This post is taken from a discussion between Jos Aguiar of ACA Family Office Consultants and our founder Rick Melero
To recap for those that are visiting our website for the first time we are real estate development, investment and private money lending organisation that focusses predominantly on North American property markets.
What we’ll be sharing in this conversation is how investors who aren’t even in the United States are able to invest in US real estate with as little as 5000 US dollars.
What do you call this program?
You know, if you take a look at what we are is we have a public fund that allows us to bring investors from all walks of life. Some are accredited, very sophisticated investors. Others are coming from different parts of the world, but the real bridge here is that investors from all walks of life can jump into this fund and invest in a variety of different projects for as little as $5,000.
So that’s the program that we were looking at. Build took us over 17 months, of course, to get approved by the Securities Exchange Commission. But it created this beautiful opportunity for us to be able to focus on a portfolio approach. So we do a variety of projects and investors partner with us through this fund to be a part of all of those deals.
What kind of structures that they get to go through the process and what kind of investment is it?
You know, it’s a host of different investments if I can kind of give you a picture. Now, of course, we have what we call are directed, directed, active projects, meaning these are projects that we source we acquire, and oversee to the finish line.
We also have some of our passive investments, which might be in partnership with operating partners. Then there’s a higher level a higher tier of these kinds of investments, which we call club deals. These are projects that are a lot larger, they have some form of legacy play, they’re very exclusive.
From time to time, we’ll select the right opportunity to incorporate in our investment strategy, and we’re able to work on some substantial projects. That investors often get to benefit from.
Can you tell me more about what exactly a club deal is and what the significance of these deals is?
The club deal has become kind of an institutional buzzword and its different institutions, that are family offices, extremely wealthy families, and even private REITs and hedge funds come together.
They collaborate in like this exclusive network. What they do is they source for opportunities that have not been available anywhere in the marketplace.
So this group of individuals and funds come together, look for opportunities that are aligned with their vision, their mission, and their legacy play.
They work together towards taking down these substantial projects. That’s really what it comes down to.
So really, at the end of the day, when we get involved in projects like this, we find that number one, they’re extremely exclusive and really harsh, harsh.
Now many people are aware of them but these particular groups and what I mean by a large project some of these projects are the billion-dollar deals that you hear about on the news later on in this monster project took place they’re building X amount of community and you hear it in the news going my goodness, that’s incredible.
Well generally by the time you hear it, the club investors have already partnered up and put the funding together to get that kind of project in place. It’s really good. As I said before, there’s a legacy play. Most of these projects have some level of legacy that these extremely wealthy families or investors want to leave behind if you will with this project.
It’s got some form of a signature for some type of purpose behind it. Most of the players in this particular club deal are going to be extremely qualified sponsors. They have experience, they have a history, and there’s a lot of wealth behind it.
Again, these aren’t necessarily projects that are for starters, these are projects that are very, very sophisticated and most importantly, these are projects that like I said earlier, they’re very exclusive.
These are opportunities that most people only hear about in the news after the fact that during the time of due diligence, these guys are collaborating to make deals happen. Hopefully that kind of gives everyone a picture of what a club deal really is in our space in our industry.
How does this apply to mom and pop investors?
Well, it generally isn’t even for mom and pop investors really, I mean, again, it’s made to be a project where they don’t have to worry about the level of sophistication of the investor.
We’re the ones that have been trying to come up with a solution that creates a bridge between that Mom and Pop investor. That they’re able to partner with us in projects that we’re investing in. That’s really what it comes down to because the way that we wrote our fund, it allowed us to diversify our portfolio approach.
One of those strategies is that we’re looking for sponsors or family offices, or institutional partners, who are already sourcing deals that are exclusive that fit our particular box of investment strategy. So really, it’s not meant to be for the public, but we’re creating a bridge that allows the public to participate passively in those opportunities if that makes sense.
How do the sponsors and family offices source for these deals?
You know, over the years, we’ve been doing this now for 20 years.
So what I’ve learned over the last 20 years is that this is a very exclusive elite network, that collaborates and so it took us quite a bit of time to get to the level where we were kind of brought in by referrals primarily.
So really, when you take a look at this particular elite group of people that are kind of coming together, it takes time to get to that book of business and to be able to collaborate. Now, one of the things that I’ve learned about within the years of doing this is that most of the people that are in this you know, quote-unquote, inner circle.
They either have contacts already in the industry for many, many years. I mean, some of these are generational wealth. These are families that are 300 years old, in the industry, right? What you find is that some of these landowners that have owned 1000s of acres have been a part of these networks for years.
When the historic cycle begins to pivot and change and you get to a growth cycle, then all of a sudden this piece of land that nobody even knew would be available, becomes some form of either sale or in a partnership with a club deal investment that then all of a sudden develops these projects.
That’s primarily the way that these opportunities come about. Most people are not even aware that for the last 20 plus years, people have been slowly assembling these portfolios or these blocks of projects that are going to be extremely monumental and very profitable.
Tell us about the deal you just invested in
We’ve been building relationships for years, and one of the off-market projects that we’re working on is over 300 plus unit apartment complex. In fact, in this podcast, we’ll share a link. It’s actually with the investment platform that we use to bring investors into the fund.
Now that particular projects are already out. We can’t take on any more investors. But this gives the investor the opportunity to kind of get a picture of what these projects could look like. But just to kind of give you a basic piece of why we were attracted to this particular deal, and why we invested the very first thing was it was a very much off-market opportunity.
Nobody was even aware of this only in a small circle of people were there talks about this project as it was coming to fruition. The other piece that I found that was powerful about this deal, especially in this market, when you hear about multifamily deals, and institutions are investors like brand names that are out there buying these deals.
Most of them are buying them retail so they rate very, very low cap rates when they buy these projects. Then what they’re hoping is that through inflation and incremental increases in rents, and management, then they’re able to then increase their overall cap rate.
Well, I don’t believe in that philosophy. So from our perspective, this project fits the bucket because of the fact that it had a couple of components.
Number one, we were building at a price that really hedged us because we had a lot of equity built into the project. In addition to that, when we ran the financial numbers on the income stream, which we’ll talk about in just a second, the income stream was incredible.
There was an amazing exit strategy. So we felt that it really hit all the balances if you will because we’re looking at deep discounts.
We’re looking at specifically the controlling basis, which is basically keeping a strong margin and also making sure that we have the intrinsic value truly in place, and that we’re below that intrinsic value. Now the numbers are pretty straightforward.
I’ll kind of give you a picture.
The total equity (this is the amount of investor capital) that was put into this project was $17.8 million. Now total construction, Project land and development, and everything else. All in was roughly $69.8 million of that 17.8 in equity but was amazing in the diligence processes that we were able to really get an appraised value of about $122.7 million when the asset is built and stabilized.
What that means for us is that we lease up to even a 90% occupancy rate with these brand new construction projects. What we’re able to expect is about a net operating income of about $5.1 million, which basically means that if we paid all cash for this deal, we’re looking at a 13.7% annualized. What we loved about this deal is that when we started analyzing that particular market, other insurance companies and institutions are buying these stabilized projects at a five cap.
We felt extremely confident that we had a really solid deal with great returns that if we needed to keep it we could because the cash flow is there. But the exit strategy is incredible. So again, this is one of the elements that really made sure that we were really drawn into the deal.
In addition to that, of course, we did our due diligence. So we felt very confident that the guarantor and sponsor partner not only had the liquidity but other light projects that they had done together in the past and so that really pass the muster for our due diligence process.
For those that aren’t aware of industry terms. What is a five cap?
Five cap so it’s called a capitalization rate. The simplest way to put it is when you are estimating a commercial asset you’re valuing and not just on replacement costs or sales price in the industry. You’re also analyzing it based on the annualized income that you generate and what profit that looks like for your investment.
So for example, if you were to buy a project and you’re looking to make a 10 cap or a capitalization rate, that means that if you’re buying it for a million dollars and you want to make 10% annualized that property would have to net a minimum of $100,000 a year after operating expenses.
So in our particular investment approach, what we’re saying is that we’re putting in $17.8 million in this project. At the end of the day, when it cash flows, we’re expecting at 13.7 cap, which means we’re getting a 13.7% return on our money annually based on the net rental income and to sell it to an end-user that creates the opportunity for us to be able to sell it to them at a 5% return.
So that means they’re going to pay a premium for that asset because they have a longer-term vision a longer-term goal for this project. So it just creates a great exit for us. an incredible opportunity if we hold as well.
What was your due diligence process?
Yeah, so I mean, obviously we talked a little bit about the summary of numbers. I’ll be honest with you this process for a club deal of this size, obviously takes some time and due diligence.
If I can kind of streamline it for most people to understand because obviously, I know there will be some sophisticated clients but you might have some investors that this is like their first conversation about a multifamily project that’s worth over $100 million.
You know, what we really boil it down to is we look at some of the core essential elements of the risk and of the opportunity. It begins with the sponsor and operator and I like to quote Buffett because obviously, he’s one of the most brilliant investors on the planet today.
If you look at his philosophy when he’s investing in a business, what you will find is that he’s always looking at the intrinsic value, but even further, what he looks for is the management team.
- Do they have experience?
- Do they have the potential to really take this business to the next level in order to grow the value?
One of the first elements of our due diligence, was really doing our due diligence of the sponsor, or the operator of this deal to make sure that number one, do they have the track record?
Number two, do they have the reputation of performance. Number three, what is the background and liquidity that we see does it pass and so in our due diligence process? This particular sponsor passed the muster.
From there, we said, Okay, well, now that we’re good with the guy that’s running this deal, let’s take a look at the market. Are we comfortable that this is the right time for a project of this magnitude?
We did basically what we call a market feasibility study. That passed during our due diligence we use a third-party company to give us all of the indicators that are going on in that localized market because real estate is hyperlocal.
After that, we talked a little bit about what we call a Builder Review, which is a part of again, our due diligence, and what that means is, while I might like you as the sponsor, at the end of the day if you have the wrong contractor for the job that could equally impact our ability to perform or meet deadlines or stay on budget.
We also use a third-party company to do what we call a builder’s review. That particular builder that was being hired that contractor passed with flying colors throughout that due diligence process so that was essential for us.
Another piece that then we do is we start saying, Okay, well now, we’re good with the operators. We believe this is a product that’s needed in the marketplace, this is the right time.
Now what is it worth? We started really taking a look at will the market support this project? What is it worth and what is the income really going to look like? We used some analysis tools to really get comfortable with the values that I just talked about.
We felt confident that $122 million was a legitimate value on the asset once stabilised when we ran the numbers at a net operating income of $5 million a year. We were very confident that those numbers match and in fact, we put a fudge factor there because we’re analyzing at a 20% vacancy rate on brand new construction projects.
That was another essential element of our due diligence. Another thing too is we did what we call a stress test. If you look at a lot of financial institutions FDIC does stress tests on banks to say, hey, if the market were to have issues, what is your ability to perform even in the worst of circumstances, so we actually ran the numbers back and put it through a stress test, and it passed.
That was a very important component of this particular due diligence. Now I can go on and on but I’ll say we looked at the title, we looked at the proper insurance.
We went through the process of understanding how the exit strategy is what are some of the potential buyers because generally by the time you build this, you’ve already had talks with other institutions that are looking for this particular turnkey inventory.
Those talks have been going on in addition to talking to the banker because if you remember, I talked about a $17.8 million investment, but the total project is $69 million.
Where’s the difference coming from?
Between the investors that are the operators and a bank, that’s how we’re leveraging to be able to increase our return. We have those due diligence talks as well. There’s a host of things that goes on, but in essence, those the approach of clearing if you will to make sure that we felt confident about this opportunity.
How can a small investor participate in these 300 Plus unit projects like this one?
Well, obviously, if you’re an accredited investor or you’re an affluent person, you know, you might have some similar opportunities that are available. Generally, these type of club deals as I said before, you have to be what they call in the industry, a qualified purchaser, okay.
That’s really the term in the industry that is used and generally for you to actually be an individual that fits that category. You generally have to have at least $5 million of liquid capital to work with this group. Okay, are these individual institutional groups that are looking for these opportunities?
It kind of makes it a little harder to find these kinds of deals or to even fit into that because not many individual investors have the $5 million dollars to even step into the game to begin with. But I also want to kind of hint at something else.
What we learned over the years is that it wasn’t even just about the money as well. Another element for these groups do we have an alignment of interest? That is essential. I’ll give you an example. This particular project that we were talking about specifically, one of the things that linked us wasn’t just a liquidity investment opportunity that we have with them.
But the fact is, HIS capital is really focused right now on finding innovative ways of investing in real estate part of those innovations are how do we tackle the affordability crisis that we’re dealing with in America right now?
How do we deal with the product that we’re developing, that doesn’t impact our planet any more than all these new construction projects that are out there?
The alignment for us wasn’t just the money. The alignment had to do with the fact that we were going to build affordable luxury housing. In addition to that, it was truly a green project. That was going to have minimal impact on the global impact that most projects have.
That’s another key element that aligned us with this particular project and allow these investors to take us on as their partners in the deal as well. Now, for everyday investors, you know, you can look for groups, there aren’t many that do what we do, because they’d usually like to keep it exclusive.
But that’s been one of our missions is how do we bridge between the institutional level investment and the individual investor and so investors can join our fund for as little as $5,000 and they can participate in projects just like the one we’re talking about today.
If anyone wants to reach out to you to learn more, where can they go?
If they’re interested in learning more, what I would highly recommend is if you haven’t participated in investments like this before is to go to hiscapitalgroup.com.
When you get to the website, there’s a button that says free education. What you’ll notice as soon as you click it is that it gives you two options.
We’ve broken down our content into those two key components and I highly recommend that if you haven’t done something like this, you first educate yourself, understand the risk, understand the upside and understand the due diligence.
I would highly recommend you to do that. Now, if you already have experience and you’re just looking for immediate opportunities.
Also on that same page, actually, right on the homepage, you will see a button and that button gives you the opportunity to participate.
It literally says see our investment opportunities, which will link you directly to our fund platform where you can literally click and invest.