Multifamily: The Low Cost & Transparent Alternative

Part 6 of a 10 Part Series

Multifamily Investments are both Low Cost AND Transparent!

Do you understand how annuities calculate your rider fees? Can you explain which load fees apply to your share class? Or how your mutual fund determines its 12-b1 fees? Are you already lost? I worked in the traditional investment business for nearly 25 years and the number and types of hidden fees in today’s most popular investment vehicles often left me scratching my head too!

Ok, to be fair, they are not technically hidden, you can find them somewhere in those 65 pages of disclosures and disclaimers you signed when you gave the bank your life savings. Just in case you missed it in the heaps of documents, here are some of the fees and charges that may lie within your contract: administrative fees, expense fees, surrender charges, mortality and expense risk charges, commissions, rider fees, redemption fees, transfer fees and distribution fees. Wowza. That’s quite a list. Is your head spinning yet?

Mutual funds often confuse people in other ways. Your broker will advise you which funds to put your money into, but then it goes down hill from there. You will receive a prospectus in the mail, but it will cover multiple funds with multiple classes. First you have trouble figuring out which information is relevant to your investment, then, you can get overwhelmed wondering which fees apply to you. I was a trained professional and I still found them bewildering.

Well, I have good news for you. When you invest in existing multifamily properties, there are only three primary fees and they are disclosed before you make your initial investment.

The first one is the acquisition/disposition fee that relates specifically to the purchase and sale of the property and land. The sponsors often underwrite and pursue dozens of potential deals to find the one they are presenting to you so the purpose of the fee is to help the sponsor defray the sunk costs on all they properties they did not acquire. This fee, typically 1-3%, is clearly outlined in the offering memorandum. No digging. No surprises.

The other standard fee is the asset management fee to manage the day-to-day operations at the property level. The asset manager oversees operations and makes decisions regarding the asset itself, such as choosing the property manager, determining and adjusting strategy, making key decisions on leasing and capital expenditures, reviewing and approving property-level expenditures above a certain threshold, reviewing monthly accounting reports, and making recommendations to an investment committee on when to sell or refinance. Market rates average about 1-2% of gross revenues or equity annually and are clearly disclosed in the offering documents.

The final expected fee is the property management fee. Someone needs to deal with those leaky toilets and clean the swimming pool, right? As a passive investor, you should be thrilled to make sure that someone is there to knock on tenet doors each month since the value of a property is largely determined by collected rents. You will see this fee, usually 3-4% of revenue, clearly itemized on the operating income statement. No need to hunt for it.

As I’ve mentioned before, I’m thrilled that I found multifamily as an alternative to traditional investments for my clients. Just in case you missed some of the reasons why, you can review Part 1 that explains how interest rates work for you, then go to Part 2 that discusses how multifamily provides consistent income, or Part 3 that demonstrates why cap rates are so powerful, on to Part 4 that highlights why multifamily has a lower risk profile than other investments, and finally Part 5 outlines all of the tax breaks offered to passive investors like you.

 

I hope that you found this helpful in your quest to find the best place to invest your nest egg. We at East Light Investments would love to discuss the possibility of partnering with you. Please don’t hesitate to contact me directly if you have any questions.

Karen Oeser, CFA
Principal
karen@eastlightinvest.com
864-551-1820
www.eastlightinvest.com

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