August 9, 2022
Four Ways to Invest in Private Real Estate
The historic allure of alternative investments piques the interest of many investors who are constantly seeking diversification in their overall portfolios. In private real estate, there are a variety of options to consider, but the nuances of each asset type can make it difficult to digest and the considerations for every individual investor vary: Why invest in private real estate? Is there a liquidity option? Am I diversified? What type of ongoing distribution and appreciation occur? What are my tax implications? How do I get involved? As with any investment, each choice has its own unique set of considerations you should review with your advisor team. Here’s a summary of the most common ways to make an allocation into private real estate. Public REITS Real estate investment trusts, better known as REITs, are generally publicly traded investments that own income-producing real estate. REITs were created in the 1960s to give individual investors a vehicle like mutual funds in which they could invest in commercial properties. As with each differing investment vehicle, there are advantages and disadvantages to investing in a REIT. These investments tend to be liquid – meaning they’re more readily available to non-accredited investors, and investors can divest and sell shares in...
July 26, 2022
The Tax-Efficient Power of Reinvestment
Private real estate is a tax-advantaged asset class. At MLG, we first focus on making smart real estate investment decisions, then wrap the best tax planning around those decisions. One financial strategy our investors can take advantage of is the power of reinvesting over time. When one of our older funds produces a large distribution following the sale of a property, many of our investors consider making new investments into our newest fund. New investments generally create fresh tax losses that could be used to offset taxable income from prior funds within the same year. To illustrate the power of reinvestment, let’s see what potential tax savings could occur from an investor using their proceeds from a distribution in an older fund to make a new investment into our latest fund offering. This scenario is hypothetical, and it is always wise to consult your tax professional before making any investment decision. Let’s assume an investor made a $250k investment in one of our prior funds. Let’s also assume that a property sale produced a return of capital of 20% of their original investment amount, or about $50K. Lastly, let’s assume this investor has a high income, and is taxed at the highest marginal...
July 20, 2022
The Math of the MAD Initiative: Part 2
Now that we’ve provided a high-level overview of the Making a Difference (MAD) Initiative, let’s take a deeper dive into how we’ve structured this investment. There aren’t many investments out there that generate a positive return on your investment while targeting to create incredible tax-efficiency for investors. The driving force behind the creation of the MAD Initiative was not to create a tax haven but to foster rippling social impact. Needless to say, the tax benefits are indeed a bonus of the investment. At MLG, we are value-add investors. This means we are hunting for, and investing in, assets with existing inefficiencies. We do so with the plan to resolve issues and streamline efficiencies, ultimately aiming to increase the net income the asset produces. MLG generally targets an 11-15% IRR return to investors. This is comprised of an annual 8% cumulative preferred return and share of appreciation over time. The standard share of profit is 70/30 (investor/MLG). So, how does the math work out for an investment in the MAD Initiative? There are two main components driving the tax efficiency within the MAD Initiative. The first stems from the passive losses generated for investors through bonus depreciation from our private real estate investments....
February 22, 2022
The ‘MAD’ Initiative: Part 1
When you think of MLG Capital, you’re likely considering us through the lens of alternative investments, specifically in private real estate. While this is true, and our core focus is on investing in deals with believable and achievable assumptions, we also have a heart for investing in our community. One of our core philosophies is “making a difference, while making a living”. Within this foundational principal, employees are encouraged to participate alongside our corporate philanthropic strategies. In our pursuit of this mission, we’ve implemented a unique opportunity for our family of investors to participate in our Making a Difference, or MAD, Initiative. Launched in 2017, the MAD Initiative allows MLG investors to invest in our Private Funds, while making an impact at a charitable organization by donating a portion of their distributions to the charity. When the initiative first began, the selected organization was Lifesong for Orphans, a nonprofit in which our CEO, Tim Wallen is still an active board member. As of October 2020, we have expanded this effort to include 5 additional organizations, all of which have a focus on youth education within the City of Milwaukee, Wisconsin: SecureFutures, St. Marcus School, Augustine Preparatory Academy, Milwaukee College Prep and Howard Fuller Collegiate Academy. Collectively, these organizations passionately served...
February 9, 2022
How to Prepare for Tax Season: 2021 Edition
Tax season is finally here! I’m not sure everyone is quite as enthusiastic about tax filing and compliance as we are, but hopefully this article provides a 2021 tax outline roadmap for real estate investors to better equip themselves for a successful tax reporting for the current and future reporting years. Throughout the 2021 tax year, tax estimates may have been distributed to you or your investment advisor (or both). As a passive investor, this will be a key starting point in understanding what your tax exposure looks like for 2021. For current MLG investors, the information provided in this blog is subject to and does not alter any investment agreement with MLG. As a real estate investor, capital gain from property sales is usually one of the bigger highlights from the reporting year for your tax position. One key item to look for on your estimates would be any capital gains being passed through to you. As a reminder, long-term capital gains (1231 Gains on an MLG K-1) are taxed at more favorable rates than ordinary income. The table below shows the various tax rates based on taxable income for individuals: If any capital gains are included in 2021 tax estimates,...
November 5, 2021
Focused on Finding the Right Deals
Private Real Estate is a fast-paced, ever-evolving market. Often, investors are curious to learn more about our acquisition process and how our team can find opportunities in the competitive market that we operate in today. Our answer is straight forward: we’re actively involved in our target markets, we leverage technology where we can, and we build strong relationships. Market Knowledge Finding the right investments takes persistence and patience. Competing with 20+ groups on a fully marketed opportunity often is the norm in today’s investment world. This elevated competition requires us to be an active and connected acquisition team. We “knock on all the doors,” “make all of the calls,” and remain diligent to find the best investments for our investors. Being a very active group gives us the flexibility to be selective of property and provides us top-tier insights into market, submarket, and deal-level knowledge. It also often affords us off-market investment opportunities, that is, deals that other groups may not get a chance to look at. At MLG Capital, we actively underwrite and pursue over 2,000 investment opportunities per year, on average; however, we only acquire 15-20 properties across the multifamily, industrial, office, and retail sectors. How? We implement...
November 5, 2021
15 Questions to Ask Before Investing Your Money: Part 4
You’ve gathered enough information to make an informed decision about your manager. Now what? Consider how you might want to invest and the type of experience you want to have once you sign on with a specific manager. What Are the Tax Implications of My Investment? Some firms may have in-house tax staff, which can be advantageous for structuring investments to benefit their investors. These staff might also serve as a resource for you, once you invest, to answer questions about withholdings or other tax reporting. Compared to other types of investments, private real estate can offer many tax advantages. While tax efficiency should not be the sole driver of your investment decision-making, it is helpful to know how investing in private real estate might impact your tax situation or if it makes sense for your overall financial picture. It’s important to note that tax situations can vary from investor to investor, so it is best to discuss tax planning with a professional such as a CPA or tax attorney. Do You Accept IRAs or 401ks? While tax-advantaged investment vehicles such as IRAs and 401ks are typically invested in public equity, there are opportunities where these vehicles can invest in alternative...
October 21, 2021
15 Questions to Ask Before Investing Your Money: Part 3
I’m sure you’ve heard before that real estate is a relationship business. This is not only true when it comes to finding good deals, but it’s also true for managers working with new and prospective investors. Strategy and structure are critical for the performance of an investment in private real estate, but the success of a firm can give a manager a leg up on its competitors. While past returns are not indicative of future results, a track record is an important factor to look for in a real estate investment manager. Here are some questions to help guide your conversations when vetting a private real estate firm. How Has the Firm Weathered Market Cycles? In the past 30 years, the commercial real estate space has been through several major downturns that resulted in reduced demand for real property: “Savings and Loan Crisis” of the late 1980s, the “Dot Com Bust” and the resultant recession of the early 2000s, “The Great Recession” in 2008 and, most recently, the impact of the coronavirus pandemic in 2020. A firm that managed through these cycles and remained in business throughout these downturns, and subsequent recoveries, in the real estate market may indicate to you that it their...
October 14, 2021
15 Questions to Ask Before Investing Your Money: Part 2
In part one of this series, we outlined questions regarding the overall strategy of an investment in private real estate. Now, let’s focus on the structure. These questions will help you understand how the investment works and the impact it can have on your investment returns. How Does the Investor Get Paid? It’s easy to get excited about an investment based on the targeted return, but it’s critical to dive in and understand the mechanics of how investors will be paid from the profits of the investment. Most structures distribute returns based on some sort of tiered waterfall system, which we will explore further below. Generally speaking, investors should seek to be compensated first and allow the sponsor to participate in the upside. Most times, after fees are paid, the first obligation of the sponsor is to give investors a preferred rate of return; said differently, 100% of the cash flow from the investment until investors have achieved a certain rate of return. The higher the preferred return rate, the better for the investor, as they have a priority on the cash flow until that rate of return is achieved. Investors should also seek for their preferred return (“pref”) to be accruing and compounding, meaning that if the sponsor...
October 6, 2021
15 Questions to Ask Before Investing Your Money: Part 1
As an alternative to the typical investments in stocks and bonds, real estate offers many opportunities for high-net-worth investors, family offices, and investment advisors. In addition to the standard due diligence of a specific investment opportunity, it’s important that investors also understand the intricacies of investing in any private real estate vehicle. This 4-part series will outline the core focus investors should consider and the types of questions to ask to make an informed decision before committing capital to an investment in private real estate. What is the Investment Structure? There are many ways to organize a private real estate investment. Whether it’s an individual syndication, niche fund, diversified fund or other type of specialty structure, each provides a distinct set of opportunities and risks. An individual syndication, for example, is an investment in a single property. If you invest with a developer in a ground up multi-family development, and the project goes well, that investment could generate extremely attractive returns. However, because all of your money is invested in a single property, you stand the risk of a total loss on the investment if the project doesn’t go as planned. With an individual syndication, there is no diversification achieved...
