Why does Santa Claus Love Private Real Estate Investing?
December 24th of every year, children rest their eyes in hopes of waking up the next morning with special presents beneath a beautifully decorated tree. Milk and cookies are left for a man, disguised by red velvet and a white beard, who flies around on his reindeer sleigh spreading joy to families around the world.
This year, MLG capital’s newest Private Equity Associate, Rachele Voigt, had the opportunity to sit down with the jolly man in red for an interview all about private real estate investing – addressing the normal concerns and questions a private real estate investor may have while explaining why Santa has favored private real estate investing (with MLG!) over the years.
After all… Santa also deserves just as much (if not more) of a return on his investments!
Rachele: Well, welcome to our headquarters, Santa! Pleasure to have you here in Brookfield, WI. Would you like some coffee?
Santa: Thanks for having me, Rachele! I’d take a cup of hot cocoa if you don’t mind.
Rachele: You’ve been an investor of ours for many years. Through market ups and downs, you have continued investing with MLG Capital. I’d love to ask you a few questions about how private real estate has benefited you over the years.
Santa: That sounds great. I’d happily answer a few of your questions, but first let me ask you a few relating to when I first became an investor- and since you stole me away from the North Pole on the 22nd of December, I’m going to jump right in so I can get back to the shop (laughs).
Santa: Rachele, one of the largest areas of question/concern I had when I was considering private real estate investing had to do with taxes. You know, no matter how many children I provide gifts for each year, the government still taxes me on my income! (laughs). Could you run through what tax benefits exist in private real estate investing with MLG Capital?
Rachele: I’m glad you brought this up. For future reference, our CEO Tim Wallen was interviewed by a podcast earlier this year regarding this very specific topic. When you’re cruising in your sleigh in the coming days, you can listen to it here- www.realcrowd.com/blog/2017/06/episode-8-tax-advantages-of-real-estate-investing/
The truth is there can be many tax benefits to private real estate investing. As you know, we have several CPA’s on staff as well as a tax director who are always happy to answer specific questions you might have. When we rolled out our first private fund, we stressed this topic in our planning meetings as we believe it’s key for our investors to understand. Depreciation, cost segregation studies, blending commercial assets with multifamily assets, and wrapping exceptional tax planning around all of our deals and funds are some of the strategies we see for tax efficiencies. Ultimately, as a company, we choose to do the extra planning work for our investors by utilizing the deep bench of talent on staff – something we’re proud of and feel makes us unique. But, let’s keep going so I don’t talk your ear off.
Here is an article Tim also wrote with more information about this topic- mlgcapital.com/mlg-capitals-tim-wallen-on-the-tax-advantages-of-private-real-estate-investments/
Santa: Before I met you, I owned some land in the North Pole as well as the real estate where my elves make toys. Could you explain why you came up with a private fund concept versus investing in individual real estate deals?
Rachele: Real estate is an interesting game. Historically, and even today, real estate operates at a very local level. I’m sure you see it, Santa, in the North Pole where certain hills of snow are safer than certain frozen bodies of water. During and after the recession, we wanted to provide investors (let’s take Ms. Claus and yourself for examples) an opportunity for stronger levels of diversification similar to an ETF or a mutual fund, vs. an investment into a single stock. Diversification is key in wealth planning and wealth preservation. Our series of funds are vehicles to acquire assets among different asset classes (multifamily, industrial, retail or office), in different geographies, and with different managers. We feel our funds provide an exceptional way for most investors to get diversified!
We believe direct and diversified exposure to real estate should have a place in any investor’s portfolio. Based upon low market correlation, cash yield with potential appreciation along with advantageous tax legislation, commercial real estate serves as an ideal alternative investment. Take a look at a quick infographic on how we diversify our clients’ investments.
Santa: Rachele, I’m going to make this my last question and then I’ll pass the mic back to you. So, over the years, I’ve had many parents send me letters at the North Pole asking if I’d want to invest in deals they find or funds they’re raising money for. Why you? Why do you think I picked you?
Rachele: Santa, first off – we appreciate you being a part of our family of investors. We cherish our relationships and hope to continue investing in smart real estate deals for many generations. If I remember correctly, you liked our deal sourcing strategy and our return structure. A bit different than others in our field, we don’t dip our hand in the cookie jar along the way, so to say.
Our investor model and investment structure ensure our investors come first, literally. First, 100% of all cash flow is distributed to pay an 8% annual, cumulative and accrued, preferred return (dividend). After we are current on your 8% return, we must then return 100% of your original investment. Then, only once current on your 8% investment and we return 100% of your original investment, do we begin sharing in the profits with you. Our funds typically charge a 1.25% annual asset management fee on invested equity. The combination of the above targets a net return to our investors in the 13-15% IRR range (net of fees) with about ½ targeted to come from current cash flow and the other ½ targeted to come from appreciation over time from the execution of individual business plans on each individual asset.
Rachele: Now, I have a few questions for you! Tell me why you were interested in private real estate investing originally?
Santa: I wanted a separate avenue for passive income distributions. As you may assume, the toy-making business is heavily concentrated towards the end of the year. Since my operations are quiet for many months I needed and liked the idea of having continuous cash flow throughout the year! It’s a good thing, because Mrs. Claus sure does love a vacation, and so do my elves!
Rachele: Previously, before investing in our fund, you owned some real estate in the North Pole directly. Do you still own that real estate? Also, what made you want to be in our fund?
Santa: You hit the nail on the head earlier. Your strategy of diversification which provides me with different tax benefits is what I found most attractive about your fund. Your deal flow is remarkable.
While I do still own real estate in the North Pole directly – I think it’s important to invest locally and I plan to leave behind this part of my wealth portfolio for my elves someday – there is no way I could gather enough deal opportunity to make my own diversification.
Overall, I am happy with my investment into your private diversified fund and the return profiles of each deal within the fund.
Rachele: To conclude here Santa, I’m going to ask you the same question you asked me – why did you pick us here at MLG Capital?
Santa: Simple. My entire being was created around doing good for others and that’s what I saw in your mission statement, in your people and within your strategies. While it’s odd to flip this around, the world depends on me – they know I make appearances at the mall in December; they know every December 24th I’ll be in my sleigh and down the chimney; and, they know every December 25th they’ll see a gift from me under their tree. Trust is why I picked you.
Rachele: Well, Santa, my heart is certainly warm now. Thank you for trusting in us at MLG Capital and thank you for your time today!
Santa: Until 3 more days! Merry Christmas to you!