Debt vs. Equity Syndication
John Larson and the Real Estate Cowboys talk passive income real estate investing.
Hear new episodes every Sunday morning at 8 a.m. The Cowboys talk about debt vs. equity syndication, the differences, and the benefits. Want consistent cash flow? Think debt syndication instead of equity.
Keep the #CowboyCoffee hot while listening to John, and the Cowboys talk about how to #BeACowboy and earn passive income in real estate.
Announcer: Have you thought about becoming financially free through real estate investing, but don’t have the time or knowledge to get started? Welcome to the Real Estate Cowboys podcast. Each week we discuss passive income investment opportunities in the red-hot Texas market. John Larson and the Real Estate Cowboys will show you how to leverage their team to build wealth in real estate through passive investment opportunities. And now here’s John.
John Larson: Hello and welcome to another edition of the Real Estate Cowboys. This is your host, John Larson, about to head out on a flight to China for a real estate investment expo. Pretty excited about that. Going to Shanghai this week. Gotta get another episode of the Real Estate Cowboys out. Can’t leave my listeners hanging. This week we’re going to talk about the difference between a debt and equity syndication. Last week we were talking about good investment options coming into a possible recession or market correction. We talked about private lending. We talked about taking the role of the bank. I believe that that is an opportunity right now that can be, it’s a way to minimize risk, mitigate risks by taking first lien position and investing in a market like Dallas, Fort Worth; looking at project specifically in Dallas, Fort Worth, just because of the fact that the economy here really is so diverse.
You know, 49 Fortune 500 headquarters in the state of Texas, that’s second only to New York. Twenty three Fortune 500 headquarters in Dallas. There’s 21 down in Houston, five in other Texas cities. Uh, it’s close to 10 percent of the Fortune 1000 companies. Close to 10 percent of Fortune 1,000 companies have headquarters here in Texas. Over five percent of the Fortune 500 here in Texas. Texas has five of the top 25 fastest growing metropolitan areas in the U.S. The economic diversity of Dallas, Fort Worth and Houston makes it more recession independent than most. Example. Have you ever seen the big short in 2008, and Texas led the nation in building permits in 2017. That is over 50,000, over a 50,000 over second place, which was Florida. And currently leads in 2018 as well. So you see there is a huge need for new development in markets like DFW and Texas as a whole because there’s so many people moving here.
I believe it’s like 1200 people a day move to the state of Texas. That’s the average and 400 people a day move to the DFW area. And so when you have that type of growth, you have to…you need more roads, you need more retail space, you need more commercial buildings. DFW being the number one market in America in terms of where the most corporate headquarters are? That is Dallas, Fort Worth. And companies are going to continue to move to Texas because of the business-friendly landscape and then no state income tax and also the central location to the entire country. DFW airport is a hub for many international flights and many domestic flights, and it’s just, it’s a very, uh, you know, it’s, it’s, it’s very, uh, what’s the word I’m looking for? Convenient. Having a business in Dallas, Fort Worth is very convenient. It’s very easy to get to the west coast.
It’s very easy to get to the east coast. It’s very easy to fly internationally. Like I’m taking a direct flight to Shanghai right from DFW, so that is a very important factor in terms of doing business in my opinion and also operating in the central time zone is very important. Some people take that for granted. I love operating in the central time zone. I’m only two hours ahead of the west coast and only one hour behind the east coast, so it makes doing business very easy and so like I said, because of all these reasons, I expect companies to continue to move into the DFW area, which means more and more people are going to continue to move into this area, which means that there’s going to continue to be demand for new housing, new retail space, and new commercial space.
And that is why Real Estate Cowboys and American Real Estate Investments, my company, have been so focused on opportunities where I can let my lenders come in and be the bank and earn double-digit fixed returns on their money. Because I know that cash flow is really tough to find in a lot of real estate investment opportunities right now. Um, especially when you’re trying to invest in, in really safe markets. Markets with very diverse economies that can withstand a recession, which I’m telling you is, is definitely coming. And so we’re already starting to see the housing market like we discussed last week. It’s, it’s slowing down because of the fact that the interest rates are going up. So I think a lot of people are just getting really nervous right now when there’s really no need to be nervous just yet.
The bottom’s not falling out of the real estate market, but we definitely had to cool down the buying pattern that we’ve been on for the past eight years and especially in the past three to four years and especially here in Dallas. House prices were just rising really high year over year, you know, and that needed to be cooled, and that was just because of the fact that there’s very low inventory in the market and there was just too many buyers out there. A lot of investors here doing flips and a lot of retail buyers moving into the market looking for homes. That has caused the prices to skyrocket over the past three, four years and has really compressed the cap rate that you can achieve by building a single family rental portfolio in a market like Dallas. And it makes so much sense to invest in Dallas because there’s so many people moving here.
And obviously one of the main goals with a rental property is to keep it leased, right? So when you have 400 people a day moving into the market you know there’s huge demand for homes, right? For places to live. That’s why Dallas is, that’s why I moved here, you know, back in 2014. That’s what we started doing business here in 2012. It’s for that reason, businesses moving here, jobs moving here, which is causing people to move here. And we knew that we would be able to keep our properties, you know, ultimately it’s leased, you know, consistently. Now there’s still some, you know, bad eggs here and there that you have a tough time leasing. And when properties go vacant certain times of the year, whatever it may be, they could sit on the market for a little bit. I’m not saying it’s a perfect system or a perfect market, but I’ve worked in many other markets across America, and American Real Estate Investments has operated in 12 different markets across America.
And the data has shown us that it has been the easiest to rent properties and keep them rented in the DFW market. Like I said, the cash flow, especially when you’re getting a loan, with investor loans now reaching six percent, it’s very tough to get these properties to cash flow if you’re getting a loan on them. And obviously getting a loan makes sense for those who qualify for loans, it’s really compressing the cap rate in today’s market. And that’s not just in Dallas. That’s in a lot of other areas. You know, even Detroit, the cap rates have been compressed. Cleveland, the cap rates have been compressed. Some of these quote-unquote “cashflow markets, the cap rates are still getting compressed due to the higher interest rates and also property values and a lot of those markets have gone up as well. Now I don’t expect them to hold their much longer, especially with news coming out of the Midwest, Detroit where GM is talking about laying off 17,000 people, and I expect the other automotive companies to follow suit.
I’m not saying it’s going to be 17,000 people, but you’re starting to see the production of cars and car lines being cut out and I expect that to happen at Ford and Chrysler Fiat as well. If that happens. We saw what happened in 2008 when the. When the automotive industry was not doing well, you saw a lot of layoffs which resulted in a lot of foreclosures, which resulted in the and also other key factors, but that really helped a tribute to the extreme decrease in property values that we have. We seen that we saw, you know, at that time in those markets in the Midwest because those are cities that are very reliant on manufacturing jobs, and if there’s no manufacturing jobs and less manufacturing, people can’t afford their homes, and when foreclosures hit the market, that’s going to drive down pricing. Now for investors. I see opportunity, you know, I don’t know when it’s going to come.
Exactly. Expect the market to definitely be slower this summer than it was in recent years and that’s just due to the higher rates. But then with these layoffs, I do expect to see some more homes going into foreclosure, and that will drive down pricing, and at that point, that’s when you, as the investor needs to be looking to pounce. Okay. I’m also seeing some cooling in the Dallas area. You know, some of the some of the areas in Dallas, the higher price areas, uh, those properties are sitting on market longer. It’s forcing the sellers to have to decrease prices. That is where the correction is coming in. So it’s, it’s an exciting time — an investor who’s got some casts and liquid capital ready to deploy for in 2019, 2020. I do believe you’re going to get deals on properties. Again, you are going to see some higher cap rates on rentals.
And you know, we also discussed last week, and I talk about this on the show a lot, you’re going to find opportunities out there still in today’s market with the prices where they’re at. I’m back almost at an all-time high. And with the rates going up, you’ll still be able to find properties that look like they’re great cash flow producers. And rate of return producers on a spreadsheet, but in actuality, they’re going to come with more risks, so we talked about that a lot last week, not chasing a yield, being very careful, still doing your due diligence. You don’t want to just chase yield, okay, you chase a higher yield, you’re going to be just putting yourself in a higher risk situation — areas with higher crime areas that are going to have a tougher time renting areas. We’re not going to see appreciation with the property areas where your property can be broken into and vandalized, so on and so forth, and we do not want to purchase or invest in something that’s going to cost us money.
We want to invest in something that’s going to make us money, so do not, I’m telling you; be cautious. Do not chase a return just because you’re trying to hit a specific number and just run yourself into more risk. That doesn’t make sense if you’re an investor who is looking for a cash flow opportunity. That’s what we’re gonna talk about this week, talking about that syndications first, equity syndications. I’ll start really quickly on an equity syndication. Syndication is typically going to be, you know, an apartment complex flip where investors are coming in for some pref return because the property is producing income as is, but maybe the rents are below market, and the idea is to go in, renovate the property, bring the rents up, and maybe just do half the units and then sell this business in a box right to another investment group who you are able to show the financials. Here’s what the properties were renting out. Average rents let’s say were a thousand. Now the average ones are 1200. We only renovated half the complex. Here’s the other half. You can go in. There’s meat on the bone, right? So you’ll see a lot of equity syndications structured like that. There’s also equity syndications in new construction, building buildings, building hotels, building retail space, so on and so forth. But the thing with those, they’re more speculative than a debt syndication. A debt syndication, you’re guaranteed to get a certain return, and that is by taking the role of the bank and getting first lien position on the asset. Okay? Now there is no guarantee you’re going to get your money, your initial principle investment paid back. But there is a guarantee that you will receive a monthly dividend in the form of interest payments. Now the borrower could default. That’s where the first lien position comes in, right? And so if anything, you’re not going to lose your money. It’s not like the stock market; you know a company, you know, makes some sort of announcement that just totally depletes the stock or the company goes out of business. You lose the money. That’s not the case with debt syndication because you still hold title to a property, still have the deed, and that’s a great way to protect you as an investor. And, and like I said, with an equity syndication, it’s more speculative in terms of the sponsors, the people that are managing this opportunity or offering this opportunity. They believe they’re going to be able to sell the property at a certain price, which is going to then get you your return. And with equity syndications, you’re not seeing immediate returns. But in most cases you can see higher returns, sometimes 30, 40 percent, whatever, it may be, as high as that. But that is based on the belief that they’re going to be able to sell the property at a specific amount.
Now me, myself, as an investor, I’m a little nervous to get involved in an equity syndication in today’s market because I do see the market correcting itself. I am seeing layoffs coming, and so that makes me a little bit more nervous because if it’s an equity syndication where it’s at two to three-year plan, sometimes even longer than that before you’re going to see your return. I just feel like there’s just too much. It’s too risky right now. There’s too much going on with the market, with the interest rates rising, so on and so forth. Now the layoffs are coming. I just believe that it’s not the best time to get into equity situation where you are forecasting a potential profit, and you’re basing your returns off that. With debt syndication, you know, you invest $100,000, $200,000 into debt syndication.
You have first lien position, in many cases, these buildings are already going to be there, constructed. Like an offering, we have right now is an office building in North Dallas that is already cash flowing. And so our investors are loaning on purchasing the building, doing a renovation, upgrading the building. Last time it was updated was in 2005, so there is a need for some updating, adding in some more amenities like a cafe or something that makes, you know the tenants want to stay, adding amenities to where we can increase rents year over year and also there’s three vacant units where you know, we want to get those occupied and adding a cafe and updating the building. The outside and the inside will help with getting that property fully stabilized. So that’s what the investors are lending money on, purchasing the building and renovating the building. At that point, we have a couple of different scenarios. We could flip the property back on the market and sell it. We’ll test the market obviously and in Dallas, there’s still a high demand for this type of real estate opportunity. This type of real estate space, commercial office space, or what we’ll do is just refinance and hold it as a company. I don’t mind holding a building like this. The building’s already valued at 4.2 million.
We’re only asking our investors to come in for 3.5 million. And so that is a syndication. Not one person is coming in at 3.5 million. It’s a group of people coming in at the 3.5 million and that is how we are able to provide the investors with a multilevel deed of trust. So a multilateral level deed of trust basically means that we have multiple lenders on one deed. Okay. And that multilevel deed is composed of the list of beneficiaries instead of a single beneficiary. So instead of a Bank of America or Chase on the deed of trust, your name is listed along with others on the project.
And the more money you contribute to the loan, the greater your beneficial interest is in the project. Let’s say a property does go to foreclosure. Let’s say you lent $250,000 and the majority of the others lent $50,000 or $150,000 or $100,000; you would have more say so in how we’re going to proceed with the foreclosure and the exit strategy of the building, right? Maybe it makes sense to hold the building and cash flow, disperse the cash flow among all the beneficiaries and then maybe sell it later. Maybe it makes more sense. Hey, the market’s still good now let’s, let’s, uh, foreclose, let’s get ownership of the property and then we as beneficiaries, we’ll put it on the market and sell it and get our money back that way. Either way. I mean there’s a reason why banks lend money. It’s because you have first lien, right? So the worst case scenario, the borrower does not pay, you take the property back.
So that’s essentially what we’re offering our investors and we’re able to offer them a double digit return. So if you’re looking for cash flow specifically, you don’t care about the tax benefits, you’re just strictly looking for cash flow, private money lending is a great option. And you can also do private money lending through your IRA or 401K, where then those monthly dividends could go back to you either tax free or tax deferred depending on what type of structure you have. If it’s a Roth, self-directed Roth, those interest payments are going back to you tax free. If it’s a traditional self-directed account, uh, that the taxes are deferred. Now, once you hit 59 and a half and you want to take a draw from the account, you would pay no taxes on that. And so it’s a great way to build a retirement account.
Whereas with a rental property, there’s still benefits of buying rentals, but when you’re buying a rental through an IRA or 401K, there’s no real tax benefit, right? Getting your rental income back to you tax free or tax deferred. And if you were to sell the property within the IRA or f401K, the profits would go back to your tax free or tax deferred. But you’re not taking advantage of all the other tax benefits that are available to you outside of the IRA, which is why most investors like to purchase with cash and leverage because then they’re getting paid in up to six ways, right? And also with buying a rental property with an IRA or 401k, there can be problems. You know when you’re buying outside of the IRA or 401K, any losses you’re able to write off, right?
But if you have vacancy within the IRA or 401K, if you have a break-in, a theft, a vandalism, right? When you’re buying these properties in more distressed areas because you’re chasing that yield, it can turn into a money pit and really deplete that IRA or 401K. Whereas with a private lending model, you are just growing your account. You are supplementing your income into that account, you’re growing that account through the monthly dividend that you’re making by loaning money through the IRA or 401K. Okay? And it’s a very passive passive model. Owning rental properties, there’s going to be instances where it’s not very passive. You’re going to be on the phone with your property manager, lengthy emails back and forth trying to figure out how to get the property back on track. You’ll get maintenance bills that are sent to you.
You’ll have tenants that are making maintenance requests. Now, property manager’s assisting with that, but you know, if you hire a property manager. If you don’t have a property manager, that’s definitely not passive. Anyhting but passive. The property manager’s going to try and make it as passive as possible. In actuality, meeting an owner of rentals, me flipping thousands of homes, uh, I know how many things can go wrong with properties. There’s a lot of stuff. And so you know, it makes it anything but passive. Now, with a private lending model, you lend a good borrower, someone with a good track record in a good market where you know there’s demand for that type of property that you’re lending on. So you should be able to have a safe, easy exit. That makes sense. That makes sense. 10 and a half percent annually, which is what some of our officers have been, 10 and a half percent annual on your money. And you get your money back in a year, 18 months, maybe, you know, some could go as long as two years, but in most cases our offerings are 18 months. You get that initial money back and then you can reinvest that money. You know, you can just roll it into another private lending opportunity if we have one, or if your borrower has one. And that’s what a lot of investors are doing. Many investors, they might just do just the single deed and just loan on a house flip.
Now, I wouldn’t be really looking at loaning on house flips right now with the way the interest rates are going up. I have to imagine that the attractiveness to purchase a home right now has got to be lower than it was a year or two, three years ago. So I don’t know if I’d be loaning money to do house flips right now. Also, you know that money that’s going to come back to you is going to be based on what the borrower and house flipper believes he can sell the property at. I’m seeing prices being decreased around the country daily. So just because today they believe they could sell the property for $450, half a million dollars, and really they’re only able to sell it for $400 or $350. How are you going to get all your money back? You’re not, you might only get a portion paid back. So, I like commercial because, you know, or loaning on commercial because it’s income producing. Uh, the way the properties are traded is on cap rate, not on market value. And so, you know, as long as you are able to put together a property that’s in a spin off of six, seven, eight percent net cap, you know, you, you will find a buyer for that property. Okay. And so it’s just a little bit more cut and dry with commercial and retail space. It’s basically, you know, what is the property, how much income is the property producing? You know, it’s all about cap rate. It’s not about market value. With single family homes, it’s all about the market value. And if there’s high interest rates, which is slowing down the buying pattern and layoffs coming and foreclosures hitting the market, then the property value can go nowhere but down. And that is out of your control as the borrower or the house flipper. It’s just, there’s no control of that. So for those of you who are thinking to yourself, hey, I’ve done, you know, an equity syndication or a debt syndication; you know, maybe it was successful. I’ve spoke to some people that have had some unsuccessful experiences on equity syndications and they’re so, you know, they like the idea of the debt. They liked the idea first lien position and they liked the idea of fixed double digit returns, right? They don’t want to hang in the realm of speculation, or hey, best case scenario, we’re going to sell the property for this. But then, you know, worst case scenario comes about and hey, maybe the project doesn’t get finished. Or you know, like I said, it doesn’t sell at the price that the sponsor or project manager, borrower thought they would be able to sell it for. And now you’re in a situation where you thought you were going to get 30 percent, 20 percent, whatever it may be, returned and now you only get a five percent or no percent or negative percent return on your money. So most of my investors like to come in on the private lending model because they know what they’re going to make each month to the penny. Their only risk really is if the borrower, does not pay. And then at that point you own a commercial building in a Dallas market, right? Lot Of, a lot of interest lately on the debt syndication side and, and also, you know, I’m looking at in the next couple of years, the banks may slow down lending money on new developments and things like that. And I think that building a relationship with my investors to build a private lending program and proving out and getting their money paid back will help me through a time where maybe the big banks aren’t lending money. Or the, uh, terms are just not attractive. Um, you know, and you’ll find that in a recession. And so if I have a group of investors who have already been private lenders on other deals and they made their money back and made their 10 and a half percent return, there’s a good chance they’ll reinvest it with me, you know, even during the recession.
Because during the recessions is when you’re going to get your best opportunities. You know, that’s when the best opportunities hit the market. That’s when people are able to make money. If you’re cash heavy during a recession, you can make a lot, a lot, a lot of money. Think about all the hedge funds out there that were buying up properties like crazy back in 2008, nine, 10, 11, 12, 13, until they started slowing down because of the cap rates really weren’t there because the prices have rebounded and, and started to become so high again to where the cap rates just weren’t there. Especially in markets, big markets, Atlanta, Dallas, uh, markets that were growing by leaps and bounds. That would be one of the main differences between the debt and equity syndication. That syndication, you know, what you’re making each month, you’re seeing an immediate return. Whereas an equity syndication is going to be, you know a return in the future could be a larger return, but there’s more speculation that is tied with it. Okay. And so how does this whole thing work?
Basically it’s you and a group of other accredited investors who are loaning on a development opportunity in, let’s just say the Dallas Fort Worth Market for us, because that’s what we’re doing. And our accredited investors take on the role of the bank receiving first lien position on the asset by receiving a multilevel deed of trust with a group of other beneficiaries on there. And it’s executed by a title company, a local title company here in Texas. So for all our deals that we do here in DFW, we have a local title company who secures the loan through the deed of trust. And these deals are also a secured by the protection set forth by the SEC and rule 501 of Regulation D. There’s also a promissory note that is signed between us, the borrower and you, the lender. And that formalizes the agreement between us to receive your monthly interest payment.
Okay, and so a lot of investors are liking this, right? And one of the main things is how do I get paid. So you, the investor lend on a project along with the others and you loan the money to us, the borrower, and we also serve as the project manager. We have a lot of experience obviously flipping homes, creating, building rental portfolios for investors, land developments. We’ve been doing single family lot land development down in Houston for years. Um, and we’ve been building commercial buildings in the DFW market and mixed use commercial buildings. So we have a lot of experience in that aspect. Also, I mean us, our development partners, we develop private islands on Belize, we develop luxury homes on Belize. So we have a lot of development experience on our team and a vast amount of projects, right?
I mean from private island development to flipping a house, uh, that’s how much experience we have in this field. So obviously finding a good partner that has good experience and good track record and then obviously putting the money in a market that you feel like even during a recession, even during an economic downturn, there should still be demand for that type of a property. Right? That’s very, very, very important. So as I said, we serve as the project manager. It’s our job to complete the project. So for example, in the current offering that we have, purchasing an already almost fully stabilized office building that just needs a facelift. We’re going to go in and do the facelift and then we’re going to go ahead and get it back on the market for sale or, like I said, refinance and hold it. Uh, it almost makes more sense to just refinance and hold it. It’s a beautiful building. Almost already completely occupied so we’re cash flowing day one. And just needs a little facelift. That’s it. So I love deals like that and we’ll be out of that project in 12 months. Our investors are going to get their money back in 12 months and this is a deal that we’re actively raising for. So if this sounds interesting and you have this sounds interesting thus far, go ahead and get on our website RealEstateCowboysDFW.com. Put in your information. A member of our team will reach out with more information. Uh, you must be an accredited investor for this offering. If you just say that you are accredited, we can then get you the ppm to review the deal and we can also give you details on how to move forward with the opportunity. Uh, you can also go to American Real Estate Investments website, AREIUSA.com. Throughout the 12 to, let’s say 24 months of the development. You will receive a monthly dividend just like a bank would. You’re Chase Bank, you’re loaning money on a commercial development, whatever it may be. In return that borrower is paying you a fixed monthly principal and interest payment, right. In this case it’s interest payment, but you are getting that money paid back from the borrower. And at the end of the project, you as the investor will have the option to roll your principle. So let’s say you invested 100K on this Carrollton office building, this North Dallas office building. And after a year it’s comes time to pay that $100,000 back. We will have another deal lined up to where you could then just roll that $100,000 into another opportunity. So when we go to pay back, instead of the money going into…the money would just then go into another opportunity. I believe it is going to have to come back to you, especially if it’s an IRA, it’s going to have to come back to you and then you have to do another, direction investment form into another investment. But if it’s just cash, we could just then roll the cash directly into the next project and just keep the money working for you.
We’re about to come up on the holidays here. You know we’re going to take breaks from work. We’re going to go do things with our family. We’re going to go do a vacation, whatever it may be. Like I have a cruise planned with my wife, she’s very excited about, but I have money working for me. So even though I’m on a cruise in the Bahamas, I have money working for me back in the U.S. That is the idea. Money does not take breaks. It does not take vacations. It does not take up time. Take off time from work. If it’s invested in the right opportunities, even while you’re relaxing that money is working for you. When you’re going to bed at night, that money is working for you. Think about that. Private lending opportunities like this are great, great way to make money when investing in real estate. So that’s great. And then like I said, we can just continue to keep that money rolling for you for as long as you’d like. And you know, you do always have the option to pull the initial investment when the deal pays back. But most people just like to continue to keep it working. Right? If your $100,000 made you 10 and a half percent last year, why wouldn’t you want to let it make 10 and a half percent for you this year too. You know, unless you get a better opportunity where you can make more. But ten and a half percent in a market like Dallas is actually a really, really, really solid return. Okay, we’re going to take a quick commercial break. When we come back, we’ll talk a little bit more about the difference between debt and equity syndications and we’ll talk more about using your IRA and 401K, and then we’ll talk a little bit about the risk that’s associated with, you know, any type of syndications, but debt syndication specifically. So let’s take a quick commercial break.
And welcome back to the Real Estate Cowboys. This is your host, John Larson. This week we are talking about the difference between debt and equity syndications. So I want to talk a little bit about what the typical projects are that we’re doing. So right now we’re raising capital for an office building that’s already there. It’s already built. There’s already tenants in there paying rent each month. There’s a few unoccupied units because the seller sold some of his businesses that were in the building, which is also what’s prompting him to sell. He just wants out of the opportunity. I’ve been working this deal for a long time. I finally got the seller down to a price that just makes absolute sense. So that’s what we’re going to raise it for now. And then the building hasn’t been renovated since 2005. So we want to go in and do a facelift to the inside and the outside and and get this thing fully occupied obviously. And then the exit strategy would be to then sell or to refinance and hold as a company; which we hold a lot of real estate here at American Real Estate Investments. And so other opportunities that we’ve offered lately. We just did a couple of mixed use commercial buildings, new developments, new construction in South Lake Texas, which is a very wealthy suburb in the US and the wealthiest suburb here in Dallas. And there’s a huge, huge need for office and medical space out there in uh, South Lake and just DFW as a whole. And really the entire nation. There’s a huge demand for medical space. Uh, the baby boomers are getting older. Some of them are getting to an age where they need care and you know, these, the medical space is just really booming right now, so we’re trying to take advantage of that. But our land development projects are typically going to fall into one of four categories and that would be a single family residential land development where we’re going to go find a raw piece of land. We’re going to put the infrastructure in; roads, sewers, electricity, so on and so forth. Get the land ready for large national builders like David Weekley, Century Homes, large companies to come in and then buy the lots from us and build the homes on the lots when they’re ready to go. And then on most cases we’ll have a improvement district set up wherever we’re doing these land developments, so in Houston we’ve had Harris County, which is Houston Improvement District, where all the work that goes in for the infrastructure for the roads, so on and so forth, is then reimbursed by the county. And you’ve got to think why would they want to do that? Well, right now they’re are only making taxes on a raw piece of land, right? Which is not very much, but when we turn it into a bunch of single family lots where you have homeowners paying yearly property taxes there, obviously that increases the revenue that they’re going to be able to bring it in. So it makes sense for them to give us money back for the development in the form of a BAN, which is a bond anticipation note.
So they know once the lots are completed and homes are built on them and people move in, they’re going to then start to receive much more in tax revenue through having a developed subdivision. So that’s one thing that we specialize in, mainly focused on in Houston on these opportunities because of the improvement district that we have set up. The next one would be a commercial land or property development. So we’ve done deals where we went in and developed land to then sell lots off for commercial buildings. In this case, uh, that one was South Lake. We actually own the land. We developed land and then we were going to our investors to then purchase a lot from the actual development, the land development, and then build a three, four unit, mixed use commercial building. So it’s zoned for office or medical. So we’ve done those.
Uh, multifamily real estate flip. You would see these, you know, a lot of these are set up is as equity offerings, but a multifamily would be, you know, going to buy an apartment and renovating it, bringing up the rents and increasing the cap rate and then going ahead and selling it or you know, renovating half of it and then flipping it back on the market and sell it kind of as a business in a box. Or you know, going in and doing the renovation, getting it, bringing up the rents and then refinancing the building and holding it. But that’s another one that we are able and have the capabilities of doing. And then a commercial real estate flip, which is what we’re doing right now with the office building that I’ve been talking about on the show.
So a lot of investors are going to ask what is my risk? And you know, think about it. The safest position to be in a with any deal is the bank. The bank always gets money one way or another either in the form of principal and interest payments or through foreclosure. Right? So by taking the place of the bank, and our debts syndication are accredited, investors are in a secure position protected by Rule 501 of Regulation D; it’s backed by a promissory note like we discussed and first lien position on the asset, which, that is going to be secured through a title company here in Texas. You’ll be listed on that deed of trust with the list of other beneficiaries. That is how your loan is secured. The promissory note is between us as the borrower and you as the lender to pay you that fixed dividend each month.
In an equity syndication, you assume more significant risks. You rely on future payouts and depend on market projections. And like I said, coming into the market that, the shift that we’re seeing in the market right now might not be the safest investment to go for an equity syndication based on potential profits potential. Uh, what we’re going to be able to sell it at potentially, right, down the line. I just feel like that we’re coming into risky time with today’s market. And you know, like a bank, you’re going to assume the lowest risk by earning payouts immediately, right? That’s a good thing about this. And that’s what’s so attractive to most of our investors. They loan money, the money sits in escrow until we’re ready to close, which typically, it takes 45 to 60 days to raise for these opportunities. And then after that 60 days you start receiving your interest payment and hey, if you’re one of the guys that comes in at the end of a raise, you can start earning a return in as little as 30 or less, 30 days or less.
So think about that. You know, this is a good, good opportunity. So if you’re looking for some investment opportunities to close out 2018 and ways to supplement income or income within your family, you know this is a good opportunity that you should be looking at. Now you must be accredited. Most of our investors that come to us are accredited. So no need to be worried. But I would look into these opportunities. You know, let’s say there was a foreclosure. Well, basically you would hire an attorney, you and your beneficiaries that are on the deed would hire an attorney and the attorney here in Texas will do, and they can facilitate the foreclosure process. Okay. Let’s go back to using your IRA and 401K. We talked about self directing your IRA. You got to self direct first and foremost to become a private lender through an IRA or 401K.
But this is starting to become more and more and more popular because investors just can’t deny the fact that hey, the first lien position protects me and I’m also a earning double digit fixed returns in a very, very passive manner. And so I’ve been speaking to a lot of guys in the industry and, and you know, when anytime I’m out and about, I run into people and I ask what they’re investing in and so many people have been telling me how they’ve been doing private lending through their IRA or 401K and it’s been so successful for them. I was speaking to a guy who has a million dollars that he’s put to work in an IRA, through an IRA, a self directed IRA that he lends out to real estate developers and he’s got a guy in the middle who kind of vets out the deals, make sure they’re good and then just kind of lets him know, hey, I would go with this one. And then he helps them place the money in these opportunities with these borrowers. And obviously this is, these are guys that are proven developers, proven borrowers, and he’s making over $100,000 dollars a year just through lending money through his IRA or 401K. And that money’s come back to him tax free or tax deferred. I believe, tax deferred. I believe he’s getting close to 59 and a half. But that, that was, you know, great story to hear from the guy who’s really seeing huge returns in passive returns, uh, through the private lending model. So if you’re listening to show and you’re really just primarily a single family rental investor and you’re noticing that, hey man, it’s just been really tough to get cash flow in today’s market. Now these rising rates are killing me. Look at private lending, you know, there’s not really any tax benefits with it.
Um, but you know, even if you’re the guy that makes a lot of money adn you’re ina high tax bracket, you know, think about it, 10 and a half percent, even if you have to pay 40 percent of that back to the IRS, you’re still making six and a half percent passively. That’s still better than what a lot of guys are doing in the stock market that are just, you know, kind of just in the stock market passively. You know, Edward Jones, these guys are watching their portfolio. You know, that’s still a solid return. Six and a half fixed. Even after the taxes are paid back to the IRS. Not that you know, especially because of the fact that it is very, very passive for you.
That’s pretty much it for this week. If you are interested in learning more about these opportunities and the current raise that we have going on now and North Dallas, go to RealEstateCowboysDFW.com or to AREIUSA.com, which stands for American Real Estate Investments USA.com; just put your information in and a member of our team will get the PPM out to you so you can review it.
Obviously, you must be accredited to review that PPM. But, um, you know, we’ll get you the information out so you can do your due diligence. But this is a pretty high offering right now. I believe we’re going to be able to get this thing closed out by before the holidays. Um, that’s the goal. Um, so if you are interested, go to either one of the websites that I just named and put your information in. I think it’s a great time to get into a debt syndication here in a strong market like DFW. Um, so take a look if you are interested and we will instruct you how to get involved on the next offering. You can start earning double digit returns on your money as early as January. So let’s help us get this deal funded. If you are interested. Other than that, you know, if you’re just interested in browsing, our website is getting more information on all the opportunities that we have, single family rental ownership, um, if you’re looking for some tax benefits as well.
A little tax shelter here towards the end of the year, single family homes, a great way to do that, single family rentals. And we also have our private island developments and luxury properties that we are developing down in southern Belize in Placencia. Still great great opportunities down there in Placencia to buy real estate at an affordable price. And with the fractional model that we have down there, um, not a time share, a fractional model where you can own these properties with other people to make it more affordable. And we all know you’re not going to be on your private island in Belize all year round. So when you’re not there, why not let some of the owner, other owners, your partners, use the property, and when all of you are not using the property, we rent it out for you so the property cash flows. Okay? So great, great opportunity there. So if you’re interested in learning any more about what we’ve discussed on the show today about private lending goats, go to RealEstateCowboysDFW.com or to AREIUSA.com. I’m going to be heading off to China. So until next week, take it easy Real Estate Cowboys. Do your due diligence. Let’s get your money working for you so you’re not working for the rest of your life. And always remember, what is your return on life? This your host, John Larsen, see you next week.
Announcer: All opinions expressed by the host of the show are the opinions of American Real Estate Investments LLC and do not reflect the opinions of guests or sponsors. No personal or professional advice on this program should be considered an endorsement to follow a real estate financing or investment strategy. Before acting on any information, seek advice from your financial tax, mortgage or real estate advisor, as the information is not guaranteed and investment strategies have the potential for profit or loss.