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Understanding the Capital Stack as a Passive Investor · The On The Rise Podcast

• PIMS 2: Welcome to the On the Rise podcast, where we talk about time freedom, passive investing through real estate, finance, and mindset. Let's dive in. Quick disclaimer as always: I am not a CPA, I am not an attorney, or a financial advisor. This is not financial advice. I am not telling you or anyone else what to do. The views and opinions expressed in these podcasts are provided for education and informational purposes only. And are not necessarily the views of my employer. All right. Welcome. Welcome in, everybody. thanks again for jumping into the second passive investing made simple session series. Just before we got started here, Chad and I were kind of reminiscing about last month's session, and we had tremendous feedback from those that that tuned in and dialed in. the last session for those that weren't able to join was called reading the numbers and what the metrics really mean. And as I mentioned when we kicked off our first session, you know, the reason why we're doing this is because these are the types, this is the information that I personally would have liked to know before I used the shotgun approach. when I held my breath and plugged my nose and started deploying capital. you know, into real estate syndication. So really glad again that you're with us again today. We'll be recording the session again as we did previously. we'll provide a QR code towards the end of the presentation, which has a link to our landing page for this series for those that might not currently have access to it. we also do have the live QA box open as there's time permitted here towards the end we'll definitely jump into a QA session here towards the end. So without further ado, for those that don't know myself, I'm Jeremy Dyer, the VP of Capital Formation with Rise48, and I am accompanied here by Chad Ackerman, who is a longtime passive real estate investor, educator, and founder of the Chad Ackerman Real Estate Group. He previously co founded Left Field Investors, which was acquired by Bigger Pockets, and today he focuses On helping professionals confidently navigate passive real estate investing. Chad, again, really appreciate you being a part of session number two here. And I'm excited to get started. Yeah, Jeremy, it's great to be back. the first session I thought went really well. Glad the feedback was positive. I'm excited to be here today and share some more knowledge. Let's see if we can help people out. Sounds great. Let's chop it up. So, for those that aren't familiar with myself, again, Jeremy Dyer, VP of Capital Formation. I like many listening. I was a W-2 earner. I was in tech sales for 25 years, top professional, you know, in that space and in my class. I then transitioned into fix and flipping back in back really during the global financial crisis. My wife and I were buying single family homes for for pennies on the dollar. we were doing quite well in that space. the challenge for us is in twenty fifteen, we decided to double down on children. So we went from two kids to four kids, and at that time I really had to make a decision out of bandwidth. And that is do I continue to scale my single family business or do I focus on my day job, my technology sales job, which again what I was doing relatively well at, and and also obviously trying to be a good husband and a good father all at the same time. So I made a decision largely out of bandwidth to transition from active real estate ownership to passive back in 2015 is when I made my very first passive. Investment as a limited partner investor, again, using the shotgun approach, of course. since then I've now invested in over 75 different real estate syndications as a passive limited partner investor. I've invested with a dozen different operators, a dozen different asset classes. I authored a book a couple of years ago called The Fundamental Investor, which is largely designed to educate individuals like yourself. On the benefits of passive real estate investing. I also started my own fund three years ago, launched a company called Starting Point Capital, which is largely meant and designed to educate and provide value to those that would like to diversify outside of Wall Street and into Main Street and want to invest in real estate, but they lack the time, the energy, the bandwidth, the team to be doing it actively, but they want to deploy capital into real. Real estate syndications. And now I'm the v vice president of capital formation at RISE48 Equity. So I'll go ahead and transition now over to Chad, who's going to kick us off and lead us through the presentation. Yeah, thanks, Jeremy, again. quickly, my name's Chad Ackerman. I have formed a company called Chad Ackerman Real Estate focused on education for the limited partner investor because I feel there's still a huge gap out there to teach people about this space. I was a W-2 guy for 25 plus years as well. Jeremy was in sales. I was creating compensation plans that Jeremy would get paid under. So I was on the other side of the quota, divvying it out instead of having to chase it. did that for several years and got bit by the bug about investing in real estate and finding that alternative income stream and started looking into it about 2016 or 2018-ish is when I really got into it. I Then kind of fell wholeheartedly into the whole process, chased all the shiny objects. I never pulled the trigger on a single family purchase that just I didn't hit with me. It what really clicked was this limited partner investing side of things. I got introduced to it and made my first investment in 208, 19, 2020 era, right around then. I'm a 401k liquidator. I bought into the whole model and moved all my money out of the stock market into the real estate side of things. Along the way, as Jeremy said, we formed a company called Left Field Investors. And it was a group of limited partners that just pulled together to share stories and experiences so you can make a better decision. We sold that company in 2023 to Bigger Pockets. And I went out and got certified as a business coach at that point in time. And then I blended those resources from the business coaching with my experience with Left Field and as a passive investor. And I developed care so that I could. build out that education that I always felt was missing and we never quite got to it left field. So that's kind of my quick story to share as well. But why don't we jump into everything? Quickly a a disclaimer, just to I'll let you read through this if you want, just to let you know it's not legal advice that we're giving. if you need anything specific, please seek out the professionals that can help you out with any questions you might have. But a little housekeeping. So we try to keep these to about 45 minutes. we then want to take questions at the end, but feel free to drop those in the QA along the way. The group may be trying to answer them as we go as well. But if we have some that are worthwhile asking at the end, we can carry them then. And as Jeremy said, a reminder, we are recording these. You can find them in the library that Rise 48 has built. So if you missed one, you can go back and catch the material. At that point in time. Yeah. And I did just want to mention, before we kind of get rocking and rolling here, Chad, this topic that we're here to talk about today or that Chad's going to present to us is really one that most people do not ask about, but they really should be. Okay. That's exactly right. We're here talking about understanding the capital stack. So some people might understand, you know, in a real estate syndication, you've got the senior lender, you know, you might have preferred equity, you might have mezzanine debt. And then you've got this common equity, which is where the bulk of us sit. And then within that common equity, there's a certain risk reward profile. But within common, you also might have different share classes, which Chad's going to talk a little bit more about here as we get going. You know, most people are, you know, they they understand I'm investing at an A class level or a B class or a C class. And maybe there's certain requirements in terms of the size of investment that I need to make, which determines which class of share that I'm in. But I think it's really important for people to really dial in on this episode specifically because it really is a question that you ought to be asking. No, that's exactly right. Thank you for that intro. spot on. It it's one of the more technical sounding topics that we might go through, but it at the end of the day, it isn't rocket science. And what I tried to do is boil it down to be a visual aid for you to really try to help explain it and make it simplified. to try to help get people understanding what this is. So it's not too intimidating if you hear all that language. There's a lot of lingo in what Jeremy just said. I want to try to make it simplified for you so you aren't too overwhelmed when you hear those things. But the the but the general idea with this is the moment that you invest, you are sitting in a specific seat in the deal, whether you know it or not. And there are there multiple seats, like Jeremy just kind of spelled out. Most people invest. Without really ever asking about what seat they're in or understanding what seat they're in. So that's what we wanted to kind of cover today. And that seat, it it quietly, it will decide two huge things for you when you invest in a deal. One is when are you going to get paid? And the other is what happens if the deal struggles. So it's important to know these things because they are influencing the outcome of your investment. And we want you to have a better understanding of what you're signing up for. Because some of this you have the option to pick, or you may have an option to pick where you land. So understanding the differences between those different seats is important. And that's what we want to go through. So today isn't really about the technical diagram that you'll see in a lot of PPMs. It's more about having a strong understanding of where your money is aligned and how that can impact the performance in the deal as you're going through it. So we'll start there. let me make sure. Actually, go back one, Jeremy. I'm sorry. Yeah, this one here. Sorry. I got two different screens up. I didn't see where you were on this one. Forgive me. So a quick map of of where we're going, what we're going to go through today. First, I'll I'll give you the mental model that I've put together. And it's it's a bucket, is what I've used as a visual for you to understand this capital stack situation. That this can explain the whole concept in a very simple manner in my mind. I'm a visual learner, so it translates well for me. That's why I built it out the way I did. then we'll meet the three seats and we'll talk about them and see where people sit generally. We'll define what each of them means and how they act differently from one another so that you get a good feeling for why they are there and which one aligns to your goals and is one you would like to be in. Next, we'll see why the seat you choose sets the risk and your reward at the same time. So you can look at each of them for the exact fit you would prefer. And then finally you'll leave and be able to open any deal, hopefully, and find your own seat in it so that you're confident in understanding where you are, what your impact is, and what you're investing in. And you can go from there. So, with that, then before we talk about the bucket and get into it, I did want to share with you one simple kind of idea that a a big property, a huge investment that we're usually looking at with Rise 48 is a big apartment building complex, generally isn't bought by a single check. There's not usually one individual paying for the whole thing. It's funded by layers of different kinds of money being pulled together. And each layer is really a different investor or different arrangement that is coming into it. That's the stack. The stack is those layers as they layer up, and they're always, you know, it's generally called the capital stack, as you'll hear it in all the documentation. You're not watching the stack from the outside, though. When you invest, you become one of those layers. You are in that stack. So there's only one real question that you have when you're doing all this is which layer am I? Is what you're really focused on. So that's what we're gonna go through today. So here's the bucket. So this is the picture I wanted to kind of simplify and help you to understand how this works. And think of a deal as an empty bucket to start with. And as cash is produced in the deal, or as water is poured in, it fills the bottom first. So as you're pouring water into a bucket, it fills from the bottom to the top. Same thing happens in the capital stack. As you would add water to bucket, if it will fill from the bottom first. So the very first dollars that go into a deal go into the bottom layer, the debt in this case. And only once that's full does the water rise to the next seat from the bottom. and then all the way to the top. So notice that this kind of flips your instincts. I think usually people look at this kind of thing and they think it's the reverse. That's what I like, the simplification of this kind of model. The bottom of the picture looks like the least important spot, but it's actually first in line and the safest seat of the whole deal at the end of the day. And we'll go through these more in detail, but I wanted to give this visual to start with to give people understanding how this works. Yeah. Now, Chad, I just want to interject here, you know, one thing. Obviously the senior debt is going to look a little bit different, you know, deal to deal in terms of, you know, how much of that senior debt is filling the cup. Right. That's called you know LTV or loan to value, right? And so obviously there's a different risk reward profile involved if the deal is leveraging more debt versus less debt. Not all deals also have preferred equity. Some deals don't have a preferred equity, you know, layer in the stack, so to speak. And it's really just the senior lender and then the common equity, you know, investors in that deal. there are also other circumstances in which case The deal may start with perf senior debt and common, but through an additional cash and fusion, otherwise known as a capital call, there may be an additional layer in the stack introduced into the deal later. So a lot of investors who maybe invested into deals in 2021 and 2022 maybe had a need for additional an additional cash and fusion, you know, into those deals to extend out, you know, that deal's runway. And so they maybe had that preferred. Equity layer of the capital stack introduced to the deal, you know, post the original close of escrow or post, you know, your individual investment in that deal. Yeah. Thank you for that, Jeremy. It's spot on. it can get very complex, especially if something gets added as the the deal is in progress, which is all the more important to understand where you sit so you understand how that change will influence what you're doing. So so on this next slide, then I I want you to look at the arrow on the side and the idea or the two arrows, forgive me, on this, on the side and understand that there is kind of a counterbalance here that's going on. As generally speaking, as reward climbs as you go up the stack, the priority of who gets paid first climbs as you go down the stack. So those happen in reverse. They run in opposite directions on purpose. That's how they're built to work. The safest seat is paid first, but earns the least upside. So there is a cause and effect with your decision of where you want to end up in this stack as well. Every seat is just a different answer to the same question at the end of the day, which is how much safety are you willing to trade for how much upside that you want to get out of the deal? So Keep these two arrows in mind the next time you're looking at a deal, because again, the safest seat is paid first, but earns the least amount of upside. The riskiest seed is paid last, but can earn the most. And we'll talk about this more as we break down each of the three categories, which we'll go into next. That'll be our next topics. And let me get my slide to change. There we go. So let's start at the bottom. Let's start with the debt. and this is generally the lender seat. This is usually the bank. It's typically not the retail limited partner that's down in this area. This is usually bigger checks. and it's generally coming from the bank in most cases. But you have to understand it because everything above this line is defined in relation to it. So Being the lender means one thing above all, they're in the first seat. They get paid before the equity investor sees a dollar, and they are secured by the property itself. So if there had to be a foreclosure, it would go to the loan or go to the bank, go to the debt, senior debt person, not to well, it depends on what the structure was, whether it trickled down to anybody else. But that's important to understand. The catch is the trade. By being in the senior debt location, is they are trading the upside for safety again. If the deal hits a home run, the lender still just gets its interest and that's it. They don't see a lot of the upside or much of the upside at all. so first in line, but they're capped. That's important to understand. And then that's the deal that's at the bottom. That's what a senior debt person is focused on when they look at these kind of deals. Anything to add on that one, Jeremy? Are you good? No, I think that's spot on. Thank you. Good. Appreciate it. Yep. So then the middle seat. And this is one, this is the preferred equity seat. And like Jeremy said, this isn't offered in every deal. but when it is offered, this is where it will be sitting in the capital stack. So you can understand it. It's between the lender and the common owners. Some deals will offer limited partner investors this spot. So this is the first potential that you might have a chance to get into as a limited partner retail investor. And be a preferred equity person in a deal. It gets a set return. So you'll still hear it or it still has a kind of a capped amount. You'll hear it called the pref a lot of times in the documentation, in the marketing material. That's what they're referred to when they're talking about preferred equity, then. And it's paid before the common equity shares see anything as well. So again, that water fills up the preferred equity has to get paid out in full. Before it trickles up to the common equity side of things as well. So you've got a little cushion beneath you and a better place in line than the top seat from a security standpoint. The trade is the same one we keep seeing and keep talking about. In exchange for that priority of being first, you're gaining a little bit of the upside by being in the preferred equity bucket. So they're seeing a little bit more money than what the senior debt is from an equity standpoint. That makes sense. Chad, there's one thing I'd like you to maybe kind of highlight because sometimes people get a little bit confused when we talk about pref or preferred equity. Okay. There are common equity investors that may have a pref, right? Whether you're class A, class B, class C. This type of preferred equity that sits in between this the senior lender and the common equity is a different type of a pref than what you would see inside your common equity investor. Class. Am I saying that correctly? Yeah, yeah. And the way I like to translate that, that you're right. There is a preferred equity component in the common equity bucket, usually. The difference between the two in my mind, the preferred equity seat is thinking in terms of you get preferred treatment before common equity does. The pref that's in the common equity is you're getting paid before the general partner does, before profit goes out the window. So they are same similar terms. Can be a little confusing. Just understand read the document. Make sure you're understanding what pref you're looking at if you see that in there to understand what you may get for sitting in a certain seat. Yeah. It's a good point. Yeah. Thanks for highlighting that. Yep. So then our next slide is the common equity bucket, then. And here's a seat that this is where most limited partners end up sitting before the end of the day. This is Typically where they're getting involved in a deal. And in a typical passive investive deal, you're the common equity, you're at the top of the stack. You get paid last after the lender, after the preferred investors are made whole. and in the deals, and if the deal struggles, your seat takes the first loss. So that's important to understand as well. Because after the bank is paid and the pref the preferred equity group is distributed their payments and so forth. There's higher risk that there won't be much profit left to pay the common equity bucket. But that's why people choose it because on the flip side, they get pretty much all of the upside that a deal has then as well. So all of that upside really sits in the common equity. So it's that high risk, high reward. You're being paid for being willing to take the risk that this deal is going to go great. And if it does, you will see the upside and the pref and the senior group won't receive those same benefits. So when the bucket overflows, when water's flowing over the top, the overflow belongs to the top. And the last line and the first to lose in exchange for the bigger payoffs is what you're really buying into the common equity for. So the trade-off of being an LP in a deal and picking this line is. The hope that it's going to be a home run deal for you. That makes total sense. And I know that neither you nor I are CPAs or tax professionals. And just as a bit of a teaser, for the month of November, we've decided to bring the tax benefit side of tax benefit side of real estate investing and the advantages, you know, offered to you, you know, as an investor. But I believe, and correct me if I'm wrong, Chad, to your knowledge. There are greater tax benefits to limited partner passive investors investing at the common equity side of the stack versus the preferred equity. Am I saying that correctly? There it is. It's that magic bonus depreciation that we'll we'll get into more of that next month as well, like Jeremy said. But yes, there are pros and cons additional to risk and reward that are involved in the capital stack as well, for sure. So good. So this next slide. So if if you s think about this, if you strip everything else away, there's really only, you know, this is the one trade that governs the whole stack is every step you take towards safety costs you upside. And every step you take toward bigger payoff costs you safety and places you and your place in line of when you would get paid. So just understanding that it goes back and forth. And to describe it plainly, there is no seat that has both first pay and holds the biggest upside. That doesn't exist unless you're buying the whole deal by yourself, which I don't think many of us are being in the business that we are. So understanding that you're always going to have a little give and take based on what you're choosing to be in. So this isn't about finding what the best seat is, though. I want to make sure you understand this as well. It's about choosing the seat that matches what. You're after what your goals are, which is exactly the return and risk conversation from your buy box that we've discussed. That you ought to make sure you have a firm understanding of how comfortable you are with risk and reward, what you're really seeking. But your seat is it's ends up being a decision. It's not an accident. This is what your strategy should be aligning you towards. It's just today we're trying to help you understand. If you have that choice of common equity, preferred equity, why you might choose one versus the other, depending on what you're looking for in any given particular deal that you're trying to get into. Yeah, it makes total sense. And I oftentimes think about, you know, diversification. Some investors are actually after, you know, kind of having a nice balance between, you know, that risk reward profile. I kind of think of it or liken it to stock investing, right? You know, maybe you want to have a balanced portfolio. Of both large cap and small cap stocks. Maybe you want a balance between domestic and international, you know, in your portfolio. So I think that's another way that we could look at, you know, where where it makes sense for you individually to invest, you know, in the in the stack. Exactly. It's all very subjective too. I mean, there again, there's no right answer here. It's what fits you, it's what you're looking for that really drives everything. So spot on. So One last kind of image with the bucket. So cash and losses move through the bucket in opposite directions, like we've talked about. When a deal does well, cash rises from the bottom to the top, and the overflow or the best part lands at the top, like we talked about. But when a deal struggles, the reverse of this, water doesn't fill all the way to the top. So losses come from the top down. So the common equity group is the group that gets hit first when we don't quite make it to what the deal was planned to get to. And the debt at the bottom is the one that's protected the longest in a in a deal, in any given deal. So now hopefully that risk reward tension makes total sense to you that the top seat earns the most precisely because it's paid last. And loses first. So it's precious up there, but it's compensated for standing in the most exposed spot too. So understanding maybe the the deal flows to a point where some common equity gets paid. And that's where where Jeremy brought up the pref that's in common equity kind of helps. It's not a guaranteed payment, but it's saying if there's only a little bit of money to go into common equity, we're going to try to pay that. Pref to the LPs before the GP ever sees a dollar. That's your kind of safety net that if there is money that makes it to that comedy equity, you're going to get paid first up to a percentage before the GP takes anything. So it's a little way to sweeten that risk spot for you as an investor. But generally speaking, we've kind of talked about this pretty thoroughly. I feel like today of you're trading that risk for reward based on where you pick and choose to go up and down the stack. Yeah, it makes total sense. I also like to highlight like time timelines, right? So I think back into like 2021, 2022, when people were selling deals at the peak of the market cycle, you know, there were investors that were doubling their money in two years or less in some cases. And this common equity really swelled, right? So if you think about like this this cup that Chad is describing, you know, this common equity layer of the stack really ballooned. And took up a lion's share of the cup. Whereas right now, you know, the sellers that are selling, and most of those individuals that have invested, you know, into a Rise 48 deal in the last year or two, you know, we've told you that a lot of these deals we're buying at a 30 to upwards of a 50% discount from distressed sellers, maybe not distressed operationally speaking, but distressed financially. And that's because the senior debt has swelled, you know, as Chad has articulated here in the cup. And the operator's just not able to continue to make payments on that debt, right? Which is why an operator like Rise 48 is able to come in and acquire, you know, a good quality asset at a steep discount. Yeah, yeah, it's great. That's kind of the repercussion. As you said, common equity swelled. Several years ago, it feels like as the market is as interest rates went up and everything, people ran to preferred equity then. They wanted that little more security. I feel like we're in kind of a good mix right now, it feels like, too. So it ebb and flows, but it's it's subjective to the investor. Like, what do you need? What are you looking for? understanding what you could potentially invest in is important then. So Jeremy kind of called this out to start with, too. This is the complexity of what it could get into. in in a certain offering. There could be many layers to this. You know, one quick reality check before we kind of finish up. Everything we've drawn in the model to keep in your head, we've we've talked through, but real deals can get a bit more complex. Sometimes a single layer has layers of its own. On the debt side, Jeremy talked about this. You might see a second loan that shows up in the deal. That's the mezzanine debt. Sitting behind the main mortgage, but before equity start, equity investors start receiving money. So that could layer in another step that you got to go through enough return money to get up to your common equity if you're in that bucket. And on the equity side, both preferred and common, they can split those into multiple classes, like the class A, class B description here. And understanding, again, the fact that money flows from the bottom up. Helps you understand that if you're a class B investor in preferred equity, you're ahead of common equity, but you're behind Class A investors as well. So again, the visual hopefully is going to pull together the idea of how this all works the next time you look at a deal to have a good, firm understanding of how many people are going to get paid before you do and who gets paid after you to know kind of where you stand. But the deals, they look complicated, but if you zoom back out, really you're you're focusing on debt, preferred, and common equity. And that's going to be the same thing in every one. Again, you might not have mezzanine, you might not even have preferred equity in there, but you should see something similar to the bucket that we've talked about today. Yeah, sounds good, Chad. And I'll just kind of reinforce with Rise 48 specifically, deals that we acquire really just have two main layers in the stack. Okay. It's senior debt and it's common equity. Deals that we buy, we do not have a preferred equity layer in the stack and we don't leverage mezzanine debt. But within common equity, we actually have three different classes. So there's class A, class B, and class C. And I think, Chad, you're going to be jumping into those classes here in just a moment. Yeah, we we don't dig much deeper into those. It's similar kind of things. Actually, if you want to layer on How Rise 48's approach to those different classes plays in. That would be valuable to have. Yeah, absolutely. So for our listening audience here, the three different classes that we have within common are ABC. Class A is a 10% preferred return, okay, with no equity upside. That class gets paid out first, okay, in what we would call internally as the waterfall, right? That's going from the senior lender down to common equity class A gets paid first, they sit in that priority position. And then class B and Class C are parapassu with one another. Okay. So they sit bas basically they're on equal footing, I should say, not parapassu, but equal footing, right? Class B and class C. And each class B and C also have a preferred return baked into them. But the profit split and the promote that they receive when that deal goes full cycle is actually greater And I don't want to get ahead of myself and bury the lead here, but Chad's going to be talking in a future session about how and when you actually get paid from a distributions and a profit participation perspective. So again, we'll cover that more here in a future month session. I like the tease though. Thank you for that. So as we're kind of approaching the end of this, let's let's make it practical here at the end. In most passive deals that you're offered, you're sitting in the common equity. In the Rise 48s, you're going to be sitting in common equity or the top seat. Some deals you're you'll be offered a pref equity position and potentially or the middle seat, but generally you're going to be in that top one. How do you tell? The offering always says this. It will always specify if it's common equity or pref preferred equity or whatever the case is, what class. You'll always find that in the paperwork, even if it doesn't use our own bucket language that we've talked about today, it'll be in there. And the sections that you're hunting for, it's called the waterfall. If you look at this information in the documentation, it's literally the seeding chart that we've been discussing today of who gets paid and when and in what order. So if you find that waterfall, then you found where your seat is and where you are in this whole capital stack. You should always be sure to understand what your seat is before you ever commit that capital so that you understand how you'll be paid and what your risk reward potential is for that particular deal. So, to kind of wrap up some takeaways, like we've covered some quick concepts today, but hopefully some of this sticks and has helped out. Perhaps in the past, capital stack may have sounded like jargon and was overwhelming, but hopefully it's a little simpler for you now. I wanted to keep it simple today with the whole bucket visual just to help you understand the concept. It can get very complex, it can get a little more overwhelming when it has multiple layers. But under if you pull back and look at it from a high level, It's kind of that bucket concept, no matter what the concepts spell out to be. But filled from the bottom with profits, the three seats are there, if you know, in some way, shape, or form generally. But then the single trade concept that runs through all of them is that you're giving up priority for upside or upside for priority. So you got to pick and choose which one has the highest priority for you. And then hopefully and the next time you look at a deal, you'll be able to identify your seat and have a good understanding of where you are. So that you have a better understanding of how that deal is going to work for you. So it's not a technical, technical footnote for you anymore. It's something that you should have a better understanding of how it works and hopefully won't be so overwhelming. I I think we've decided, Chad, that we're gonna pivot. our original plan in November was going to be to talk about how and when you actually get paid, as I kind of teased out already. But before Chad and I jumped into the session today, we decided that November should really be centered more around the tax benefit side of real estate investing. And the reason for that is really just a a matter of timing. a lot of individual earners. you know, really look to solve for tax challenges in the current year in the fourth quarter. Okay. So we have a lot of investors that will actually partner with us on our quarter four investment opportunities because they're looking to lock in additional tax benefits through depreciation. And so again, I don't want to bury the lead again on this, but just as a matter of a teaser, we've decided to pivot November's session to talk specifically about the tax benefit side Of real estate investing. I also want to let those that are listening know that in November we're also hosting the Rise 48 Partners Summit. It's our second annual summit. We're hosting it in beautiful Scottsdale, Arizona. we have a jam-packed session, especially on Friday, November the 6th. If you're able to make it on that day, I promise you there will be a tremendous amount of value. We have 16 different speakers, one of which is myself. two is Zach Happenstall, our founder and CEO. we've got other speakers like John Chank from Marcus AmilaChap and our very own Chad Ackerman. He's a very Chad is a very humble man, but I can tell you when Chad walks into a room, he's like the celebrity. So you'll have a chance to meet Chad, the Rise 48 team, and several other speakers that are all designed to bring and provide you value related to investing in real estate. All right. With that said, Chad, I've just got a couple of questions. And actually, they're not even questions, they're more comments. Patty says, Thank you so much. I was confused, you know, about the type of investor that I was, you know, going into these investment opportunities. So we appreciate you, Patty, for saying that. Yeah. And then John and a couple of other people have been messaging me on the side just saying they really appreciate the tremendous, you know, value. You know, that we've brought to them in just two sessions. And we're I feel like we're just getting started. There's so much to talk about, right? We haven't even found our legs yet. You know, this is only gonna get better. So I'm glad that there's some value add. I'm glad people are getting something out of it. That's right. And I'd like to give people an opportunity, by the way. If you think of a particular topic that you would like, you know, Chad, you know, and or myself to bring forth to you, please let us know. We've got a library of you know, probably eight or nine other topics that we're going to be bringing forward to you over the course of the next, you know, several months. But if there's something on your mind that you would like us to cover specifically, and we have enough people that would like us to cover that topic, we will absolutely, and I don't want to speak on behalf of Chad here, but we'll absolutely bring that you know topic forth to you. And the purpose is really truly to educate you. Okay. We are trying to make passive investing simple, right? You know, no pun intended there. And so I'm very blessed to have, you know, Chad, you know, on this on this journey with us. I do have one question, Chad. It just kind of came in here at the last moment. John asks, In common equity in the common equity seat, do you wait to get interest return or do you get immediate returns? I think he's referring to distribution, right? Yeah. So yeah, I like that will depend on the deal. Obviously, a lot of this is subjective to the deal structure. But in the common equity seat, if if income is better than expense in the deal on a monthly basis or quarterly basis, depending on how the deal is structured, common equity will see distributions as soon as the operator is making them available. They may be holding some of that for reserves because they're doing capital improvements to the property. So they may not be doing distributions to start. Understand the deal, look at the deal details before you kind of really have a feel for that. But generally, yes, it would be available if again money rises from the bottom. So they got to pay their debt, they got to pay the preferred com or preferred equity first. If there's enough income that brings the cash up to that level and they're willing to do distributions as opposed to padding reserves, then absolutely common equity could start receiving those distributions during the deal. Yeah, and John, I'll just kind of also mention, you know, here as well, it also depends on the type of deal you're investing into. If you invest in a land deal, for example, or you invest into a ground up development, you know, deal, or maybe you're investing into a multifamily apartment community that has a tremendous amount of operational distress, meaning the occupancy is, you know, really low, right? It's got a lot of deferred maintenance, it's a much heavier value add. You know, it's going to take longer to execute that playbook, right? You know, that the operator's presenting, you know, in their pitch deck. So a lot of that also comes into play as to when that deal is going to start producing, you know, distributions payable to the investors, whether it's monthly or quarterly. But as Chad mentioned before, those distributions to you as an investor are largely determined based upon how much free flow cash flow is available. Each month at the property level to pay those distributions out to you as an investor. So your heavier value add deals or your new development deals, they're going to take longer, okay, to pay out distributions because there's a longer runway needed to execute and effectuate that business plan. Whereas if you're investing in more of a turnkey asset that is producing free flow cash flow upon acquisition with maybe a lighter. you know, value add component to it, that type of an investment's likely gonna pay those distributions much sooner. and as soon as, by the way, within sixty to ninety days, you know, of the time that you make your initial investment and into that opportunity. So great, great question there. Anything else that you'd like to add to that, Chad? No, I think thank you for putting kind of rise's spin on it as well. So hopefully that's helpful for people to have a better understanding of that case. But Should be available, you know, if if all things is going well with the pro with the deal itself. Yep, absolutely. Ed Edward asks a question. I don't know if maybe we want to deflect this question, but he he's got a good question here, and that is related to 1031 exchanges, which is probably another good future topic for us to cover because I know a lot of people are in positions right now, you know, with the aging population, this kind of wealth transfer. you know, from maybe parents to children, that type of thing is happening. You know, a lot of the baby boomer generation owns real estate and they're looking to maybe transition out of active, you know, ownership into maybe more of a passive role. so as it relates to ten thirty one exchanges, do you wanna provide any commentary as to, you know, where they technically kind of sit, you know, within that, you know, capital stack, given the fact that they are actually direct owners in the underlying real estate asset itself and they don't really, you know They're really not positioned, you know, from a from a common equity side or a preferred equity side either. So my first response to this is going to be consult your CPA on this. Go go to the experts on this. I I personally don't have any experience with the 1031 exchanges into these kind deals. So I'd hesitate to even give you some advice right now or explain how it works. But it would make a great topic that I'd be happy to do some research at gosh, I Chris Lopez with Property Llama, he's done a lot of research. He actually gives a class at Bigger Pockets about this, doing 1031 exchanges out of the active side into the passive side. That I would it's a great topic. I would interview Chris and get some great detail and come back and share it with people, probably would be my suggestion. But Jeremy, if you have experience on it, feel free to jump in there. Yeah, yeah, it is a whole nother topic of conversation. So if you if you are if you have an asset that you own today that you're looking to put on the market, you know, you're looking to sell and you'd like to explore more about 1031 exchanges, both the traditional and the lazy or the light 1031 exchanges, please do reach out to myself or a member of the Rise 48 team or one of our capital partner liaisons, and we will absolutely have a conversation with you about what that type of structure would would look like. So great, great question. Ron Ron asks one more here. he wants to, you know, and this is maybe more of a question for me, I guess, than you, Chad. Is there a range of investment? It seems like there are a number of different investment types. And, you know, Ron, as it s relates specifically to Rise 48, we like to keep it very simple. It's really just common equity, and you've got your class A, class B, class C. so we really try not to complicate it, you know, and we don't need to, you know, have other layers in the capital stack to raise the equity. That's another thing that we didn't really talk about is some operators need to leverage mezzanine debt. They need to leverage, you know, preferred equity because they need the capital to be able to close the deal. Maybe the senior lender is not willing, you know, to loan out all of the loan proceeds that they need. So they need to add in that mezzanine, you know, level or layer in the capital stack. Maybe they're not able to raise all the common equity dollars from from retail, you know, limited partner passive investors like you and me. So they need to raise additional funds into that preferred, you know, layer of the capital stack. And a lot of times that preferred tranche comes from maybe a larger institutional, you know, type of an investor or a family office or a private equity group, you know, something like that. So really good question, Ron. Again, I can't speak on behalf of other operators, but we try to keep it very simple. you know, here at Rise forty eight. Yeah. And the short answer for other opera is you'll see a little bit of everything. So you look at enough deals, you'll you'll see a variety of things. But that's right. Good explanation. Yeah. Chad, that's all the questions we have. I've got a lot of people commenting us. So kudos to you for a great presentation here. And we're definitely looking forward to the to the next one. Well, I've I've really appreciated the partnership that loved the brainstorming we do together to come up with topics and everything. Love the topics coming from the group. This at the end of the day, that's all we're trying to do is find out where you have questions and let's build some education to bring to you and help you out with it. So hopefully everybody got something out of today. And Jeremy, thanks again for having me in. Yeah, absolutely. Chad, thank you so much. And we'll talk to you soon. Yep. We'll see you next month. Thank you for hanging out with us today and for listening to the On The Rise Podcast. This show is for entertainment purposes only. Nothing said on this show should be considered financial advice. Before making any financial decisions, please consult with a professional. This show is copyrighted by the On The Rise Podcast. Written permissions must be granted before syndication or rebroadcasting.