How to Take Your Investments to the Next Level in Commercial Real Estate
With Percy Nikora, Co-Founder
So as I was looking at ways to diversify the portfolio. Going back to my earlier childhood, I had always seen how real estate could be leveraged and should be a part of your Apocrypha diversified portfolio. So I started to invest in income producing real estate. Now, at the time, to me and to many of the investors who start down this path, that typically means single family residence houses that you rent to somebody could be anywhere from one, two to four units. And so that's what I started to do, is rent those houses, do some fix and flips. And you get to a point where it becomes hard to scale a single family rental business. So I started to look at ways in which we could scale and perhaps leverage that same asset class, but take that business to the next level.
And that's when I started to come across more of the commercial, multi-family or apartment complexes and started to see that while these apartment complexes are not just owned by some huge large company, it can also be owned by the small lies like like us. And part of the reason why we created Penn Capital was to be able to identify good apartment complexes, good commercial real estate opportunities that we can sort of bring to our contacts are all our equity partners or investors and who can call invest with us in these deals. So to us, it's almost like a platform that we identify good deals that we want to invest in. And then we extend that opportunity to others as well who could join us in this investment. And as as we were researching that space, there are added benefits, significant tax benefits that come along with apartment complexes that didn't exist in some of the other commercial real estate classes, which allows you to take a large amount of depreciation. So this allows you to, let's say, defer the taxes that you're about to pay on any of the rental income that is produced. It also allows you to do a what's called a 10:31 exchange, where when you want to sell the property, you can defer the taxes even further and continue to build on that and get a compounding effect on the returns, which is very powerful.
And it also allows you to control the value of the property. So in single family real estate, the value of the property is primarily driven by the location. And you can make some improvements to the property, but there's sort of a glass ceiling as to how high the value of the property would be worth in a particular neighborhood vs. with apartment complexes. The value is really based on the net operating income. So you can increase the bottom line, so to speak, of the property either by efficiencies in in operations or. By enhancing the revenue, by making improvements to the property. And for every dollar that you increase or bring to the bottom line, the value of the property increases anywhere from 15 to 20 fold. So that's extremely powerful. And given that you're talking about assets, there are tens of millions of dollars that you can see a substantial increase in the value of the property by making a few enhancements. So, you know, those those are the main reasons that attracted me more towards the commercial real estate, particularly multi-family versus single family. And in a fuller at the highest level, you can almost think of what we're doing as a fix and flip, but at a large scale. Right. So just add a few more zeros. But you're buying an asset that's undervalued or underperforming. You are enhancing it, optimizing it, and then you're selling it. We're just doing it at a larger scale.
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