Investment Property Perks Without the Pain
Growing Wealth Magazine -- April 1, 2008
Finding the best rental property in today’s unpredictable real estate market, whether you’re an experienced buyer or just starting out, is a challenge. But, there are options available to those who want the benefit of real estate ownership without the headaches and hassles of day-to-day management.
Since 2003, a small group of savvy Los Angeles-area real estate investors has put its money into an LLC real estate entity known as Forward Progress Management Real Estate Funds. Fund manager Billy Ruvelson raised $1.5 million to create the first fund. With that money, the fund purchased three apartment buildings.
“I had no idea how easy or difficult it would be to find that money,” admits Ruvelson, who is also a real estate broker and president of Forward Progress Management Real Estate Inc. “It turned out to be fairly easy.” He raised $5 million for the second fund and bought 10 properties. For the third and fourth funds, he again raised $5 million. A fifth fund for a special project was financed for $3 million.
“I wanted a stake in hard real estate, and I didn’t want to be a landlord,” says Linda Burum, an investor in the fund. “Instead of investing in [mutual] funds, I found this. And, I receive a tax break because the IRS considers my investment a return of capital, and not income.”
Genesis of an idea
The idea for the fund originated from Ruvelson’s experience helping his parents with their rental properties. “I grew up in a household where my parents always owned some kind of rental property,” he says. “And I helped them. I answered the phone calls when they ran an ad looking for tenants, and I’d go and watch my folks when they’d collect the rents.”
So Ruvelson expanded on the concept he learned from his parents, and turned it into a business whose members own 20 properties and have more than 250 tenants paying rent every month.
He decided to focus on the Los Angeles area for fairly obvious reasons. The city ranks No. 1 in the top-10 apartment rental markets in the country with a forecasted 3.9 percent vacancy rate and 4.9 percent rent growth, according to the 2008 Grubb & Ellis Real Estate Forecast.
The population in Los Angeles surpassed 4 million last year, a number equal to New Zealand’s population. The steadily expanding population, continued job growth, and shortage of raw, undeveloped land places the city in a unique position for multiunit residential property investors.
Identifying the properties
The properties Ruvelson buys are not trophyesque; they are the bread-and-butter types of units that appeal to the masses. His goal is to purchase at about $100,000 per door, and he thinks the $2 million to $5 million property has better value. The buildings vary from between 8 to 36 units, are generally 99 percent to 100 percent occupied, have adequate parking, and sit on nice pieces of land.
Most of the properties are within the Hollywood/Koreatown/Metro Square area of Los Angeles. Ruvelson’s practice is to purchase in areas that are close to or within walking distance of one of the nine metro stations. With traffic becoming increasingly nightmarish in Los Angeles, he thinks people are willing to pay a slight premium for the ability to walk to a center of mass transit.
He also likes to buy where big developments are under way, thinking that once the project is complete, the value of nearby properties will increase, especially if they’re located next door or across the street.
According to Ruvelson, FPM may eventually convert some properties to condos or rebuild them into mixed-use projects with subterranean parking. The proceeds from the sale of the condos would be distributed to the investors.
Details of the fund
By buying into the fund, the investor becomes a part owner in all of the real estate the fund owns and will eventually own. The principal investment is sold by prospectus in increments of $100,000 membership interest to accredited investors, most of which are either repeat investors or referrals. A handful of participants have invested in every fund, and many are invested in four out of the five funds.
Although the ownership benefits are similar to a TIC — in which title is held as tenants in common and individual investors are all named on the title of one property — the fund starts with one property in escrow and grows to 10 apartment buildings over several months. When Ruvelson finds a potentially profitable deal, he uses his own money as the initial earnest-money down payment to start the new fund. He then raises $5 million from the investors who have filled out reservation forms to purchase approximately $14 million in property.
He never accepts an investor’s money until he has found the investment property he wants to purchase and needs the cash to close. And, after the initial investment is made, Ruvelson says the investor will never have any unforeseen, out-of-pocket expenses.
Drawing benefits
The investors own 85 percent of the equity in the fund and receive their first distribution check approximately 45 days after the initial investment. As the apartment buildings appreciate, so does the value of the investment.
Investors receive a detailed statement itemizing the fund’s monthly expenses along with their monthly distribution check, which includes rental income as well as income from the laundry machines and parking. Expenses, such as mortgage payments, utilities, and insurance, are deducted from the income. The monthly net is then divided between the fund manager and the investors. Historically, the funds have produced annual, tax-free distributions between 7 percent and 17 percent.
The entire fund inventory is published on the company’s Web site, so all the investors know where their properties are located. Investors are always welcome to visit the properties and the offices, Ruvelson says.
Because the funds have hired a management company, investors do not have to maintain the properties. One in-house property manager oversees all the buildings as well as the individual on-site property managers. By keeping routine repairs and maintenance in-house, those expenses are a fraction of what they could be if an outside vendor provided the service. And with the increased bargaining power of multiple units, recurring costs like trash collection and pest control are also reduced.
Ruvelson owns a key man life insurance policy for the full amount of the investment, and the policy names each participant member as a beneficiary. If Ruvelson were to die, his beneficiaries would receive a large, tax-free payment and continue to collect dividend checks, because the LLC owns the properties.
Painless perks
The fund is ideal for investors who want to use cash on hand, an IRA, or any other qualified plan, such as a SEP IRA, Roth IRA or 401(k). It delivers all the benefits of direct ownership interest in apartment buildings without the headaches.
Instead of owning one property, investors have many assets that are professionally managed — like a mutual fund. And they can count on the management team to make sound financial decisions, because they also hold an ownership stake.
So the real estate fund investors just sit back, collect their checks every month, and never answer those emergency phone calls at midnight about a pipe bursting.
