The investment formula called Apartment Building (since it involves investing in real estate –usually blocks of flats (such as entire condominiums) – made up of several units), unlike the better known property rental and real estate flipping operations, is an absolutely innovative formula based on the best financial engineering techniques which, thanks to a financial leverage effect, allow you to obtain high returns with a level of risk that is very low and even completely disappears after a certain number of months.

PHASES OF THE APARTMENT BUILDING INVESTMENT

01

RESEARCH AND SELECTION

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02

PROPOSAL / CONTRACT

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04

BUYING WITH LEVERAGE

(30/70)

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05

RESTRUCTURING / STABILISATION

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06

REFINANCING + CASH-OUT

(CAPITAL REPAYMENT)

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07

CASHFLOW MANAGEMENT

(ZERO RISKS)

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HOW APARTMENT BUILDINGS WORK

In essence, these types of transactions are characterised by:

  1. the acquisition – by means of a purchase offer formulated on the basis of a precise mathematical algorithm capable of identifying the exact price at which a given property must be purchased in order to guarantee refinancing by credit institutions and a predetermined percentage of return on the investment – of an apartment building (consisting of at least 50 units) defined as “distressed”, i.e. characterised by a non-optimal and inefficient management on the part of the owners (e.g. because it is characterised by a high vacancy rate since many of the units are not rented, or because it is structured on rents below the average market rents, etc.). This acquisition is financed in part by the investor through their own capital and in part by a bank (at absolutely competitive rates, thanks to the consolidated relationships that Remida Properties enjoys with the best American credit institutions, without which it would be impossible to access the US credit market);
  2. the renovation of the apartment building (to make it more attractive to new tenants and to further motivate the increase of the pre-existing rents) and its “stabilisation”, which takes the form of managing the property for a certain period of time (usually 3 months) with a minimum vacancy rate and regular rents;
  3. the subsequent refinancing (again by a bank) of the property on the basis of its new, increased value;
  4. holding the property in the medium to long term, or reselling it if the differential between the selling price and the cost of the transaction allows for appreciable margins in the short term.

Capital

Whatever capital you put into the operation will be returned to you in the refinancing phase.

Risk

The risk of the transaction is already low, due to the fact that the underlying asset is real estate. Moreover, once the refinancing period has elapsed, the risk becomes zero because, in addition to receiving interest, the investor is paid back the entire initial capital.

Yield

The return is initially 10%. As the refinancing approaches, the return increases significantly (due to the cash out) until it becomes infinite when the initial capital is fully repaid, because the participant in the transaction continues to receive a cash flow, as a shareholder of the company that owns the property.

WHY PARTICIPATE

Considering all the factors involved, the apartment building operation has a high ROI for those involved, even though the risks are low, thanks to the leverage effect and the expertise of Remida, which accompanies and advises its clients throughout the operation.
The leverage effect produces a great advantage in terms of ROI without increasing the investor’s risk in any way by virtue of the financing system designed by Remida.

RETURN ON INVESTMENT

%

Preferred return

+

%

Cash out

+

%

participation bonus

During the above-mentioned phases, the investor will be entitled to:

  • a remuneration of 10% on the invested capital (as preferred return) during the whole restructuring phase until the refinancing of the property (phase lasting 12 to 18 months): this remuneration is paid every 3 months at the rate of 2.5% on the invested capital;
  • an additional tranche of capital (as the difference between the capital invested and the capital – pro rata – refinanced) at the time of refinancing, on which no taxes are due;
  • a tranche, determined on the basis of its own capital contribution with respect to the overall cost of the investment, of the monthly cash flow that the property will generate as the positive differential between the total rents received (revenues) and the related costs (management, financial, maintenance);
  • the tranche of the differential between the sale price and the total cost of the project when the property is sold.
What are the risk profiles of the investment?

Against this overall return on investment, the related risk (which does not follow normal market logic according to the typical relationship of direct proportionality return/risk, where high rates of return necessarily correspond to high rates of risk) is structured as follows:

  1. the investment is secured by the underlying property, the purchase price of which – as mentioned – is always significantly lower than the market price, so that no capital loss is conceivable in the short to medium term;
  2. the investor’s risk completely disappears after 12-18 months because, when the project is refinanced, the entire capital will be returned to him or her (plus an extra share): in the absence of financial exposure, the investor will in any case have the right to a 10% free share in the capital of the company owning the property, which guarantees him/her (i) the pro-rata share of the monthly cash flow and (ii) the percentage of the gain when the property is sold. Paradoxically, it can be argued that after repayment of the entire capital, the percentage return on the investment tends to infinity (since the number at the denominator of the fraction will always be “zero”);
  3. also the “operational” risk, i.e. the risk linked to the actual management of the property, has very limited values compared to an ordinary single family investment, given that, even in the case of delinquency or eviction of one or more tenants, the overall cash flow will undergo minimal changes and in any case will be largely absorbed by the profitability of the other non-delinquent units (in the case of single ownership, by contrast, it is clear that the arrears of the tenant and the consequent eviction – even if in the USA the eviction procedure is very quick and does not require more than 30 days – entail the temporary interruption of income and, if it is necessary to substantially restore the property, wipe out the said income entirely where the restructuring/restoration expenses are greater than the rents received in the year).
What about market risks?

The market risk, i.e. the risk of a possible fall in property values, is in fact very limited in this type of transaction.

In order to understand this aspect, it is necessary to consider the natural and widespread propensity of the American population to rent: as is well known, Americans often prefer not to buy a property but to rent for life. This mentality, which is very different from ours, allows the owner of the property to guarantee full occupation of his property, and above all protects him from the risk of a collapse in property prices: in fact, in the event of a downturn in the US property market, historically what happens is that this decrease in prices and therefore in the value of property either precedes or follows a financial crisis, the characteristic element of which is always the so-called credit crunch, i.e. a low propensity on the part of operators to grant credit. When financial operators restrict the supply of credit, what actually happens is that the private citizen cannot access any form of loan to buy a property to be used as his own home, and is forced to rent one. This means that, whether the US housing market grows or declines, the value of rents tends not to decrease, but to increase.

 

Not only that.

 

In the event that there is a real collapse in the market price of real estate in the U.S. in the period between the acquisition of the apartment building and its refinancing (which occurs, as mentioned, after about 12/18 months), and then the capital refinanced by the bank is not sufficient in relation to the capital to be returned to the investor, Remida Properties is able to remedy the detrimental effects of such a remote occurrence by allowing the investor to acquire a higher percentage of the share capital of the company holding the property (10%) than he would normally be entitled to, so that the additional percentage of capital perfectly “fills” the difference in capital not returned.

 

In essence, there can be no market event whereby the investor loses even a small part of his invested capital.

What are the criticalities of leverage?

When people talk about leverage, which is the most useful and widespread tool for increasing equity capital at multiple rates, they usually evoke risks and critical issues mainly related to the financial cost of borrowing capital, as well as the risk of not being able to repay the lender at maturity.

 

Risks that are indeed concrete, real and possible.

 

So what is the actual risk profile of an investment in apartment buildings?

 

Exactly the same as described above, since in this type of transaction leverage does not entail any greater risk of exposure for the investor, given that, while on the one hand the bank is financing and must be remunerated for this, on the other hand the investor is entitled to a guaranteed return (as a preferred return) from Remida Properties, as well as repayment of the entire capital invested.

 

In addition, the logic behind the purchase price of the property and all the costs necessary for the project to return a positive cash flow guarantee not only the profitability of the borrowed capital (understood as the positive differential between yield and cost) but also its full and complete repayability at maturity.

What kind of properties do you acquire?

Multi-family properties consisting of multiple residential units (apartments)

What is the size of the transaction?

Normally the target investment is a property worth $2,000,000 or more once renovated.

How old are the properties you select?

These are usually properties built from 1960 onwards that require renovation, which is why they are bought at heavily discounted prices.

What are the target markets?

Remida is active in all states that guarantee favourable regulations for investors and offer a high return opportunity for the investor. These are mainly all states in the South East, South West and Central USA.

In which locations do you select properties?

The selection of properties is done by considering their location. The search takes place in those locations classified as A, B and C+ on a scale from A+ to D-.

What is the quality of the assets selected?

Normally these are so-called “Value Add” properties and therefore require renovation work, both physical and management.

What is the average occupancy of properties?

Normally the average occupancy in a purchase might be low and the aim of the project is to bring it above 90%. Usually occupancy is one of the most important parameters considered in the valuation of a property. Even more important for us is the so-called “Collection”, i.e. the percentage of rents collected that through sophisticated management techniques Remida is able to keep always at high levels and above the market average.

What is the CAP Rate you take into consideration?

By market CAP Rate we mean the discount rate of the financial flows deriving from the management of the property. Normally in the markets on which we operate it corresponds fluctuates between 5% and 8%. As for the CAP Rate of our operation, that is the effective rate of return generated by the investment, we are talking about CAP Rate between 10% and 15% compared to the total cost of the project.

What are your general selection criteria?

We select properties in locations defined as A, B or C +. These are properties that require renovation works and a complete management review in order to create a lot of added value net of the period of operation. As a general criterion, the total cost of the operation will not exceed 65% of the expected final value of the property.

What is the target return and the period of the transaction?

Investors in operations of this type can expect a total return in excess of 20% annualised. Yield paid from multiple directions. The payout period for those investing in this type of operation is between 12 and 24 months and a return stream is also expected during the project itself.

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Q

 

Proprietà che richiedono un lavoro di rinnovamento e/o di ristrutturazione sostanziale; da questi aggiornamenti possiamo massimizzare il capitale/valore delle proprietà

sottoperformanti con sfide legate al mercato e/o alla gestione

Opportunità off-market e opportunità dirette al venditore che possono essere negoziate direttamente con i proprietari

Proprietà che richiedono un lavoro di rinnovamento e/o di ristrutturazione sostanziale; da questi aggiornamenti possiamo massimizzare il capitale/valore delle proprietà

sottoperformanti con sfide legate al mercato e/o alla gestione

Opportunità off-market e opportunità dirette al venditore che possono essere negoziate direttamente con i proprietari

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