Partnership Type
PRIOR STEP: THE BASICS
Multi-family investments generally fall into one of the following categories. It is important that the property acquisitions of the partnerships you select acquire assets that fit your retirement objectives.
For example, if you are seeking to retire by Year X, you would seek partnerships that project a level of cash flow that will result in partner distributions, which will collectively provide an after-tax amount that meets your retirement cost-of-living standards by Year X.
Yield / Income
Often referred to as a "Yield Play", this type of partnership usually has LESS RISK since it involves property(s) that are either already stabilized or require a very short period of time to reach stabilization when acquired.
The Rehab, if any, is typically cosmetic in nature, as the projected investment outcomes of a yield play are much more likely to occur.
Summary: The relative purchase price (for the partnership and its target asset acquisitions) is likely higher, and while the returns may be lower, they tend to be more assured e.g. think "T-Bill" without a US government guarantee.
The EQUALIZER™ calculation, which uses pro-forma amounts for yield plays, is normally lower than that of a successful value play or hybrid.
Value / Growth
Often referred to as a "Value Play", this type of partnership usually has MORE RISK, and involves under-performing assets that the syndicator believes can be successfully restored in a manner that will provide a significantly higher value than when acquired.
Value play properties are not only NOT stabilized at acquisition, but they generally have low occupancy and/or need major rehab. Achieving the projected investment outcome is a much heavier lift and requires experienced property management with a verifiable track record, preferably with other value play properties.
Summary: The relative purchase price of a value play is likely lower (for the partnership and its target asset acquisitions), while the post-stabilization returns are potentially higher, but less assured.
The EQUALIZER™ calculation, which uses pro-forma amounts for value plays, is normally higher than a successful value play or hybrid.
Hybrid
A hybrid has income and growth components, and often involve properties that are near full occupancy upon acquisition, but in need of renovations to thoroughly update the property to the point that will allow it to be successfully re-positioned to achieve higher rents, higher tenant profile, or a higher property class.
Summary: The relative purchase price of a hybrid is generally lower than a yield play, but higher than a value play (for the partnership and its target asset acquisitions).
While the post-stabilization returns have the potential to be as high or higher than a yield play, they are less assured.
The EQUALIZER™ calculation, which uses pro-forma amounts for a hybrid, normally produces results that are higher than a yield play, and are in the same, or slightly less range, than that of a value play.
It bears repeating here NEVER forget that investing in real estate partnerships ultimately involves an act of faith in the business venture and/or the syndicator.
Furthermore, partnership investment decisions are all too often made one at a time, not with a view toward their overall impact on net worth, retirement goals or the overall composition of the investor's assets.
We feel that real estate investing is most productive when it is executed in the context of an investor's total financial and estate planning requirements.
Matching a real estate partnership's economic benefits with an investor’s needs requires balancing the expected results with such needs, and in doing so, directly relates to the partnership "type" of each one you select for your portfolio.
Most partnerships maximize either cash flow or appreciation, and while it does happen on occasion, it's rare to see both in a single investment. Investors must maintain reasonable expectations bolstered by the MATH.