange in accordance with Internal Revenue Code (IRC) Section 1031 is referred to as a QI, sometimes known as an accommodator. According to the Federal Code, a QI's responsibilities are as follows:

A qualified intermediary is a person who: (A) Is not the taxpayer or a disqualified person; and (B) Enters into a written agreement with the taxpayer (the "exchange agreement") and, in accordance with the exchange agreement, obtains the property being exchanged from the taxpayer, transfers the property being exchanged, acquires the replacement property, and transfers the replacement property to the taxpayer. (26 CFR § 1.1031(k)-1)

A person can become a QI without having to fulfill any eligibility requirements or obtain a license or certificate. The Internal Revenue Service (IRS) does, however, specify that anyone who is related to the exchanger or who has had a financial relationship with the exchanger - such as an employee, an attorney, an accountant, an investment banker or broker, or a real estate agent or broker - within the two years prior to the sale of the relinquished property is disqualified from serving as the exchanger's QI.

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Why is a QI crucial to a 1031 Exchange?

Every 1031 exchanger is required to choose a QI and sign a formal agreement before closing on the property being given up. After being chosen, the QI's three main duties are to create the exchange documentation, swap the properties, and keep and disburse the exchange monies.

The Creation of Exchange Documents

The QI creates and maintains all pertinent paperwork throughout the exchange, including escrow instructions for all parties involved.

Trade of Properties

In a 1031 exchange, the QI is required to buy the exchanger's property that is being given up, give it to the buyer, buy the seller's property that is being replaced, and give it to the exchanger. Despite the fact that the QI also transfers the title, the QI is not technically required to be a link in the chain.

Exchange funds holding and releasingFor an exchanger to defer capital gains, all proceeds from the sale of the relinquished property must be held with the QI; any proceeds held by the exchanger are taxable. As a result, the QI must handle the sale funds of the property that was given up and put them in a different account where they will be kept until the replacement property is bought.

For the exchange to be valid, the exchangers must adhere to two crucial timeframes. At the conclusion of the identification phase, the first occurs. The exchanger is required to choose the new property to buy within 45 days after the transfer of the property being given up. At the conclusion of the exchange period, the second occurs. Within 180 calendar days of the transfer of the relinquished property, the exchanger must receive the replacement property. Even if the 45th or 180th day falls on a Saturday, Sunday, or legal holiday, these severe deadlines cannot be extended.

What factors should investors think about while selecting a QI?

Since a QI is not needed to hold a license, investors should do their research to make sure they choose someone who can manage the 1031 exchange effectively. Investors may be compelled to pay taxes on the exchange as a result of errors made by a QI because the IRS regrettably does not pardon any mistakes made by a QI. Here are some factors that investors should take into account while choosing a QI.

Statutes of the State

Although QIs are not governed by federal law, certain states have passed legislation that does. For instance, rules governing the sector have been passed in California, Colorado, Connecticut, Idaho, Maine, Nevada, Oregon, Virginia, and Washington. These states frequently have license and registration requirements as well as requirements for separate escrow accounts, fidelity or surety bond amounts, and error-and-omission insurance policy amounts.

Federated Exchange Facilitators

A national trade organization called the Federation of Exchange Accommodators (FEA) represents experts who carry out like-kind exchanges in accordance with IRC Section 1031. Support, preservation, and advancement of 1031 exchanges and the QI sector are the goals of the FEA. Members of the association must follow by the FEA's Code of Ethics and Conduct.

Additionally, the FEA has a program that awards the title of Certified Exchange Specialist® (CES) to those who meet certain requirements for work experience and who successfully complete an exam on 1031 exchange rules and processes. This certificate's holders are required to pass the CES exam and complete ongoing education requirements. To taxpayers thinking about a 1031 exchange, the designation "demonstrates that the professional they have selected possesses a certain level of experience and competence."

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Information and expertise

As previously stated, a QI error in a 1031 exchange could lead to a taxable transaction. Before making a selection, investors who are choosing an accommodator should carefully consider each person's credentials, including their knowledge and experience in the sector. Investors should find out if the person is employed full-time or part-time, and how many transactions and how much value the person has enabled. Furthermore, it's critical to understand whether the person has ever had a failed transaction and, if so, why.

Understanding 1031 exchanges is essential. Potential QIs should be familiar with the fundamentals as well as the specifics of the 1031 exchange procedure. For instance, QIs should be aware of what constitutes a like-kind attribute. They should also be aware of Delaware Statutory Trusts (DSTs), one of the most frequently disregarded alternatives to 1031 exchanges. Sadly, a lot of QIs are unfamiliar with DSTs. Investors who wish to successfully delay capital gains while still achieving their overall financial goals must find a qualified and professional QI.

How exactly should an investor choose a QI?

Investors should ask for recommendations to identify a QI in good standing. Finding a trustworthy QI might be a lot easier by word of mouth. Investors can request a recommendation from a real estate lawyer, a trustworthy title business, a certified public accountant (CPA) with experience in 1031 exchanges, or even the other party to the exchange.

Investors must probe potential QIs with inquiries that go beyond the bare minimum to learn more about their breadth of expertise and experience. For instance, the FAE mandates that prospective QIs work full-time for a minimum of three years before being allowed to take the CES exam. When evaluating a QI's experience, three years is a decent place to start; five to ten years is a good number.

One of the most important steps in a 1031 exchange is locating a qualified intermediary (QI), as the exchange cannot take place without one. Investors must confirm that their QI is knowledgeable about the numerous tax rules involved and has extensive experience. Additionally, investors must confirm that the QI is not a relative, an employee, or an agency and has had no recent financial ties to them. The IRS does not take these issues lightly; if the requirements outlined below are not met, there may be severe penalties assessed, or the IRS may even forbid the transaction from taking place at all.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only, and should not be relied upon to make an investment decision. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

Are There New Rules for 1031 Exchanges in 2022?

Every year, concerns about the future of 1031 exchanges surface among investors. The ability to defer capital gains through a 1031 exchange has long been a point of contention among politicians. For those wondering whether changes to this real estate investing tool have been made recently, the answer is no. Rather, interest in 1031 exchanges has grown among investors throughout the country, and new questions have emerged. Here is a glimpse at the most common questions asked by today’s curious investors.

What happens when a 1031 exchange property is sold?

A 1031 exchange allows investors to trade one investment property (“relinquished property”) for another (“replacement property”) and defer capital gains taxes they would otherwise pay at the time of sale of the relinquished property. According to the Internal Revenue Service (IRS), the two properties must be “like-kind,” which under Section 1031 of the Internal Revenue Code is defined as any property held for investment, trade, or business purposes.

What are unrealized capital gains?

When investors and real estate professionals discuss unrealized capital gains, they refer to the gains made on an asset that has not yet been sold. If capital gains are unrealized, they are not taxed. Instead, these gains exist only on paper. Only when an investor disposes of the asset must taxes on capital gains be paid. 

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When can an investor use a 1031 exchange in real estate?

A 1031 exchange can be used anytime properties are exchanged as long as the properties meet the IRS’s definition of like-kind. Properties commonly traded in a 1031 exchange include commercial assets, such as apartment buildings, hotels and motels, retail assets and single-tenant retail properties, offices and industrial complexes, senior housing, farms and ranches, and vacant land. Additional trades that qualify as like-kind include investments in Delaware Statutory Trusts (DSTs) and residential properties held for investment purposes.

Can an investor avoid capital gains by buying another house?

Property owners commonly ask if they can sell their home and buy another house using a 1031 exchange. Unfortunately, the answer is no. Per the IRS, primary residences and vacation homes do not qualify for a 1031 exchange; only residential properties held for investment purposes for at least 12 months qualify.

Can an investor take cash out of a 1031 exchange?

For capital gains to be deferred, the total value of the relinquished property must be replaced, including both an investor’s equity and debt in the property. Therefore, if an investor sells a $1 million asset and has 50% leveraged, the investor will need to purchase a replacement property for $1 million and either leverage a loan for the $500,000 or pull from personal capital. Any cash taken out from the transaction is taxable.

Exceptions to the rule, however, do exist. One exception involves investing in a DST. A Delaware Statutory Trust is a legally recognized real estate investment trust that allows investors to purchase fractional ownership interest. When exchanging into a DST, investors can determine how much they want to invest and how much debt they want the DST sponsor to assign to them. A property owner could take out cash via a sale through this investment.

How does a 1031 exchange work?

A 1031 exchange requires investors to follow a strict timeline outlined by the IRS. Missing a deadline in the 1031 process generally results in taxes due on the relinquished property.

The timeline for a 1031 exchange starts when the relinquished property closes. The property owner has 45 days to identify their replacement properties and 180 days to close. The replacement properties must meet one of three rules defined by the IRS.

Do I need an intermediary for a Section 1031 exchange?

Yes! The IRS requires that 1031 exchanges use a qualified intermediary (QI) or exchange facilitator. After the sale of the relinquished property, all proceeds are held with the QI, who will release the funds for the acquisition of the replacement properties. If funds are held with the seller or any other party that does not qualify as a QI, the sale will not qualify for a 1031 exchange, and the seller will be responsible for paying capital gains.

How does a 1031 exchange work in a seller financing situation?

While seller financing is permitted in a 1031 exchange, it is not commonly used.

Seller financing reduces the immediate capital available for an exchanger; however, this does not exempt them from IRC section 1031 that states an investor must replace the entire value of the relinquished property. Therefore, an investor must identify how they will purchase their replacement properties when offering seller-financing. The most obvious solution is to offer short-term financing. This, however, does not solve most buyers’ problems. Instead, the exchanger can work with a qualified intermediary (QI) to sell the promissory note received from the buyer to cover the funds for the exchange. The exchanger can purchase the note or sell the note to the lender or a third party. Whatever option is used, all funds need to be with the QI by the end of the 180 days to prevent the proceeds from becoming taxable. Once proceeds are available, the investor can trade into a chosen like-kind property.

Can an investor still file a 1031 exchange after closing on a property?

No, a seller cannot file a 1031 exchange after closing a property because all proceeds from the sale must be placed with a QI. Therefore, if the exchange is not preplanned, the proceeds cannot be distributed appropriately for a 1031 exchange. Investors interested in a 1031 exchange should identify a QI before selling their real estate.

Can investors avoid capital gains tax if they reinvest?

A 1031 exchange allows property owners to defer capital gains when they reinvest and follow the rules outlined by the IRS. Reinvestment gives investors access to the numerous benefits offered by a 1031 exchange, including portfolio diversification and deferment of capital gains. Additionally, reinvestment via a 1031 exchange resets the depreciation schedule on the investment, providing investors access to additional tax advantages.

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What are the hottest markets for real estate investing in 2022?

The hottest market for real estate investing depends on an investor’s investment strategy. Is the investor risk-averse and looking for only stabilized assets in primary markets? Or are they willing to take on some risk for higher returns and invest in a value-add asset or a secondary or tertiary market?

To best understand which asset and market are best for you, contact a qualified 1031 exchange specialist. The team at Perch Wealth can guide you through the process and introduce you to 1031 qualified properties that are in line with your financial and investment objectives.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only, and should not be relied upon to make an investment decision. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

Should I Invest in Housing and Elderly Care?

Recent data from the US Census Bureau reveals that all baby boomers will be 65 by 2030, bringing the number of seniors in the country from 56 million to over 73 million. With a 30% increase in this population, we face an unexpected housing challenge: the demand for senior housing will far outstrip supply.

As a result, the sector is expected to grow over the next decade, creating an opportunity for investors. However, not all investments in the sector are created equal. In this article, we look at various aspects of housing and elderly care and identify the critical characteristics that investors should consider when investing in this asset.

What is the housing and elderly care industry?

Investments in senior housing vary according to the level of care the facility provides to its residents. Here is a quick snapshot of the various types of investments:

Independent living is generally for healthy and active people. Most communities offer private homes with additional services such as personal and community social activities and 24-hour security. Residents can enjoy the feeling of traditional independent living without worrying about home ownership responsibilities such as maintaining the property or paying bills.

Assisted living, also known as residential care or personal care, is designed for patients who are generally healthy and independent, but who may need help with activities of daily living (ADL). On-site staff are available to assist with activities such as bathing, dressing, and administering medications. Additionally, the staff generally help with laundry, cleaning, meals, and transportation. Many of these facilities also offer social activities. Memory care centers serve patients with cognitive disabilities. Staff are generally available 24/7 to assist residents in their daily lives, including those provided in assisted living facilities. Additionally, memory care centers can provide certain activities and therapies to improve memory and offer supervision to prevent residents from wandering.

Specialized nursing homes offer the most in-depth care, including residential medical treatment for the elderly. These communities are designed to provide 24/7 medical care to those who may have a chronic illness or need ongoing care from a healthcare provider. Skilled nursing home staff includes skilled nurses, most of whom provide care similar to that found in a hospital setting.

It is important to note that this is a general scheme of the differences between the structures. However, the exact services and care provided vary from facility to facility and may overlap in some cases.

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What should people consider when investing in the housing and elderly care Industry?

Investments in senior housing and care facilities have increased over the years, attracting more attention from institutional and accredited investors. However, being a relatively less popular asset class, many investors today are unsure what to consider when evaluating an investment opportunity. To help provide guidance, here are some characteristics, in addition to the type of assistance a property provides, to consider when looking at an investment overview.

1- How is the investment income supported?

Residents seeking senior housing must pay for their level of care. In some cases, insurance, Medicare, or Medicaid will cover associated expenses; however, most properties require a private payment. Here's what might be covered:

For those facilities that require private payment, residents have to pay out of their own pockets. For long-term care, some facilities may also review prospective residents' finances to determine if they can afford the facility.

Identifying which one is accepted in a facility can help provide guidance on an investment opportunity. While Medicare and Medicaid can guarantee a higher employment rate; meanwhile, private payment structures are generally better maintained. Although this is a hypothesis, it can give an idea of ​​the investment.

Real estate is all about location, and investors need to consider how a property's location and demographics will affect its ability to attract and retain residents. For long-term stable investments, investors should identify a location that is experiencing positive population growth, particularly among the population over 50. They should also identify a place that has the right demographics to support the facility and has surrounding services that can help residents. 

The assessment of these factors is also related to the mix of taxpayers. Facilities in vulnerable communities may have less favorable demographics; however, they tend to accept Medicaid, which provides a supported income stream. Meanwhile, communities in high demand, such as coastal California, tend to rely on private pay. While they offer goods they value highly, keeping residents can be more difficult during an economic downturn.

In determining whether an investment is good, investors should consider who manages the property. Performing proper due diligence on a trader's experience and finances can offer insight into an asset's long-term potential. For example, today's major carriers include Genesis HealthCare and HCR Manor, along with the largest national carrier, Brookdale Senior Living, which will provide more security to an investor than a single carrier.

Ultimately, investors must take a data-driven approach to determining whether a specific investment in housing and aged care is the right investment for them. Understanding the pros and cons of each investment opportunity, as well as how these above characteristics can affect performance, can provide insight into whether or not to consider an investment. How can I invest in the housing and aged care sector?

Those interested in investing in have more options

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Investors can invest directly in a new or existing development through direct acquisitions. Like other investments, this option requires the largest share of an investor. Unless they identify a property that is an absolute triple network, they will need to consider the management involved in the investment. There are also passive investment opportunities. Non-accredited investors can invest directly via shares. For example, they could buy stock in an existing aged care and housing company, such as Ensign Group, or invest money in a real estate investment trust (REIT). Meanwhile, accredited investors have the option of investing in a Delaware Statutory Trust.

Are you interested in learning more? Contact our team to discuss how to invest in the aged care and housing sector today.

(855) 378-3443