The Investing Landscape
When it comes to real estate, commercial markets offer a lot of investment opportunities. In fact, over 90% of the world’s millionaires gained the vast majority of their wealth from real estate.
At Fish Capital Investments, we’ve chosen Colorado for its strong real estate market and the constant demand for multi-family properties. The mountains and lifestyle offered by Colorado, along with the increasing job opportunities in our thriving metro cities, are attracting a large number of renters to Colorado.
Using our investment strategy, we can target and invest in large multi-family and commercial properties that are stable, opportunistic and value-add to spread both the risk and the return across our pool of investors. But the investment landscape can be challenging to navigate. That’s why we’re here to walk you through the commercial real estate market and where Colorado falls into that market.
Once you understand the investment landscape — and how Fish Capital Investments uses our strategic model to find the best investment opportunities — you can become an investor and start investing passively with us.
Commercial Real Estate (CRE) Investment Opportunities
Before delving into the method our fund manager uses to decide which markets and assets to invest in, it’s important to understand the different components that create value in real estate. From cash flow and equity to appreciation, these are good terms to understand.
Cash flow is the primary motivator for investing in real estate. The cash flow is the excess profit that goes into the owner’s pocket once operating costs and other expenses have been taken from the revenue.
For example, we can buy a $1,000,000 property that produces $110,000 annually in rents. Operating costs are $50,000 per year. The remaining $60,000 is the cash flow for the owners.
Leverage allows investors to increase risk to help increase returns. When you put down a fraction of the property’s value, you receive cash flow on the entire asset using that leverage.
For example, you can put down $250,000 cash on a $1,000,000 property, leaving you levered at 75%. Out of that $60,000 cash flow, we pay $33,750 in mortgage interest, leaving us with $26,250 profit. That means the return on the levered cash (the $250,000) is 10.5%.
Equity assigns a percentage to the value a homeowner has in their investment property. To find your property’s equity, you take the value of the property minus the amount of debt you have. If the value of your property increases, your equity increases. Additionally, if you use a portion of the income generated through rents to help pay off your loan, your equity also increases.
For example,we put that $250,000 cash down on our $1,000,000 property. This means that we would have 25% equity on that property because we still owe the other $750,000 through loans.
Appreciation is the increase in value of your property over time. In residential real estate, the appreciation rate changes based on market conditions and the value of other similar properties. But, in contrast, commercial real estate is dependent on the value that specific property produces. Similar properties can have different appreciation rates because the income they generate varies significantly.
Capitalization (or cap rate) also plays a large role in appreciation. Cap rate is the ratio of the rental’s net operating income (NOI) to its purchase price. Cap rate is also a good indicator of risk, where a high cap rate signals a high risk investment.
For example, if we want to calculate the appreciation of our $1,000,000 property, we will have to look at the income the property generates. We take that purchase price and find the ratio for an NOI of $60,000, giving us a cap rate of 6%.
From there, to help increase our property’s appreciation, we want to increase income. If we raise rental prices by 2% each year, we would be making $66,244 by five years. If our property appreciated to $1,104,066 (with the same cap rate); our cash investment stays at $250,000; and our property’s value increased by $104,066, then that means we’re seeing an 8.3% return on our investment.
If you own commercial real estate, there are certain write off and tax deductions that property is eligible for. There are also other mechanisms, like 1031 exchanges, that are useful in helping you defer gains and keep your money working for you. If you’re looking for tax benefits associated with commercial real estate, it’s always best to see your CPA, or Certified Public Accountant, for more advice and information.
Value-add is the idea of investing additional capital into your asset in order to reduce risk or increase rents.
For example, let’s say our $1,000,000 property has 10 units. We know that these units are older and if we invest $5,000 per unit, we can raise rent by $100 a month. In total, we’re investing $50,000 into our property for an additional $12,000 gain a year, which comes out to 24% cash-on-cash return for that investment.
There are also other factors to consider when working with value-add. With that increase in rents, the NOI of our property increases to $72,000, making our property valued at $1,200,000. But these improvements also changed the risk of our asset with a new cap rate of 5.5% instead of 6% because less maintenance is needed on the building. This means that our property could now be sold for $1,309,090. If rent continues to grow — like we mentioned in our appreciation example — the returns will continue to compound over time!
Independent Versus Passive Investing
Now that we have the terminology, and math, out of the way, we can delve into the benefits of investing passively instead of investing independently.
When you invest independently, the cash you lay down on your property is usually your only investment. This means that all of your risk is contained in one or small number of single properties. If you get unlucky with a tenant, it might end up costing you more than your NOI.
Passive investing, or real estate syndication, reduces that risk tremendously. Instead of having all of your investment and risk in one property, your risk is spread across a pool of investors and wide range of properties. When issues arise with tenants or needed repairs, they are professionally managed and anticipated by the syndicator. This means that you don’t have to do anything! It also means that you don’t have to be an expert in commercial real estate management because you’ve chosen a fund manager with that type of experience.
The Fish Capital Model
At Fish Capital Investments, our fund manager has over 17 years of experience in the Colorado real estate market. This puts him in a place to effectively and properly manage our investment opportunities.
Sometimes real estate syndication can be set up around a single asset. The syndicator will identify a specific asset they want to buy and will present that investment to potential investors. This lets investors know exactly what they are purchasing.
At Fish Capital, we also use a different model. We creates funds that are not centered around a single asset. Instead, we raise funds from investors so the syndicator can go out and buy properties based on a set of predetermined criteria. There are a number of reasons this is effective, like creating diversity, the benefits of moving quickly with cash, and less distraction.
Since the fund manager will have the ability to purchase multiple assets, risk is spread across the investment portfolio. This also means that the fund manager can invest in a diverse range of buildings — including small or large apartment properties or commercial assets— in different areas around Colorado. That way, investors funds are not attached to one specific asset.
The real estate market is very competitive. That is why at Fish Capital, we believe that cash is king. This means that having the cash to put down on a new investment helps improve our chances of getting that property. We can outbid other syndicators using our cash as leverage and provide less risk for the seller. As a result, we can often close a deal faster and beat our the competition.
Taking time to perform due diligence on a potential investment opportunity is one of the most important aspects of investing. If the syndicator is worried about raising funds to purchase the property, they have less time to spend uncovering and researching all aspects of the property.
Instead, using the investments stored in our fund, we can spend more time focusing on researching and closing investments. In the long run, this increases the probability of high returns and reduces risk.
Increase Returns And Lower Risk
We know that the investing landscape in Colorado is filled with promise and the potential for high returns. Through our Fish Capital model, we are committed to increasing returns and lowering risk for our investors. In fact, we aim to return 11-13% of each investment back to our investors annually.
Become a passive investor with Fish Capital Investments and trust our syndicator to find the best investment opportunities throughout Colorado.
For more information about the Colorado real estate market, you can download and read our Colorado Market Report.