My Call with Ken picked back up where it left off pretty seamlessly, He wanted to dive into the specifics of the legal documents and what he should be expecting from them. He was curious about the specifics of qualifying for a Syndication and who really invests in them.
I was all to happy to answer these, usually when people talk to me about Mobile Home Parks its all about the returns and cash flow. It was refreshing to discuss the details of the Syndication and really answer his eager questions with some educational information.
Kenneth: Hey Its me, where did we leave off man.
Me: We left off with you finding a good Lawyer for your team.
Kenneth: Ah yeah that’s right, you were telling me how complicated all the documents are.
Me: Well a good lawyer on your team is always an asset. However, I think its important you should be able to read and understand what you are investing in on your own or at least with minimal help.
Me: Here are some of the key things you are going to have to go over
PPM, or more formally called the Private Placement Memorandum, is the detailed information document about the investment, shares, includes disclaimers about the risks, terms, and sponsor’s track record. A lot of information about the fees being charged, payouts, distribution procedures. Very important to understand what the deal is offering.
Subscription Agreement: This document is the actual contract between you and the general partners. It will outline your shares, investment amount, and your role as an LP.
Operating Agreement: Like any business, there is an agreement between the partners. Something so everyone knows the rules, who does what, and how money gets split up. This is key because if there are disagreements, the operating agreement is what will either help or hurt you. So read it carefully.
Offering Memorandum: This is the sales pitch, it probably will be 10-20 slides of a fancy presentation. The only thing I can say is to judge its quality, not its information.
Kenneth: Why is that? The information is not important?
Me: Well, anything can be written on paper, and yes, it is important to review and see what they are claiming is possible. I care more about how they present it, how professional they are, how much time they put into it. Did they give it to me on a word document, just an Excel sheet? Is it a few pages turned into a PDF or did they take the time to have it professionally done? Did they spend money and time to make the first thing you see leave a good impression? If not, it’s not a good sign for how things will go down the road. Communication, quarterly reports, annual letters, may all follow the same lack of effort and care. Doesn’t mean it’s not a good investment, just says something about the operator is all.
Me: Oh, and the CPA thing is key because there are some major tax implications when doing something like this, Ken. Should be positive tax implications depending on your situation.
Income Tax: Usually, rental income is subject to ordinary income tax, but depreciation can offset much of this income. Really depends on your situation, so a CPA can help figure out how or if that can help you.
Depreciation: One of the reasons why people say real estate is the great wealth creator is because of depreciation. It can be a complicated thing to talk about. You are able to take an annual deduction for depreciation on your property, which reduces your taxable income. It’s really based on the idea that over time your property becomes obsolete because of wear and tear. The more you reduce your taxable income, the less you pay, the more you keep, and the more you can keep putting to work for your wealth accumulation goals.
Capital Gains Tax: When the property is sold, you most likely will be subject to capital gains tax, which can be lower than ordinary income tax rates. Also, if you turn into a repeat property investor each year, the depreciation on those new purchases can help offset some of the taxes on the sale. It can get tricky, but like I said, having a CPA on your team if you are going to do this is one of the greatest assets you can have, even better than the mobile home park itself!
Kenneth: No worries there, man. I have a buddy I know that does taxes for people in town here. He does my mom’s and even my sister’s. We all use him. So, I got that covered.
Me: That’s great to hear, just one thing: I know you got it covered, but make sure he specializes in real estate, more specifically syndications and funds. They will have a wealth of knowledge related to tax strategies for people like you. A lot of times a general tax accountant may only handle 1040s, W-2s, and maybe the sale of a personal home, etc. Handling investment LLCs, accelerated depreciation, and syndications is much different, plus a good CPA can help with the structure of these things and timing to help minimize tax burden and help come up with a tax strategy.
Kenneth: Oh, I have no idea if he knows all that. I can ask though, but I never heard him talk about anything like that.
Me: Like I said, if you go down this route, just something to consider.
Kenneth: So anyone can do this? If anyone can do this, how come I have never heard of this? I know people who buy real estate and own rentals, they have never mentioned syndications.
Me: Well, not everyone can do it, but anyone who qualifies is able to. You see, there are two types of syndications: 506(b) and 506(c). Now, I don’t want to get bogged down in the legal aspects of each, but they both offer the ability to invest for different types of people.
506(b): This is a traditional private placement. It is open to accredited and non-accredited investors or sophisticated investors. The key here is this type of syndication cannot be advertised. You would have to know the GP ahead of time before being asked to participate in the syndication. It’s more of a one-on-one conversation to see if it’s a good fit; you won’t see Facebook ads for something like this. Another plus is that it can accept up to 35 non-accredited investors, which means it opens up to a lot more people. Also, those people really just self-verify that they are qualified to invest, self-certification, meaning they don’t need to provide documentation to you as proof of their qualifications. Again, those people would still have to have a previous relationship with the GP to qualify.
506(c): This one is the most common I see from my friends in the industry. They like it because they can advertise it publicly. However, as a result, they can only raise money from accredited investors, which brings its own set of rules. For example, you really have to verify someone is who they say they are. Usually, getting third-party verification or even getting their CPA to write a confirmation that the potential LP is accredited. So you are usually dealing with much higher net worth investors and people who can write larger checks. A lot of verification you gotta do, but really GPs think it is worth it to get those bigger checks.
Kenneth: What is accredited? You have to have a certification or something like that? And I heard you say sophisticated, gotta be a professional I assume?
Me: Oh sorry, guess I should explain. The SEC decided that these investments are too risky for normal everyday people, which personally I think is absurd. I wish these were open to everyone. If you can buy a stock and have the money, you should be able to invest in a syndication or fund, but that’s a convo for another day! Anyway, since they think these are risky, they want you to be sophisticated or accredited for either of these 506(c) or 506(b) investments. So those are just terms to classify how much financial acumen and wealth you have. Assuming the wealthier you are, the smarter you are, and the more risk you can take. It is truly a case of the rich getting richer when it comes to these investments.
Kenneth: Yeah, but will I qualify for a syndication? I have a decent savings like I said, but I’m certainly not a sophisticated investor, am I?
Me: Well, let’s see. I think you are, but you tell me:
You gotta have knowledge and experience, meaning have sufficient knowledge and experience in both financial and business dealings to be capable of evaluating the risks and rewards of the investment. Your education or doing something similar to the investment can be considered. Also, I would throw in suitability, which is actually important: the fact that this investment is not disproportionate to your overall net worth and your commitment would not be considered excessive.
Kenneth: Okay, well, that’s a lot simpler than I thought. I am sophisticated, I guess. I am really into finances. Between the real estate I have sold, remember I had that rental back in the day? Not to mention, you know I am into stocks and business. The amount of time I have put into learning about investing is insane. And how much is a typical investment in one of these deals?
Me: Well, it could be a minimum of $25k, usually $50k, but sometimes a six-figure minimum.
Kenneth: Then yeah, it’s suitable. My wife and I have enough in our savings and investments to make that investment without worrying about it.
Me: That’s great. What about accredited investor status? This one is more formal and strict.
Me: You have to have an annual income exceeding $200,000 or $300,000 combined with your wife. It also has to be for at least the last two years. So getting a raise this year doesn’t qualify you; you gotta have a two-year history. Also, you could qualify if you have at least a $1,000,000 net worth, without considering that monster house you and your wife live in!
Me: I know this doesn’t apply to you, but certain professionals like Series 7, 65, and 82 would qualify as well. Or even if you were a knowledgeable employee of a private fund, etc., you could get qualification as an accredited investor.
Kenneth: Haha, I don’t need to go get a Series 7 license, but thanks for the tip! I mean, I really thought it was going to be much more than that, but yeah, I guess I am an accredited investor.
Me: Well, I guess that’s that then; you are good to go.
Kenneth: Yeah, but I still never heard anyone before today mention this. I mean, no one talks about this. If it was such a great way to invest for retirement, wouldn’t more people be discussing this at my club?
Me: Well, that’s probably because of access. You really need to know someone. It’s like anything in life. Nothing is on our radar until it is known to us. Kind of like a new car. You ever notice how you don’t see a Ford Fusion on the road every day until you decide to buy one? You start looking at them and comparing them, and all of a sudden, you begin to see them everywhere? That’s the same thing. Most people don’t know about them because they do not know sponsors or GPs. They don’t talk about them, research them, or think about them. It is not on their radar at all. You would be surprised how many opportunities like this there are. You just have to open up your radar. Now that you know about them and are asking questions, I am sure you will begin to see them. In fact, since we are on the phone talking, I am sure Facebook’s algorithm will start pinging you with some 506(c) mobile home park syndication ads tonight!!
Kenneth: Okay, I understand that. But even if I am sophisticated and an accredited investor, who would you say something like a mobile home park syndication is good for? I mean, money aside… Should I do one?
Me: I get what you’re saying. I guess I would have to break it down into a few categories:
1. Passive Investors: This one is a lot of people. Doctors and lawyers wanting to invest in real estate without doing the work. Retirees who want to stay retired but still be in the real estate market. I have even seen active real estate investors invest in syndications because they want passive income. Really, it’s about balancing out your active job income with passive income. Making your money work for you while you go out and make more money. It can become a beautiful cycle that creates freedom.
2. High Net Worth Individuals Seeking Diversification: You are a great example. You have a lot of your retirement in stocks and mutual funds. You may want to diversify into real estate without having to operate the deal yourself. You get the exposure and benefits without the actual work. I have even seen other real estate investors who operate their own mobile home park syndications invest in someone else’s deal as a passive investor. Or maybe they are active in storage units, apartments, or even gas stations, but want exposure to affordable housing assets. Mobile home park syndications are a great asset to add to their portfolio, all without having to do the actual work. It’s like buying stocks in different sectors for some people. They may buy tech stocks, energy stocks, consumer good stocks to diversify. Well, real estate syndication investors buy into apartments, parking lots, office buildings, RV parks, and mobile home parks.
3. Long-Term Investors: Investing in a syndication like I said can be a 5 or 7-year commitment. So it really fits for people who want to place money and not be worried about having to move it around every year. A lot of investors, once they have a good performing asset, want to really reap those rewards without the hassle of managing the money. Usually, these investors have a mix of short-term more liquid investments and need to balance it out with long-term holdings. Mobile home park syndications and real estate syndications in general are good for that.
4. Cash Flow Seekers: Probably the number one reason people invest in syndications and in mobile home parks. Cash flow. Getting monthly or quarterly checks on your money is a great feeling. Especially when you are still watching your principal investment appreciate. A lot of people are just looking for cash flow to build a lifestyle around. Investors put their money to work and look at the passive income like a check to live off of. If you build a good portfolio of passive investments each paying you $15k to $20k per quarter, that would be enough to really build your life off of, right? Or even have coming in through retirement?
Kenneth: Yeah, I would love that. And my original money is still invested?
Me: Of course, that’s the beauty of cash flow. It’s based on the rental income of the property. You are not selling the property to get it, it’s just from the GP operating it and keeping that rental income flowing.
Me: Hey Ken, Can we pick this call up tomorrow. Its getting late I feel like we got a lot more to cover still, I don’t want to short change you on info because its late at night.
Kenneth: Yeah I know I have been hammering you with questions tonight. It’s just something I wish I knew about sooner, so I am really trying to get as much information as possible, So I don’t sit back and waste more time when it comes to this. My wife and I have really been talking about how we invest for our retirement. So this has been great man, I really appreciate it.
Me: Not a problem at all, I never want to force these convos on people, especially my friends. However, I wont lie, it is great to be able to talk about this stuff with you. Hopefully it makes sense for you an wife, if not, not a big deal either.
Me: So tomorrow works for you?
Kenneth: Ah, no I forgot I gotta head out of town this week, They signed me up to train some team down in Arkansas. How about we talk Friday?
Me: Sounds like a plan , talk to ya then, give my best to the wife.
Kenneth: Same to you
I always love talking about Real Estate and get more excited when someone genuinely is deciding if it is a good fit for their portfolio. I hope so far you have gained as many insights as my friend Ken has. Just like Ken and his wife, every Investor or potential LP has different retirement plan or goal. It is important you get the questions answered so you can make the right decision for you and your family.
Although My call with Ken ended tonight, yours does not have to you can schedule a call with me right now using this link if you want to talk about this or anything related to Mobile Home & RV Parks or Passive Investing.
-The MHP Operator
