Passive Income backed by stable real estate assets
Multifamily real estate is a compelling subset of commercial real estate, as apartment buildings and complexes will always be in demand. In August of this year, multifamily completions hit a 50-year high, and the additional supply has slowed down rent growth in 2024. This follows a number of years of strong rental growth and rising multifamily property values. While there is a current lull, there are indications that it will be temporary, with the multifamily sector due for a rebound in the coming years.
Even with the new construction, the country is still facing a housing shortage that Freddie Mac estimates at 3.7 million units. Additionally, new multifamily construction is down 50% in 2024 compared to the past two years, which will eventually lead to a sharp dropoff in supply. Additionally, permits for multifamily buildings are down 17.4% for the year, while units under construction are down 16.8% for the year. While supply growth is projected to fall, demand for apartments is still growing, with the vacancy rate in Q3 coming close to the historical average. Therefore, in the coming years, rents are likely to increase, leading to higher property revenues and values.
As such, many experienced and opportunistic real estate investors will be looking to buy apartment buildings in the coming years, but may not have the ready capital and liquidity to do so, with their funds tied up in their buildings. Successful real estate operators with significant portfolios often turn to short-term loans to finance their next project or renovations on a current building. Even in a relative down market, owners who have built a portfolio over many years are in a position to leverage their existing assets to continue expanding their portfolio in anticipation of a rebound. However, debt originations from banks have been decreasing as lending guidelines have tightened, opening up the opportunity for private lenders to fill the gap.
Why is CRE debt an interesting asset class?
Lending to multifamily operators can generate passive income while minimizing risk, as stabilized apartment buildings with low leverage are generally safe and steady assets. Values of apartment buildings and complexes do not tend to fall significantly or fluctuate wildly. The asset class is similar to private credit which is generally backed by a company’s assets, whereas this is backed by real assets. It can offer double-digit annual returns, predictable cash flows, and much more liquidity than is typical in the real estate space, with short-term hold periods and regular distributions.
As an individual investor, it can be nearly impossible to access this asset class, as it is unlikely that a single person can lend to operators, let alone to dozens of operators across a diverse geographical area. Even if you could find one building to lend on, there would be practically no way to build a portfolio diversified across building types and markets. The connections and network required for dealflow, and the time required to research and diligence the opportunities is a full-time job.
What to look for when lending to operators
- Track record - How much experience does the operator have with this specific business model? What is the value of their total portfolio? How many other properties in the market do they own? Do they self-manage? If not, look at the property management company and their track record.
- Loan-to-value (LTV) - The size of the loan compared to the underlying value of the property. There is also the combined loan-to-value (CLTV) which is a measure of all the debt on the property relative to the property value. The lower this number is, the safer the loan, as the chances of the value of the property dropping below the outstanding debt are lower.
- Debt service coverage ratio (DSCR) - This measures a property’s cash flow against the current debt obligations. If a property has a 1.2 DSCR, that means its net operating income is twenty percent more than the loan payments. The higher the number, the better, as more debt service coverage insures against temporary operational shocks that could cause the debt payment to not be made. In order to calculate this, you must look at the current rent roll and expenses.
- Sponsor Character - Does the sponsor have a track record of paying vendors and lenders on time? Is there any past or pending litigation? Has the sponsor been involved in any bankruptcies, foreclosures or major partner or lender disputes?
- Use of funds - What is the operator using the loan proceeds for? How long is the expected project? When is a realistic timeline for the loan to be paid back in full?
Who is Nectar?
Nectar is a platform that allows individual investors access to the commercial real estate debt asset class. It was founded in Atlanta in 2021 by Derrick Barker and Brittany Mosley to fill a need they saw in the real estate market. Derrick started investing in real estate while still at Harvard, eventually amassing a portfolio of over 4,700 units with a value of over $500 million. While building his portfolio, he teamed with Brittany to develop a number of real estate projects, and they both have a long track record of acquiring, managing, operating, and exiting properties.
It was while they were operating their portfolio that they noticed that a number of real-estate owners, even those with large portfolios of stable assets, had trouble accessing flexible capital to improve or expand their portfolio. Nectar addresses that need, offering mezzanine financing to experienced operators who own low-leverage, cash-flowing, stable commercial real estate. It has seen considerable success, with a 750% increase in revenue from 2022 to 2023, and a further 191% increase in 2024.
The company then packages those loans and offers individuals the ability to invest in them, which generates consistent returns backed by stable assets.
Properties in Nectar Fund
Nectar’s Fund 2 consists of properties across high-demand markets including New York City, Atlanta, Dallas, and Jacksonville. One property is a 119-unit Class B building in Columbus, OH, whose sponsor needed capital to complete an office to multifamily conversion. The loan carries a low 47% combined loan-to-value (CLTV) ratio, ensuring the property is not over-leveraged. It also has a 1.96x Nectar Coverage Ratio, meaning that the cash flow from rents covers nearly twice the monthly loan payment.
Why invest with Nectar?
Nectar currently has more than $30 million in assets under management. Nectar has made 100% of its scheduled distributions at an 15% annualized rate, offering its investors predictable liquidity that can be directly reinvested back into the fund, compounding returns. Investors can withdraw their initial investment after 3 years and are not charged any management fees, as Nectar makes their money on the spread. They can also invest via their retirement accounts to minimize tax burdens.
Derrick and Brittany’s experience and deep network of connections within the real estate industry gives Nectar access to consistent dealflow. Nectar does extensive due diligence on both the operators and buildings, ensuring that they only partner with accomplished operators with long track records and only lend to stabilized buildings with a history of strong performance. They evaluate the operators and buildings so investors can feel confident about the offerings.
By keeping CLTVs low and Nectar Coverage Ratios high, there is considerable downside protection if a building runs into issues. They take no construction risk, no lease up risk, and because the leverage on the buildings is low, they take very little market value risk. If the buildings continue to perform and cash-flow, the notes will be paid. In total, Nectar has made over 100 loans that span 6,951 units and have been made in 27 states.
Investors in Nectar’s fund get access to a diversified portfolio of commercial real estate debt, with different types of buildings in different markets across the U.S. This is the kind of portfolio that an individual investor simply would not be able to amass on their own, but it can be accessed through Nectar.
Nectar was selected as a Startup Battlefield 200 startup by TechCrunch, as a top startup in the Southeast by Venture Atlanta, and won a People’s Choice Award and was runner-up for Most Innovative Startup of the Year at PhocusWright 2022.
“I've invested in Nectar since 2022. Great company. They have always met their quarterly distributions. Always on time... It was low risk and great reward for my investment in commercial real estate.” - Curtis Robinson
Passive income backed by stable assets
Nectar allows individual accredited investors the opportunity to achieve steady 10-18% returns backed by stabilized, cash-flowing buildings owned by experienced real estate operators. In an exclusive deal for the Vincent community, Nectar is lowering the minimum investment from $100,000 to $10,000.
