How It Works: Investing in Senior Living Projects via Crowdfunding

Chris Finlay, Chairman and CEO of Lloyd Jones, breaks down what it takes to start investing in senior living real estate via crowdfunding, and how to make the most of the market in 2022.

Here’s a short excerpt from this video:

“We at Lloyd Jones have invested a significant amount of capital into creating our own operating platform. We brought on board senior industry leaders, top players. And that’s the unique thing about the time we’re in…”

Ashley Socarras, executive vice president of acquisitions for Lloyd Jones LLC, was recently named a “Rising Star of Real Estate” by Business Insider. After reviewing hundreds of nominations across the U.S., the publication selected 30 commercial and residential real estate industry leaders aged 35 and under for the prestigious annual list.

“These 30 young professionals stood out as the vanguard of the next generation in real estate, from prodigies who’ve risen through the ranks and innovated at established firms to startup founders looking to disrupt pockets of the sector with deeply traditional roots,” the article said.

Ashley joined Lloyd Jones as an analyst in 2016 and has been promoted four times, most recently, to an executive vice president role. Throughout her tenure, she has played a critical role in the acquisition/disposition of more than 4,000 multifamily units across the southeast, valued at over $750 million.

The full list of 2020’s rising stars of real estate, including Ashley’s full profile, can be found here:

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Central banks like the Federal Reserve battle inflation – the general rise in prices—by boosting interest rates. In a benign environment, the rate of inflation is low, but as the economy heats up, inflation increases and robs the local currency of some of its buying power. By lifting interest rates in small increments, the Fed moderates the economy by increasing the cost of capital, that is, how much interest you have to pay to finance a project with borrowed money. Some potential projects will not go forward because they can’t generate the required rate of return necessary for investment due to the higher cost of capital. After all, the more of the project’s revenues that must be spent on interest and higher costs leaves less to compensate investors for committing their money to the investment.
As inflation and interest rates rise, what happens to multifamily real estate investment? In general, real estate values rise along with, and act as a hedge against, inflation. But the devil is in the details, and it takes the right combination of management, financing and location for a particular real-estate investment to benefit from inflation.

Make Inflation Your Friend 

Inflation and its accompanying interest rate increases affect a multifamily real estate investment in several ways. Let’s break it down.
This is how stock markets sometimes operate, with seemingly endless trends suddenly interrupted and/or reversed. A long bull market tends to attract ‘’weak” investors who are not accustomed to, and can’t stomach, a sudden sell-off. Weak investors are the first to sell their stocks when prices begin declining, which can have a snowball effect that causes volatility to skyrocket.

Net Operating Income (NOI) 

A property’s NOI is its revenues from rents and fees minus the costs of operating the property. For a property to benefit from inflation, its income must grow faster than its expenses. In the context of a multifamily property, this means that the rent increases must at least keep pace with the inflation rate, while costs require tight control to keep their rise below the inflation rate.
A good investment property in an inflationary environment will support sufficient rent increases with each lease renewal, which in turn depends upon the value perception of tenants, lease terms, and the availability of competing rentals. Improved property management can increase occupancy rates and rents by addressing structural and operational problems. Operating expenses can be controlled in numerous ways by better, hands-on property management, including switching to lower cost vendors and suppliers, more cost-efficient and effective marketing, and repairing costly problems. All of these are features of a value-add strategy, the hallmark of Lloyd Jones investment properties. The ideal property must pass our proprietary screening protocols that evaluate a property’s suitability for value-add. In other words, we need to make sure the value we add through rehabbing and better management will increase NOI. At Lloyd Jones, very few properties make it through our tough screening.

Net Profits

NOI does not include the cost to finance a property with debt – that is, the interest rate on the underlying mortgage. Net profits, on the other hand, do indeed depend on ensuring that financing is structured to provide maximum protection from the rising interest rates that accompany inflation. Here are several of the strategies we use:
1. Sensitivity analysis: Our screening protocol projects how a property’s value will fare if interest rates rise when we refinance the property (to unlock and extract equity) at the end of the value-add period, typically two to three years after purchase. We model the sensitivity of the investment’s return to a wide spectrum of interest rates so that we can quantify the risk involved in refinancing during an unfavorable borrowing environment.
2. Control leverage: Debt is indispensable to most real estate projects, but too much debt, or leverage, can swamp an investment with unsustainable interest expenses. We typically structure multifamily investments with a 70 percent cap on loan-to-value. In other words, our financing requires 30 percent equity contribution from investors to limit exposure to rising interest rates. We also observe conservative borrowing standards – we take only non-recourse loans (the property alone serves as collateral, and the lender cannot attach other investor assets), and never cross-collateralize our properties (meaning the default of one property doesn’t affect the financing of any other property).
3. Build a cash cushion: By specializing in value-add properties, we have the ability to build a cash cushion that wouldn’t be available from a stabilized property. This cushion can help protect the investment even if high interest rates negatively affect property values and cash flows.
4. Flexible debt: We often use a mix of fixed and floating-rate debt with staggered maturities. This helps keep interest costs low during the value-add period and helps us avoid overly-large refinancing tranches. We also like to structure our loans for terms of at least five years, which gives us a two-to-three-year cushion following the value-add period to refinance. This can come in handy if interest rates spike two to three years after property acquisition.
5. Reap what ye sow: We constantly evaluate whether it would benefit investors more to sell the property rather than hold it. This reduces our investment exposure during periods of rising interest rates. At the same time, we carefully manage our own cash position and debt facilities to weather rough market conditions without having to succumb to panic selling due to a cash crunch.

Property Value

The total return from a real estate investment is composed of the net cash flows and capital appreciation. The value of a properly selected and managed multifamily property should appreciate with inflation. Two factors are at play:
1. Higher rents: The value of a rental property is fundamentally tied to the rents it generates. Periods of high inflation produce rising wages and profits, conditioning tenants to pay higher rents for a given space and thereby boosting property values. Consumers with a greater sense of wealth will be motivated to move to nicer apartments, creating higher demand and higher rents.
2. Restricted construction: As inflation increases, construction costs rise (due to higher material and labor costs) as does the amount of interest charged for construction loans. These factors tend to restrict new construction, helping to limit the supply of competing housing.
Increased demand and decreased supply equates to higher property values and the prospect of greater capital appreciation during times of high inflation.
In summary, multifamily real estate investments can perform well during inflationary times if the properties have the right characteristics and are managed with a strong, knowledgeable hand. We invite you to speak with us about our past performance during all types of economic environments, and the opportunities we see right now in the multifamily and senior community market segment.
About Christopher Finlay
Christopher Finlay is chairman/CEO of Lloyd Jones Capital, a private-equity real estate firm that specializes in the multifamily sector. For the past thirty-seven years, and through every economic cycle, he has owned and operated successful multifamily businesses. Predecessor companies include commercial brokerage, appraisal, property and asset management, construction, and development.
Headquartered in Miami, Lloyd Jones Capital acquires, improves, and operates multifamily real estate in growth markets throughout Texas, Florida, and the Southeast on behalf of institutional partners, private investors, and its own principals.

“The golden era [of stocks and bonds] has now ended,” says a McKinsey & Company report issued last year.

The report suggests that returns on equities and fixed-income investments could see significant decreases – up to 400 or 500 basis points over the next twenty years.   According to the report, this will affect everybody, from pension funds that will face larger funding gaps; asset managers who will see lower fees; and insurers whose earnings depend on investment income.  And on a personal level, the new generation of retirees will retire later and with less income.

And more recently, Bloomberg reported that “U.S. markets are at their highest risk levels since before the 2008 financial crisis… according to Bill Gross, manager of the $2 billion Janus Henderson Global Unconstrained Bond Fund.” The article continues, “Gross said that ‘…returns are going to be lower.’”  These thoughts are echoing throughout the industry.

To prepare for the new era, investors are looking at alternatives.  Many are choosing real estate. And with good reason. In fact, as far back as 2012, a JP Morgan paper suggested that real estate is no longer an alternative, but rather a “way out.”  “An alternative no more.”  Just look at the endowment portfolios of major academic institutions, led by Yale whose successes are legendary. Yale has allocated 12.5% of its investment to real estate.

Maybe it’s time for you to consider diversifying your investment portfolio by adding real estate. Why?

Reduced Volatility
Real estate is stable, unlike the stock market that reacts to every nuanced whisper in politics or the economy.  It is not correlated to the stock and bond markets. Real estate offers a steady, reliable return.   Studies show that, by adding real estate to a mixed portfolio, you will see an increase in returns and, perhaps even more important, a reduction of risk based on return/unit of risk.
I’m not talking about a REIT.  A REIT is like a stock; it goes up and down with the equity markets.  I’m talking about a direct investment in private equity joint venture or a fund.

Cash Flow
Cash flow is the key.  You should receive, at the very least, six-plus percent annual return on your investment. Our goal in today’s market is yield – a reliable, on-going cash flow return.
And this is not about short term. The days of “fix and flip” passed us a couple of years ago. Now, we hold our properties for several years while enjoying the steady cash flow and substantial appreciation.

Hedge Against Inflation: Anticipated and Unanticipated
We factor anticipated inflation into our underwriting projections.  We expect an increase in expenses, and we project an increase in rents to cover them.  Remember, real estate is a hard asset.  As new construction costs increase, the cost of replacing the existing structure also rises (along with its value) creating yet another potential hedge against unanticipated inflation.
Capital Gains
When you get your money back, it is treated as capital gain, a favorable tax rate.

                                 The Private-Equity Real Estate Fund               

We like funds. You will, too.  But it is important to focus – and to focus on an asset class your partner knows and understands.

At Lloyd Jones Capital, our focus is middle-income housing. It’s what we have been doing for years. According to virtually every demographic study, the supply will never catch up to the demand.

And we focus on Texas and the Southeast, home to ten of the 15 fastest growing cities plus seven of the ten “best cities for job growth.”  We like to be where the people like to be. Plus, we have existing operations throughout these markets.

We like funds because you can spread the risk among various properties and geographic markets. A disappoint-ing performance of one asset will not affect the others. In fact, the others will most likely compensate for it.
We like eight to ten properties in four or more different markets for maximum diversification. We have operations in every market we serve, and our local presence gives us tremendous advantage in finding, acquiring, and operating properties within these territories.

Stand-Alone Entities
Our fund structure allows us to hold our investments property by property. Each one operates as a separate business. There is no cross-collateralization.  A market slow-down in one area will not affect the other properties. We prepare a business plan for each specific property, and we can choose individual hold terms and disposition times.

Alignment of Interest
We believe in our investments; we are thoroughly committed to them, so we participate financially in every one, alongside our investors.

So, what’s an investor to do?
I suggest that we all heed the words of today’s best-known economists and be prepared for the unknown future of the equity and fixed-income markets.  It would be wise to diversify your portfolio with multifamily real estate. Private-equity real estate offers protection from stock market swings and a hedge against inflation.  It provides a steady cash flow, appreciation, and great tax advantages.  What other asset class can say that?__________________________________________
About Christopher Finlay
Christopher Finlay is chairman/CEO of Lloyd Jones Capital, a private-equity real estate firm that specializes in the multifamily sector. For the past thirty-seven years, and through every economic cycle, he has owned and operated successful multifamily businesses. Predecessor companies include commercial brokerage, appraisal, property and asset management, construction, and development.
Headquartered in Miami, Lloyd Jones Capital acquires, improves, and operates multifamily real estate in growth markets throughout Texas, Florida, and the Southeast on behalf of institutional partners, private investors, and its own principals.

By: Champaign Williams, National Editor
June 29, 2016

As global interest rates plunge and bank yields continue to decline, investors are looking to multifamily assets for greater returns.

Lloyd Jones Capital CEO Chris Finlay tells Bisnow that a direct multifamily investment can earn up to 8% in returns with minimal downside risk—a plus considering recent financial market volatility amidst the Brexit fallout. Chris says real estate provides a strong hedge against interest rate changes and inflation.

In light of Brexit it’s needless to say that the opportunity to receive a return on a very safe investment in multifamily real estate is a compelling idea,” Chris tells us. “It’s a no-brainer. I would even suspect that European and British investors will be looking into the US to place more investments because we are the most stable and at this time prosperous country in the world.”
On June 10, Chris says, the 10-year US Treasury yield fell to its lowest close in three years—the worst disparity between yields on the 10-year Treasury he’s seen in his 35 years of business.
“What’s happened is the 10-year Treasury has dropped significantly and a lot of real estate returns are gauged based on a spread over the 10-year,” Chris tells Bisnow. “But if you buy what’s considered a core A-plus multifamily asset unleveraged with no financing you’d get a 4.5% or 5% return, versus if you bought a 10-year Treasury you’d get a 1.5% return. The return is three times as big; that’s pretty compelling.”

He suggests the following investment plan20% in direct multifamily real estate, 40% in stocks, 30% in bonds and 10% in alternative investments. Though multifamily guarantees returns, Chris warns that having a business division to oversee and manage properties is imperative. The investments firm offers both asset and property management and has been around since the early 1980s with offices in Texas, Florida and the Southeast.

“It’s so important to have an operations arm within your entity that’s capable of managing these properties,” Chris says. “Multifamily is all about operations and managing these properties on a day-to-day basis. If you don’t have that ability you’re at a significant disadvantage.”

See Also: 50 Years Later, The Fair Housing Act Continues To Evolve
Related Topics: 10-Year Treasury , Chris Finlay, Lloyd Jones Capital, Lloyd Jones Capital CEO Chris Finlay, Multifamily Investments
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