New to Multifamily Investing? Get with the frequently asked questions and some lingo here.
What type of accounts can I invest through?
We currently support personal investment accounts, joint accounts, and certain entity accounts (Trusts, Limited Liability Companies, Limited Partnerships, C Corporations, and S Corporations). For more information on IRA accounts, see below.
What is a K-1?
As a partner in the LLC that purchases the properties, you will receive a K-1. A K-1 is a tax form used by partnerships to provide investors with detailed information on their share of a partnership’s taxable income. Partnerships are generally not subject to federal or state income tax, but instead issue a K-1 to each investor to report his or her share of the partnership’s income, gains, losses, deductions and credits. The K-1s are provided to investors on an annual basis so that each investor can include K-1 amounts on his or her tax return.
Am I An Accredited Investor?
An accredited investor, in the context of a natural person, includes anyone who:
- Earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
- Has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
On the income test, the person must satisfy the thresholds for the three years consistently either alone or with a spouse, and cannot, for example, satisfy one year based on individual income and the next two years based on joint income with a spouse. The only exception is if a person is married within this period, in which case the person may satisfy the threshold on the basis of joint income for the years during which the person was married and on the basis of individual income for the other years.
In addition, entities such as banks, partnerships, corporations, nonprofits and trusts may be accredited investors. Of the entities that would be considered accredited investors and depending on your circumstances, the following may be relevant to you:
- Any trust, with total assets in excess of $5 million, not formed to specifically purchase the subject securities, whose purchase is directed by a sophisticated person, or
- Any entity in which all of the equity owners are accredited investors.
In this context, a sophisticated person means the person must have, or the company or private fund offering the securities reasonably believes that this person has, sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the prospective investment.
Can I Visit The Property?
Yes. Investors are allowed to visit the property before investing and during the life of the project.
Can I invest through my IRA?
Yes, you can invest through your IRA. If you currently have a self-directed IRA, please check with your current custodian to ensure that they will allow you to place your investment with Smart Capital.
What Exactly Are The Funds Used For?
Investor funds are used for the total acquisition cost of the property. This includes but is not limited to the actual purchase price of the property, acquisition fees, legal and transaction costs, capital projects, and reserves.
How Frequently Are Distributions Made?
Distributions are planned quarterly.
Do I Have To Be An Accredited Investor To Invest?
No. We currently have investment opportunities that are open to accredited and non-accredited investors.
An accredited investor is a person that can invest in securities (i.e. invest in an apartment syndication as a limited partner) by satisfying one of the requirements regarding income or net worth. The current requirements to qualify are an annual income of $200,000 or $300,000 for joint income for the last two years with expectation of earning the same or higher or a net worth exceeding $1 million either individually or jointly with a spouse.
Asset Management Fee
Capital Expenditures (CapEx)
Effective Gross Income (EGI)
Gross Potential Rent (GPR)
Gross Potential Income
Internal Rate Of Return (IRR)
The internal rate of return (IRR) is the rate, expressed as a percentage, needed to convert the sum of all future uneven cash flow (cash flow, sales proceeds and principal pay down) to equal the equity investment. IRR is one of the main factors the passive investor should focus on when qualifying a deal.
Loss To Lease (LtL)
Loss to lease (LtL) is the revenue lost based on the market rent and the actual rent. LtL is calculated by dividing the gross potential rent minus the actual rent collected by the gross potential rent.
Metropolitan Statistical Area (MSA)
A metropolitan statistical area (MSA) is a geographical region containing a substantial population nucleus, together with adjacent communities having a high degree of economic and social integration with that core, which are determined by the United States Office of Management and Budget (OMB).
Net Operating Income (NOI)
Net operating income (NOI) is all revenue from the property minus operating expenses, excluding capital expenditures and debt service.
Operating expenses are the costs of running and maintaining the property and its grounds.
Physical Occupancy Rate
The physical occupancy rate is the rate of occupied units. The physical occupancy rate is calculated by dividing the total number of occupied units by the total number of units.
A prepayment penalty is a clause in a mortgage contract stating that a penalty will be assessed if the mortgage is paid down or paid off within a certain period.
Private Placement Memorandum (PPM)
The private placement memorandum (PPM) is a document that outlines the terms of the investment and the primary risk factors involved with making the investment. The four main sections are the introduction, which is a brief summary of the offering, the basic disclosures, which includes general partner information, asset description and risk factors, the legal agreement and the subscription agreement.
Property And Neighborhood Classes
Property and neighborhood classes is a ranking system of A, B, C, or D given to a property or a neighborhood based on a variety of factors. These classes tend to be subjective, but the following are good guidelines:
- Class A: new construction, command highest rents in the area, high-end amenities
- Class B: 10 – 15 years old, well maintained, little deffered maintenance
- Class C: built within the last 30 years, shows age, some deferred maintenance
- Class D: over 30 years old, no amenity package, low occupancy, needs work
- Class A: most affluent neighborhood, expensive homes nearby, maybe have a golf course
- Class B: middle class part of town, safe neighborhood
- Class C: low-to-moderate income neighborhood
- Class D: high crime, very bad neighborhood
Ration Utility Billing System (RUBS)
Ratio Utility Billing System (RUBS) is a method of calculating a tenant’s utility bill based on occupancy, apartment square footage or a combination of both. Once calculated, the amount is billed back to the resident, which results in an increase in revenue.
The refinancing fee is a fee paid for the work required to refinance the property. At closing of the new loan, a fee of 0.5% to 2% of the total loan amount is paid to the general partner.
A rent premium is the increase in rent after performing renovations to the interior or exterior of an apartment community. The rent premium is an assumption made by the general partner during the underwriting process based on the rental rates of similar units in the area or previously renovated units.
The sales proceeds are the profit collected at the sale of the apartment community.
A sophisticated investor is a person who is deemed to have sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity.
The submarket is a geographic subdivision of a market.
Underwriting is the process of financially evaluating an apartment community to determine the projected returns and an offer price.
The vacancy rate is the rate of unoccupied units. The vacancy rate is calculated by dividing the total number of unoccupied units by the total number of units.
The acquisition fee is the upfront fee paid by the new buying partnership entity to the general partner for finding, analyzing, evaluating, financing and closing the investment. Fees range from 0.5% to 5% of the purchase price, depending on the size of the deal.
Capitalization Rate (Cap Rate)
Debt Service Coverage Ratio (DSCR)
Economic Occupancy Rate
Equity Multiplier (EM)
General Partner (GP)
Gross Rent Multiplier (GRM)
Limited Partner (LP)
The limited partner (LP) is a partner whose liability is limited to the extent of the partner’s share of ownership. In apartment syndications, the LP is the passive investor and funds a portion of the equity investment.
The market rent is the rent amount a willing landlord might reasonably expect to receive, and a willing tenant might reasonably expect to pay for a tenancy, which is based on the rent charged at similar apartment communities in the area. Market rent is typical calculated by performing a rent comparable analysis.
A model unit is a representative apartment unit used as a sales tool to show prospective tenants how the actual unit will appear once occupied.
Operating Account Funding
The operating account funding is a reserves fund, over and above the price of the property, to cover things like unexpected dips in occupancy, lump sum insurance or tax payments or higher than expected capital expenditures. The operating account fund is typically created by raising extra money from the limited partners.
Permanent Agency Loan
A permanent agency loan is a long-term mortgage loan secured from Fannie Mae or Freddie Mac and is longer-term with lower interest rates compared to bridge loans. Typical loan term lengths are 5, 7 or 10 years amortized over 20 to 30 years.
Preferred Return: the threshold return that limited partners are offered prior to the general partners receiving payment.
Price Per Unit
Price per unit is the cost of purchasing an apartment community based on the purchase price and the number of units. The price (or cost) per unit is calculated by dividing the purchase price by the number of units.
Profit And Loss Statement
The profit and loss statement is a document or spreadsheet containing detailed information about the revenue and expenses of the apartment community over the last 12 months. Also referred to as a trailing 12-month profit and loss statement or a T12.
Property Management Fee
The property management fee is an ongoing monthly fee paid to the property management company for managing the day-to-day operations of the property. This fee ranges from 2% to 8% of the total monthly collected revenues of the property, depending on the size of the deal.
A refinance is the replacing of an existing debt obligation with another debt obligation with different terms. In apartment syndication, a distressed or value-add general partner may refinance after increasing the value of a property, using the proceeds to return a portion of the limited partner’s equity investment.
Rent Comparable Analysis
The rent comparable analysis is the process of analyzing similar apartment communities in the area to determine market rents of the subject apartment community.
The rent roll is a document or spreadsheet containing detailed information on each of the units at the apartment community, along with a variety of data tables with summarized income.
The sales proceeds are the profit collected at the sale of the apartment community.
The subject property is the apartment the general partner intends on purchasing.
A subscription agreement is an agreement between a company and investor(s) that sets out the price and terms of a purchase of shares in the company. The subscription agreement details the rights and obligations associated with the share purchase.
Vacancy loss is the amount of revenue lost due to unoccupied units.