We welcome you back to part 4 of our TIC Investment Series with Karlin Conklin of IMG Northwest! David and Karlin cover all things Tenancy In Common, starting with how to buy in to this type of investment.
What You Will Learn:
- Why timing is critical.
- What goes into buying the asset.
- How an investor can get out of a TIC.
Read the Full Transcript
David Moore: Hello! David Moore of Equity Advantage. And once again, I’ve got Karlin Conklin of IMG here, and you’re probably saying, “When is he going to let her talk about how to buy one of these things? I want to buy in. How do I buy in? What’s involved with buying in? So, Karlin, what’s involved with buying in?
Karlin Conklin: Well, number one, timing is critical. Because we have a maximum, most often 10 tenants in common spots in a deal, up to possibly 15. It’s not like we have openings all the time. Most of our clients, what they do is they contact us before they ever put a property on the market, they contact us again when it’s gone in contract, and we coordinate their closing, even if they have to drag it out, so that they can get into one of our acquisitions and fit within the nomination at minimum.
So it’s more difficult to get into ours than probably most other vehicles that they could place their money in. But if somebody decides that they would like to invest with us, we have an opening, perfect, we would between the tenancy and common agreement, asset management agreement, the subscription agreement, those are documents they must review and go through, because we want to make sure that going in, we have an ownership group that is like-minded. And when that happens, like I said earlier, real estate’s the easiest game in town. Each of our tenants in common is on title, each submits financial statements through us to the lender, and we close the entire transaction on one day.
David Moore: So basically you’re securing asset, doing all the due diligence, figuring it all out, “Yeah, this is a project IMG wants to take off and take on,” and then you’re going to fill the bucket with investors. And when it’s full, you’re going to buy the asset?
Karlin Conklin: Yes.
David Moore: So that’s why timing is critical, and Karlin made a comment earlier, and because of her background, her education and her control, she wants you to talk to her before you sell the place, alright? So people ask me all the time when I want them to think about an exchange, I’m going to tell them when they buy the property, but at least when they come and place the sale.
Karlin Conklin: Yeah. And in today’s market, many, many transactions are a standstill or the sale is failing, and so the opportunity to buy is less today than it was, say last year. And we’re counseling a lot of our clients to just sit tight for six months, because you don’t want to sell with nowhere to go. And we are not a syndicator who’s looking specifically to fill a bucket with one client, we are looking at many, many, many clients. And so today’s moment in time is one that is a little bit dicier for transaction velocity. Stuff is getting done, but not quite like it was in 2020 or 2021.
David Moore: For you guys, when you’re looking at these deals, you’re tying up the assets, and you’re selling them. But you guys are investors also, we’ve already talked about that. You guys are all investors in the projects too, but you don’t have to do a deal to survive, I mean, the company’s doing these things. And that’s something I just want to point out to people, it’s like if you’re working with somebody right now in these times, and they’re relying upon you being able to get a deal done to survive, it’s a tough time to be in that place.
Karlin Conklin: You don’t want to be in that place, because it could hinder your ability to make good decisions.
David Moore: No, it’s kind.
Karlin Conklin: It’s really kind. Yeah. So we don’t have to do deals, we had a large meeting with our entire company on Tuesday, I guess yesterday. And it was that we probably have our pencils down for the next six months. And it’s because, again, it’s the totality of the deal. If we come across a property, because Neil and our Director of Acquisitions, they’re always out there looking, on the hunt, if we come across a property that’s been discounted 20%, and because of where the pricing is, paying 7% on a loan, we can still get the returns we want, we will grab that deal. So it is the totality of the investment, not one piece.
So, an investor shouldn’t look at something and say, “Ugh, 7% loan,” like, “why would I buy anything and pay that kinda thing for debt?” Well, you know what? If the property has been discounted 20%, you’re still going to make the same return. And so we feel that educating our clients is a big part of what we do so that they understand not just one little piece of their asset, they understand multiple ways of their asset. It’s likely with some of our properties, I’m sure, and that’s across the industry. Cash flows are going to go down. If you’ve got a variable rate loan, and you’ve got interest rates rising faster than you can refinance, you got some cash flow issues, it’s okay, because in the life cycle of that investment, we’re going to make it up. Real estate is a long-term game, and that’s how we’re playing it.
David Moore: Definitely. So one other thing we talked about, I don’t know if we talked about it during this segment or we talked about it during the break, but I just want to reiterate or stress the fact that this is non-recourse debt. So if you have IRA form 401K money, and you want to come into the investment, once again, you can do that. Now, just one word of costume, IRA is that with leverage, if it’s 50-55% LTV, like she said, you’re going to have tax exposure on 50% or 55% of the income. So just be aware of that, it’s not a reason to make a deal or not make a deal with your retirement account, it’s just another factor they can talk to Karlin about to figure out the ultimate ROI for you. So once again, having that debt and having tax exposure on the debt with their retirement accounts, you know, it’s not a bad thing, just got to understand the repercussions, but I want to stress that it is non-recourse, that it is a nice deal.
Karlin Conklin: Very nice deal, Non-recourse. The other thing that we do, and every real estate syndicator or folks that… Real estate have different philosophies. We do only interest-only, we believe over time that pay down principle doesn’t make any sense, what makes sense is cash, and so all of our deals are funded with interest-only debt, we don’t amortize, you know, putting money out against a principal doesn’t make sense to us, so we do non-recourse, interest-only debt.
David Moore: Well, what’s the average hold for you?
Karlin Conklin: Five years, max.
David Moore: Nobody’s going to buy a property in five years.
Karlin Conklin: Yeah. Yeah, it’s not enough. And the other thing that we educate our clients about, Karlin, we believe in holding things for 25 years, and I’m like, why? You know, you want depreciation, why if you’re going to own that thing for 30 years, what good is that? All of us as investors need to take advantage of the special tax treatment that you get across the board with real estate, and the other thing with the new tax laws of 2017, bonus depreciation, that’s a big deal. And so, we do a lot of education on why we do what we do, and we may not be the company for everyone, but I think what the investors we’re working with, that’s our goal over time, is to just build their wealth.
David Moore: No, that’s great, that’s great. So the deal is, before you ever sell something, one, understand whether you have a tax liability, but two, if it’s something where you’re interested in working with Karlin, for example, talk to her, talk to her, let her know what you got, what kind of equity and value requirements you need to meet and talk to her about when the assets are going to be available, and she just told me, just told us the pencils are going on the table for six months, so if you sell something closing next week, and she’s probably not going to have anything for you.
Karlin Conklin: That’s right.
David Moore: So really look at that, but take advantage of the people in your life, the experts in your life, ask the questions, little nuggets and knowledge can make a big difference. So once again, if somebody comes in, they want to buy your property, buy one of your offerings, they just need to engage you, they’re going to buy it like anything else, but they just need to first off, make sure something’s going to be available to see what’s going to fit their needs, understand you can offset mortgage boot with additional cash, get where they want to go, they have to be accredited investor, and then your typical hold is going to be?
Karlin Conklin: Five years.
David Moore: Five years?
Karlin Conklin: Yeah.
David Moore: What if somebody needs to get out for some reason, is there a way to do that or not?
Karlin Conklin: Yes. So both, a tenancy in common agreement and just the loan documents as well, if a tenant in common wants out, absolutely. They just simply have to offer their interest to their co-tenants first, and not to end at market, and if nobody takes advantage, then it can be sold outside. The issue with doing that is it can be prohibitive from an expense standpoint, because the lender has the right to charge a 1% fee for the entire loan, not just the co-tenants piece. Right. And so, believe it or not, the appreciation on some of these assets has been so great that somebody says, Listen, I’m making so much, I don’t care. But we have had a number of folks explore, but no one has done it yet. They just say, I’ll wait another year, I’ll wait 18 months and I’ll exit at that point.
David Moore: Got it, got it. So as far as timing the transaction, that’s going to be the critical piece, they’re understanding what’s out there and shooting for it.
Karlin Conklin: Shooting for it.
David Moore: Thank you very much. We’ll be right back. David Moore of Equity Advantage, Karlin Conklin of IMG.
Investors Management Group is an award-winning real estate sponsor and asset manager focused on multifamily assets across a national platform. IMG specializes in improving and managing apartment communities to enhance the resident living experience and maximize value for investors.
IMG has delivered to its investors an average 2.0x equity multiple and 26.3% IRR over 25 full-cycle investments since 2010. For more information tune into our series or give Karlin’s team a call at the phone number below!
Karlin Conklin Principal, Co-President & COO of Investors Management Group (747) 262-5660 or email firstname.lastname@example.org
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David and Thomas Moore, the co-founders of Equity Advantage & IRA Advantage
Whether working through a 1031 Exchange with Equity Advantage, acquiring real estate with an IRA through IRA Advantage or listing investment property through our Post 1031 property listing site, we are here to help Investors get where they want to be. Call them today! 503-635-1031.