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One of the most important concepts to understand when investing in promissory notes and other debt instruments is whether and how such debt is “secured.”

The most frequently-used types of debt are unsecured— like using a credit card. If any debts are unpaid, the lender (or creditor) has no direct recourse to seize money or assets from the borrower. Because these lenders/creditors are often taking greater risk, they generally demand higher interest rates for the debt they hold.

Secured debt, on the other hand, is that in which the lender insists on some type of collateral that, in the instance of a default, can be claimed by the lender as a reco

For this blog entry, we thought it would be helpful to lay out a quick comparison/contrast of a typical equity syndication, and the promissory notes we offer at Coldstream Partners. We have plenty of experience with each, and are happy to keep the discussion going if you have any questions, comments or suggestions.

Happy investing!

It goes without saying that any investment is made better if it can be sheltered from tax. So for this blog entry, we’d like to explain how to do that with any purchase of our notes.

Let’s start with the disclaimer that we are neither accountants, tax advisors, nor tax attorneys. What follows, therefore, should be considered as ideas or inspiration, rather than specific advice for any given situation.

With that said, individual retirement accounts (IRAs) were created to incentivize individuals to save more for retirement by investing in any of a wide range of products. We’ve all heard of various flavors, such as traditional, Roth, SEP, and self-directed (or SD-IRA). For today, let’s focus on the last of these—the SD-IRA—and what sets it

The business savvy required to own and/or operate multifamily residential properties is, we admit, not complicated. This is because, over any reasonably long period of time (say 6 months or more), the cash flow for a given property is actually highly predictable. Income (rents) is generally predictable (it certainly won’t surprise to the upside!), and barring the advent of unexpected major repairs, so are costs. But here’s the thing: over an even longer period (say 5+ years), even major unexpected repairs and dips in income (due to vacancies or delinquent tenants) should be very easily weathered, so long as reasonable assumptions are made. 

But the risks and uncertainties, we’d argue, are nothing compared to many business models. For example, there isn’t really any product t

When taking loans or investing in debt, it’s important to know and understand how the seniority of the debt is structured, since this determines who gets paid first in the event of a default, and therefore the risk/benefit ratio of each debt holder on a given property.

For most residential properties, banks and other institutional lenders (for example, credit unions) generally insist on a primary, or senior-most position. This means that if a property has to be sold to cover debt on which the owner has defaulted, the bank gets paid from those proceeds first, until all unpaid principal and interest is satisfied. If there’s money left over, it is then used to pay subordinated, or junior, debt (again, any

You’ve probably come across the PITI at some point. For the uninitiated, this refers to four of the very common recurring costs of real estate ownership: principal, interest, taxes, and insurance.

Obviously, these four costs are not universal: properties without associated debt won’t have a principal or interest cost. Nor are they comprehensive: many other types of cost (for instance, repairs and property management fees) certainly abound.

But these four costs are generally lumped together for the a few reasons. First, they’re common—relatively few instances

In order to determine whether home improvements are worth the cost/headache, people compare the cost to the projected increase in value. For investment properties, I often see people compare the cost to the expected rent increase. For instance, if a $10,000 kitchen improvement will translate into $100/mo increase in rent, then it takes ~100 months to recoup your investment.

Let’s look at why this approach is misguided.

Continuing with the example above, let’s also remember that this increase in $100/mo translates into an increase in annual net operating income of $1200 (for sake of this example, let’s say costs and other income sources remain unchanged). Depending on your local cap rate (short for capitalization rates, explained at

Among the many pithy teachings of Mr. Averbach, my high school history teacher, was “Debtors love inflation, because existing debt is the only thing that doesn’t get more expensive.”

Obviously, there are some qualifications with this kind of statement. For starters, this doesn’t apply to new loans originated during rampant inflation—those obviously get more expensive.  But the guy (or girl) who took his loan when inflation was 2% doesn’t owe more just because inflation spiked to 10%. In fact, as a general rule, that inflation is good for this person. Wages and income are likely rising (even if not keeping up with inflation), including any earned from the money borrowed (maybe it was for a college education, or an investment property), while the cost of his debt holds steady

We get asked periodically why we like this asset class. 

The short answer is easy: it generates the best risk-adjusted returns. Not just among real estate, but among any asset class.

Of course, I can’t really prove that, just like nobody can prove that any other asset gives better risk-adjusted returns than multifamily real estate. But let me try to explain why we view the risk as very tolerable, and even low, for the returns we generate:

1. Straightforward to underwrite* (both for buyer and lender): it’s pretty tough to get acquisition costs, operating expenses, and rental incomes so wrong that a dea