Let’s start with how: we’ve generally done it the old-fashioned way—come up with a 20-25% down payment, find conventional financing to cover the rest. As for the why: we see multifamily housing as offering the best risk-adjusted returns not just of any real estate category, but of any asset we can think of. Over the years, we’ve owned property in a few markets, and could spend hours and pages telling you why. But it’s probably easiest to just give us a call to discuss if your interested in learning more about this.

This is a great question, and we provide some comparison and contrasts to the two models in one of our blog posts. We recognize the trade-offs between the two models of investing, including the general trend of greater risk/greater reward for equity investments (which we also currently operate), relative to those based on debt. In our opinion, the main advantages of the debt investments we currently offer are: a) greater prioritization of investor returns (since Coldstream Partners takes no profit until all committed returns are paid out); b) greater predictability of timing/amount of returns; c) improved segregation of operating costs and/or potential rewards (meaning that investors get a fixed return that is “immune” to our discretionary decisions regarding costs for the property, like upgrades or decorating; if we invest $10,000 to remodel a kitchen in one of our units, that has no impact on what we owe our investors). 

The short answer is that we offer no guarantees, iron-clad or otherwise, and wish to be abundantly clear that this investment carries risk, including loss of principal. That said, I can also say that as of writing this, we’ve never lost an investor’s principal, and have done our best to structure each of these investments to avoid that. See the next portion of the FAQ for additional explanation of why this is.

As for securitization of an investment, we offer two options: secured and unsecured, which have trade-offs with respect to one another (further explained in this blog post). A secured investment is one in which we record a lien against the property, meaning that property cannot be sold until the associated debt is paid off, and/or that the debt still owed will be paid from the proceeds of such a sale. An unsecured investment, on the other hand, has no associate lien and is only as secure as our commitment to repay it.

Because of the additional cost associated with the secured option (and because it may be less risky), we generally offer slightly lower rates for this option, relative to an unsecured investment in the same property.

Yes! We are happy to work with custodians of any self-directed IRA or solo-401k to permit you to use those funds to invest in our promissory notes, in order to best shelter your earnings from taxes. We’re also happy to recommend custodians if you want to set up a new retirement account that permits investment in alternative assets (anything other than publicly-traded stocks/bonds/mutual funds). Give us a call or email so we can get to work setting it up!

We always speak in terms of annualized return, and use a methodology called extended internal rate of return (XIRR), as governed by the formula used in Microsoft Excel. In brief, this formula takes into account both the amount of return paid, and the time at which it was paid out. In dollar-for-dollar terms, this means a given return is more valuable the earlier it is paid out. As an example, let’s say we accept an investment for $100,000 with an agreement to pay a 10% annualized return for a term of 5 years. A simple way to meet this obligation would be to pay out $10,000 on each anniversary of the original investment (including year 5), and also return the original $100,000 on the fifth anniversary.

This would mean we paid out a total of $150,000 over the term of the deal. But suppose instead that no returns were paid out until maturity, either because the investor chose that option (which we are happy to accommodate), or because Coldstream Partners was unable to meet its obligation(s) along the way. In this instance, the amount owed on the fifth anniversary would be $161,093. So why the ~$11,000 difference? The simple answer is because of the time-value of money; returns on any investment are more valuable the sooner they are paid out. We are happy to explain this further and/or walk through additional concrete examples anytime upon request—just reach out!

To be clear, Coldstream Partners has always placed a premium on timely debt repayment, to which our bank lenders can attest (let us know if you would like to verify this; we’re happy to put you in touch!). Now, to explain what happens if we can’t make our promised payments, it’s important to consider two scenarios:

• We miss any number of payments, and maturity date remains in the future: our contracts are structured such that, in the (unlikely) event that we cannot meet any obligations to our investors prior to maturity date of their investment, this does not trigger any default or other automatic changes to the agreement. Instead, we are obligated to “make it up” at time of maturity, with a final payout of principal and interest that, when combined with any payments already made, results in the promised total annualized return.
• We miss any number of payments, and maturity date has passed: this would constitute a default, and is clearly a bigger problem than the first scenario. We obviously wish to avoid this at all costs and would do our best to alert investors in advance in the event that we forecast this as even a remote possibility.
  
  It is important to remember that, should this scenario arise, it signifies that circumstances are such that, since selling a particular note, Coldstream Partners has not taken any profit from the property (we do not take a nickel until our investors are paid their promised return in full), and that we are also facing a dire situation (at least with respect to the particular property in question). Nevertheless, we would look at all options to make our investors whole, including sale of the associated property and/or re-negotiation of the terms of our note agreement. 

The answer to this depends on circumstances. If you decide one week after an investment that you want to add to your position (and assuming we haven’t already hit our investment limit), we can probably offer a quick solution (like revising your existing note). If you’re halfway through a five year term, the request would be subject to availability and would likely need to result in purchase of a new note. Either way, if you find yourself in this scenario, just reach out, and let’s discuss options.

In short, we want to accommodate this type of request from our investors, but only if circumstances permit it. We debated adding language to the contract to cover this, but we couldn’t come up with a satisfactory way to deal with the (unlikely) even that there is “a run on the bank,” meaning many/all investors requesting/demanding money back at the same time. So while we can’t and don’t make any promises, please talk to us if you find yourself wanting or needing liquidity sooner than you had anticipated. We promise to do our best.

Great question. The short answer is that yes, we definitely always maximize the loan-to-value (LTV) ratio from conventional lenders, like banks and credit unions. But these are often capped at 70-75%, which means that we generally start with at least 20-25% equity position in each property. And this equity position naturally grows each month as a) the principal is paid down; and b) the property value appreciates. So we could (and have) of course refinance and cash-out equity with the bank, but this has limitations: closing fees, limited frequency, extensive paperwork, same cap on the LTV, and of course, rising interest rates. As we write this (September 2022), a typical cash-out refi will be about 5.5%, and max LTV about 30%. Under these assumptions, it almost always make sense for us to borrow that first 70% from the bank, and “borrow” another 20-25% of the current value of the property, even if at a higher rate. That’s where promissory notes, and you as the potential investor, come into the picture. If you lend us part of that 20-25% of the property’s value, at a rate of 8-12%, everyone wins (assuming the property performs reasonably well): the bank makes their money, you get your promised return, and we still make a profit. 

The investments we offer are property-specific for several reasons: a) we can better customize the offering and rate of return based on the performance of a single property; b) it dramatically simplifies accounting and legal practices and avoids unnecessary commingling of funds; and c) it improves our ability to transact on a given property. We do, however, understand the desire to diversify, and that’s part of the reason that we permit smaller, customizable investments than most of our peers. As an example, instead of investing $50,000 in a single property, an investor may wish to instead spread that across three properties buy purchasing three separate notes (and divide the money as she/he sees fit).

The rates we offer tend to correlate with our confidence in a property’s overall performance/return, as well as the demand we’ve observed. So we generally offer a higher return on a property we’ve owned a long time, or that has performed well in terms of cash flow, because we’re more confident in its performance. On the other hand, we may decrease the offered return on a property with a long/strong track record, simply because it has already attracted sufficent interest from investors. 

Not necessarily. As described above, we may increase or decrease offered rates over time, depending on level of interest. Such decisions will not impact note purchase agreements that are already signed/executed.

The short answer is “no.” In fact, we are big believers in each of the properties we own, and are generally committed to long-term holding periods. For the duration of any particular note (generally five years), we anticipate the growth in Coldstream Partner’s equity to be sufficient that a refinancing of the bank-held debt will have naturally occurred (we currently pursue this every 4-5 years, depending on lending environment, on each our properties as a matter of routine), and from which we could repay what is owed at time of maturity. Otherwise, since we know exactly when maturity dates are occurring, we can simply accumulate cash flow in advance.

And of course, it’s not out of the realm of possibilities that an upcoming maturity date (or series of dates for different notes) will lead us to sell a property in order to make good on our debts to our investors. If the local real estate market is favorable for this type of action, then we are happy to pursue that path. On the other hand, we do want to be realistic that selling an asset during a real estate downturn just because a note is about to reach maturity, is generally a poor decision for all involved. For that reason, we structure our contracts such that, with proper advanced warning (generally 90 days), Coldstream Partners has the discretion to delay maturity for up to an additional 2 years (during which the originally-agreed rate of return remains intact).  

While this could happen (if a number of investors commit at the same time), we see it as unlikely. It’s also frankly suboptimal, because as an investor (lender), you probably don’t want your borrower (Coldstream Partners) to have multiple debt obligations maturing simultaneously, since it would theoretically raise the risk of default. Our strategy is built to accommodate a regular pace of both investment on the front end, and successful payouts on the back end, that permit greater assurance to everyone involved that we will be able to meet our obligations. For that reason, it’s possible that we may ask certain investors to consider shifting the timing of an investment (either delaying or less likely, accelerating) in order to minimize confluences of maturity dates.

We view all money that is invested as a means of “tapping” equity in our existing properties, that we use to re-invest into the business in one fashion or another. This generally means improvements on properties we already hold, or acquisition of additional investment properties. At the discretion of Coldstream Partners, however, it may be used to cover routine operating expenses (for example, repairs), or as part of a reserve fund (saved for a period of time in case major expenses arise in the future).  Regardless of the circumstances, we pledge to a) not use these funds for anything other than investing in our business and related projects; b) to adhere to the terms of the note purchase agreement (including the rate of return) regardless of how we employ the funds.