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Feel Good Returns: A New Postgreen Long-Term Investment Model

by Nic Darling on November 5, 2010 · 17 comments

in Development,financing

If you have any long terms savings or investments including stock, IRAs, annuities, etc., than this post is for you. In fact, if you think you might someday have some sort of long term investment plan than you will probably be interested. Heck, even the broke and opinionated will probably enjoy this discussion, so why doesn’t everybody just stick with me as I lay out our new investment option.

Basically, we are looking to move into building some rental and commercial properties that we can maintain control over long-term. We think that rental units are a strong part of any developing neighborhood, and that we have an opportunity to introduce a better way of approaching this type of building. We have also seen excellent performance from rental properties in the neighborhoods we like. You will definitely be hearing a lot more about that as we get into the real design work, but today I want to talk about how this type of project potentially changes our investment model.

Our model we use right now for our “for sale” development is, as most of you know, intended to expand the real estate investment opportunity to a broader range of people. We have had investors coming into projects with amounts as low as $10k and we feel this approach has worked very well for everyone. We have already paid out 8 investors using this model and they all seemed pretty pleased with the return. The terms for this type of investment look like this:

“For Sale” Model
Investment Levels: $10k and up
Term: 1 year (with a possible 6-12 month extension)
Return: 10%-12% Annually (depending on investment level)
Security: Unsecured Note
Position: Second (after bank, before Postgreen)
Repayment: Paid Immediately After Completed Sale of Project

This is a very basic model that has served us well so far. Unfortunately, it doesn’t exactly translate to a project which we don’t intend to sell. The rental style projects require a slightly longer term investment. This usually means additional security and a slightly different repayment plan. This additional complexity also ups the barrier to entry a little, but we still hope to make it an accessible opportunity for as many people as possible. Right now our thinking looks like this:

“Long Term” Model
Investment Level: $25K and up
Term: 5+ years (with an option to repay in 3 years)
Return: 10% Annually (depending on investment level)
Security: Secured Note (note is secured by real estate)
Position: Second (after bank, before Postgreen)
Repayment: Interest paid yearly. At the end of term principle and last year’s interest paid.

This is a guaranteed interest payment that is paid regardless of project disposition. It is not tied to rental rates, construction schedule or any other external factor. For example, a $50k investor would see a guaranteed return of $5k a year for 5 years. That would be a total return of $25k over the 5 year term of the investment. Compare this to other rates (for the sake of a simple comparison I am going to assume that you pull your interest out rather than let it compound):

Mattress: 0% ($0 over 5 years)
Savings: 1.75% ($4,375 over 5 years)
Treasury Bonds: 2.5% ($6,250 over 5 years)
IRA: 3% ($7,500 over 5 years)
Stock Market: 6% ($15,000 over 5 years . . . if you remain lucky)

These numbers are obviously very rough estimates based on conditions that are constantly changing, but the fact is, most people don’t see more than a 5% annual return on their money and those that do are working for it. The 10% base return we are offering seems to look pretty good in comparison.

Many of you will point out that there is a certain level of risk undertaken when investing in a real estate project. This is true. Investing in our projects requires a certain level of faith in what we are doing, but compared to the stock market over the last few years I don’t think it’s all that much of a leap. The investment is secured by real estate, and in rentals we are working in a robust, proven market. In the end, each individual project has to be evaluated on it’s particular merits but we hope the overall offering looks pretty good.

Lastly, I’ll mention the less tangible benefits of this investment. While we all understand that an investment is, first and foremost, a money making proposition, it doesn’t hurt to invest in something that matters to you or at the very least, something that doesn’t make you physically ill. Now, I would never suggest that what we do is charitable or even particularly altruistic, but we think it beats investing in companies that are building new and inventive ways to injure people or ones that seem to be intent on inflicting as much environmental damage as possible. It has got to be better than putting your money in a place where it might be used to lobby against your very well-being and that of your children. And frankly, while I paint a comic-book evil version of this scenario, it is hard (not impossible but hard) to find a place to put your money that isn’t at least tangentially related to the types of companies you wouldn’t tell your friends you support. Investing in a Postgreen Project will, at the very least, off-set a significant amount of carbon as all of our buildings are designed to operate on half the energy of a standard building, and we hope it will make you feel just a little better about where your money is spending it’s time.

Much like the “for sale” investment program, we will be creating a list of qualified investors who will receive project proposals as they become available. To be added to this list you should have at least $25k available to invest. This post should generate a lot of discussion on this program, but if you are already pretty sure you like it you can sign up for the list now by using the unattractive form below.

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So, there’s the idea. Now, we need to hear your thoughts. What works here and what doesn’t? Did I miss any important information about the investment model? Are there other models out there that you like?

Put your words in the comments.

(Post Edited: We edited a few lines above that were causing confusion with some readers regarding a “guaranteed” return. This was an error and we certainly are not the first ones to figure out how to guarantee an investment. No investment is guaranteed, including the ones we are proposing. If a project is wiped off the earth by aliens, for instance, it will probably hurt the chances of recouping your the full investments on that property. We are sorry for any confusion.)

If you enjoyed reading this post I can promise you'll love our new writing over at Postgreen Homes. Yeah, we know that's the same thing your favorite band said and their new album is nowhere near as good as their early stuff, but seriously, we are actually still getting better.

There also isn't much conversation to be had here . . . at least not with us. So come on over to the Postgreen Homes Blog and tell us what you think of our new(ish) digs and crazy ideas. We will be sure to tell you what we think of your opinion.

{ 17 comments… read them below or add one }

1 Keith November 5, 2010 at 1:53 pm

One question, would you structure the investments so that they could be made using funds from a Roth or Traditional IRA? I am not an expert on this but I think that would open up your potential investor list significantly.

2 cherry lehman November 5, 2010 at 1:53 pm

When you list the different savings rates – i.e. mattress, savings, treasury, include your return rates so it’s readily comparable…You don’t have to scroll back up.

And it’s a great proposal!

3 Chad Ludeman November 5, 2010 at 2:06 pm

Keith – Absolutely we would work with IRA’s We have done this for a few investors to date and it is an easy and lower-risk method of investing for many. Funds in IRA’s are already long-term investments, so why not earn higher rates while investing in something a bit more interesting than traditional funds.

It’s a commonly misunderstood fact, but most IRA’s will allow you to invest in Real Estate. Some don’t want you to and make it harder than others, but most do.

4 Preston November 5, 2010 at 2:38 pm

Do you have the ability to structure the for sale investment model with IRAs?

5 Chad Ludeman November 5, 2010 at 2:44 pm

Yes. Either way works. Our IRA expert is at the Passive House conference this weekend, but may do a follow-up post on the details of how this can work next week.

6 Seth Neal November 5, 2010 at 3:13 pm

I think real estate is a great investment and I like the idea of being able to invest in the type of housing you build. My only concern is the “guaranteed” language. As someone who owns and manages several single family houses that are rentals I’m not sure how you can guarantee anything! Haha!

If the language was changed to % of profit, etc that might be more appropriate.

7 Chad Ludeman November 5, 2010 at 3:20 pm

Good point Seth. If we were to pay dividends annually, it may be better to have it as a percentage of net income. Alternatively it may be better to accrue and compound interest over the course of the investment and just pay everything out when the property is sold or re-financed at the end of the investment term.

8 Dan S. November 6, 2010 at 10:42 pm

I’m very interested in the idea of ethically responsible investment instruments.

Can you clarify the notion of an investment like this offsetting carbon for the investor? I don’t quite understand the logic. It seems to suggest something altruistic about the investor’s action, but I don’t think you mean to present this as altruism at all.

9 Chad Ludeman November 8, 2010 at 11:16 am

Dan – We are simply referring to the fact that whatever we build will consume less than half the energy of a normal building that would be built by someone else. We also try to choose as many local materials and low-carbon products to further reduce the overall carbon footprint of every project compared to a standard building that would be built in it’s place.

Whether it’s altruistic or not is up to the investor I guess. There are those out there putting their money into carbon offsetting credits and investments separately. You could argue that one is doing both with the same money in one of our projects, but it’s not something we are trying to claim as a main selling feature in an investment…

10 Gary S November 8, 2010 at 11:35 pm


I develop, own and manage mixed use investment properties for a living, have a number of years of industry experience, a masters in RE investment and an MBA in finance. Not tooting my own horn, but I like to think I know what I’m talking about.

Before offering long term real estate “investments,” you really should consult with a CPA and educate yourselves about tax treatment of these investments, just as your prospective investors should.

An unsecured loan is simply that, NOT a real estate investment. A real estate investment involves an equity (ownership) interest; sharing of profits/losses, depreciation, tax credits; annual IRS & state partnership returns, K-1′s, etc. Presumably you have some experience with this from your development activities.

Not to discourage you, but it can be quite complicated or rentals. Interest on an unsecured loan/note is not treated the same way in the eyes of the IRS – not even close. Know what you’re offering – inside and out.

11 Chad Ludeman November 9, 2010 at 9:39 am

Gary – Thanks for the comment. You are completely correct that everyone should consult a tax professional before investing in anything.

Again, this is simply an exploratory post to propose the basics of an investment model, get peoples thoughts and gauge interest. There will be more complete details in any formal proposals that go out for specific projects and of course the legal documents signed by any investing in a project.

I think we could get into a semantic argument that is not intended for these comments. You may be right that this is not technically a RE investment in the traditional sense of the term, but it is an investment. People are investing in a project for a specific interest rate. One of the main purposes of our investment model proposed is to keep things simple for our investors and prevent them from needing to worry about the complications of equity interest that you are describing. Feel free to contact me directly if you’d like to discuss further.

12 Chad Ludeman November 9, 2010 at 9:47 am

FYI – Post edited to take out “guaranteed” language. No investment is guaranteed, including any we are proposing. Sorry for any confusion.

13 Gary S November 10, 2010 at 3:09 am

When it comes to IRS treatment of a real estate investment there are no semantics; it is or it isn’t. Different rules apply for a loan, which is what you’re offering.

If a prospective investor isn’t sophisticated enough to understand the difference between the risk/tax implications of a real estate equity investment vs the second position loan (a.k.a. “mezzanine” loan) you’re offering, which can be far riskier, they really shouldn’t be considering any investment like this. Stick with REITs and REIT funds.

I’ll be very surprised if you can find any primary speculative lender willing to allow secondary financing of any kind due to the complications it causes in the event of default or foreclosure. Witness the residential mortgage mess.

You can bring in equity investors (so-called silent partners) so you can put in less equity yourself, maintain control, give investors a preferred return plus a little piece of the upside, and even have a provision for taking them out after a certain period of time. And there’s no secondary financing. The managing partner’s interests are aligned with the equity investors’ interests. This is the way it’s typically done.

14 Greenbuildingindenver November 10, 2010 at 11:02 pm

Most primary lenders don’t, and usually can’t, prohibit secondary financing. That’s the whole point of being in first position.

The current state of the market is in the perfect shape for a vehicle like this. Homeownership rates are dropping, meaning that the number of renters is rising. In addition, not much multifamily market-rate development is happening, but that will change fairly soon. Keep on your toes, because when it does happen, those developers usually overshoot the number of needed units, and that can drive rents down for years.

15 Gary S November 11, 2010 at 12:16 am

When it comes to residential mortgages, you are correct. This is, for the most part, a very standardized, highly regulated product.

Commercial lending is a whole different ballgame. Terms vary widely and many things can be negotiated to suit a borrower’s circumstances. No bank that is lending on a speculative commercial development is going to allow secondary financing because it increases risk and loans are priced based on risk.

Lots of broad brush comments and very debatable assumptions in you assessment of the state of the market and what it needs. Markets are local (Denver’s not the same as Philly) and there are lots of factors that affect rents, not just supply.

16 Max November 11, 2010 at 3:54 am

I think it is a great idea – and understand this post is mainly to feel out the potential investors. . . And I hope you are getting some emails!

So- I work for an group that both acts as a developer of homes for sale as well as rental property and they are pretty different businesses in a lot of ways. I would encourage you to describe your teams experience in this new line of business.

I guess my other feedback is that whether your investors are lending the project capital as debt or as equity they would (or at least I would) want to see your assumptions these include vacancy rates, bad debt, your management plan (are you self-managing?), and your income assumptions. Additionally, do you have any commercial tenants lined up or will this be a purely speculative project. Additionally, will the investors be ‘merged’ into a LLC or LP or will they have their own liens? What will the final LTV and DCR be and whether these will be recourse and/or have personal guarantees. I guess I would just encourage you could provide some basics without giving away your whole plan.

17 Chad Ludeman November 11, 2010 at 8:21 am

Thanks for the continued comments. Just to clarify, this post is just for the basics. We get into details that are starting to be asked in each individual project proposal that is sent out. Each deal is different, so it’s not really possible for us to address all the details in a post like this anyways.

We have been borrowing with no problems to date on our projects with this current mix of private lenders for equity and banks for construction financing with no issues. I think it’s important to keep in mind these are small deals to banks. We’re not talking about multi-million dollar projects here where different rules may apply. These smaller deals are much more conservative to all involved.

We have other models of investing that we are not talking about here for people that want to invest over $100K or be the sole investor in a project. These are more complicated and involve all of the equity sharing implications that Gary has been referencing. What’s talked about in this post is targeted mainly for people looking to get a better return on their retirement savings through an IRA or other source where they may currently be earning a lesser or more volatile rate of return.

We may be sending out a specific project proposal in the next month or two, so if you are signed up for the investor list above, you will get to see more details and we will spend more personal time answering every question you might have at that time. Thanks again for the interest.

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