Estimated reading time: 6 minutes

What is the Three-Second Rule? This is a communication technique that encourages us to pause for three seconds before responding to someone’s statement or question. 

This pause allows us to gather our thoughts, evaluate the situation, and choose an appropriate response. 

The Three Second Rule can be applied in various situations, from everyday conversations to professional negotiations.

Read a related article about sales professionals: Here

Body Language and the Three-Second Rule

Body language is a powerful tool in negotiation. It can convey our confidence, sincerity, and overall demeanor. 

The Three-Second Rule can help us to use body language effectively by giving us time to read the other person’s non-verbal cues and adjust our own body language accordingly. For example, we can use pregnant pauses or open questions to encourage the other party to share more information or to clarify their position.

[divi_switch_layout id=”1311″]

Good Deal vs. Great Deal

Negotiators who master the Three-Second Rule are more likely to achieve great deals instead of settling for good deals. 

This is because the Three-Second Rule helps us to identify and address the underlying interests and priorities of both parties. By doing so, we can create win-win outcomes that benefit everyone involved.

Ray Dalio was a master negotiator and Deal maker, Bridgewater, the world’s largest fund.

Read a related article about Ray Dalio: Here

Good Negotiators and the Three-Second Rule

Good negotiators know how to use the Three-Second Rule to their advantage. 

They understand the importance of active listening, empathy, and calibrated questions. 

Active listening involves giving the other party our undivided attention and acknowledging their feelings and concerns. 

Empathy involves putting ourselves in the other party’s shoes and trying to understand their perspective. 

Calibrated questions are open-ended questions that encourage the other party to share more information and clarify their position.

Powerful Tool for Decision Making

The Three-Second Rule can also help us to make better decisions in negotiation. By pausing for three seconds before responding, we can avoid impulsive or emotional responses that may not serve our best interests. 

We can also take the time to evaluate the potential consequences of our decisions and choose the best course of action.

Different Ways to Use the Three-Second Rule

The Three-Second Rule can be used in different ways depending on the negotiation context. 

For example, we can use it to pause before responding to the other party’s first offer, to evaluate different options, or to ask for more information. 

The key is to use the Three-Second Rule intentionally and strategically, rather than as a habit loop.

Black Swans

Black swans are unexpected or unforeseeable events that can disrupt the negotiation process. The Three Second Rule can help us to respond to black swans in a calm and measured way, rather than reacting impulsively. 

By pausing for three seconds, we can gather our thoughts, assess the situation, and choose the best course of action.

The First Offer

The first offer in a negotiation can set the tone for the rest of the negotiation process. 

The Three-Second Rule can help us to respond to the first offer in a way that aligns with our own goals and interests. 

By pausing for three seconds, we can evaluate the offer, ask calibrated questions, and make a counteroffer that reflects our own interests.

The Negotiating Table and the Three-Second Rule

The negotiating table can be a stressful and high-pressure environment. The Three-Second Rule can help us to stay calm and focused by giving us time to evaluate the situation and choose our responses carefully. 

By pausing for three seconds, we can also demonstrate our confidence and professionalism to the other party.

The Best Way to Use the Three-Second Rule

The best way to use the Three-Second Rule is to practice it regularly and intentionally. We can start by using the Three Second Rule in everyday conversations and gradually apply it to more complex negotiation settings. 

We can also combine the Three Second Rule with other negotiation skills such as active listening, empathy, and calibrated questioning for the best results.

The Bottom Line

The bottom line is the minimum outcome we are willing to accept in a negotiation. The Three Second Rule can help us to communicate our bottom line effectively by giving us time to choose our words carefully and convey our position clearly. 

By pausing for three seconds, we can also assess the other party’s response and adjust our position accordingly.

Related article about Leadership: Here

The Bottom Line is the minimum outcome we are willing to accept in a negotiation.

Mel Robbins

Mel Robbins is a motivational speaker and author who popularized the Three Second Rule in her book “The 5 Second Rule“.

 According to Robbins, the Three Second Rule can help us to break habit loops, overcome procrastination, and take action towards our goals. 

While the Three Second Rule can be applied in different contexts, its core principles remain the same: pausing for three seconds, gathering our thoughts, and taking intentional action.

Win-Win Outcomes and the Three Second Rule

Win-win outcomes are outcomes that benefit both parties in a negotiation. 

The Three Second Rule can help us to create win-win outcomes by encouraging us to listen actively, understand the other party’s interests and priorities, and find creative solutions that satisfy both parties. 

By using the Three Second Rule, we can avoid positional bargaining and focus on creating value for everyone involved.

Extreme Cases

In extreme cases, such as negotiations involving unfair labor practices or non-permissive subjects, the Three Second Rule can help us to stay calm and focused. 

By pausing for three seconds, we can gather our thoughts, evaluate our options, and choose the best course of action. 

We can also use the Three Second Rule to avoid emotional responses that may escalate the situation and prevent us from achieving our goals.

Professional Negotiators

Professional negotiators use the Three Second Rule as part of their negotiation skills toolkit. They understand that negotiation is a complex process that requires careful planning, active listening, and effective communication.

By using the Three Second Rule, they can communicate their position clearly, assess the other party’s response, and find creative solutions that satisfy both parties.

Potential Customers

The Three Second Rule can also be used in sales negotiations with potential customers. By pausing for three seconds before responding to objections or questions, we can demonstrate our confidence, professionalism, and expertise. 

We can also use the Three Second Rule to evaluate the customer’s needs and preferences, and offer tailored solutions that meet their requirements.

In Conclusion

The Three Second Rule is a simple yet powerful tool that can help us to navigate negotiations with confidence, clarity, and professionalism. 

By pausing for three seconds before responding, we can gather our thoughts, evaluate the situation, and choose the best course of action. 

We can also combine the Three Second Rule with other negotiation skills such as active listening, empathy, and calibrated questioning for the best results. 

Whether we are negotiating with colleagues, clients, or potential customers, the Three Second Rule can help us to achieve our goals and create win-win outcomes.

How can an investor understand how the equity waterfall model will affect the return on their real estate investment and if it is increasing or mitigating risk?

Due diligence in alternative investments can be complex, and when reviewing commercial real estate syndications, there are many critical factors to consider.  While reviewing the dizzying terms and understanding the capital contribution, you want to be thorough in your due diligence to confirm if there is a high degree of risk and what this fund manager’s performance history is.

The distribution waterfall or real estate equity waterfall model is a common model in real estate syndications that gives return hurdles (or IRR Hurdle) that ensure the investor’s return prior to the general partner (or management team) compensation. Although it is common, this model is one of the most difficult concepts and there are several ways to run it with various ways to pay the GP and LP.

First thing, let’s review what is a real estate structure:

Sample Real Estate Partnership Structure

A real estate partnership structure is a joint investment structure in real estate private equity. In a real estate partnership, commonly referred to as a syndication, a group of investors form a partnership and invest in a real estate asset or portfolio. The General Partner manages the partnership and is responsible for the day-to-day management and operations.

A typical real estate partnership structure might look like this:

• Limited Partners (LPs): passive investors in the partnership who provide the capital for the investment. Limited partners do not have any control over the partnership’s day-to-day operations. LPs are typically high net worth individuals seeking to diversify their portfolio into real estate holdings or increase cash flow.

• General Partner (GP): Responsible for the day-to-day management of the assets and the operations of the partnership. The GP is  an experienced real estate professional who brings expertise and connections to the partnership. The GP makes investment decisions.

• Hurdle Rate is the return threshold that is met prior to GP earnings. The hurdle rate is set to ensure the limited partners receive a preferred return on their investment before the GP begins to earn their carry.

The waterfall is a structure in real estate to determine how returns are distributed among the different classes of investors.

Examples of Waterfall Designs

In a real estate equity waterfall, a series of return thresholds are established, and returns are distributed to different classes of investors when the return thresholds are met. If the preferred return threshold is met, returns are distributed to the preferred equity investors until they have received their total preferred return. Once the preferred equity investors have received their total preferred return, any other returns are distributed to the ordinary equity investors.

The private equity waterfall ensures that the different classes of investors receive their fair share of returns based on their investment terms. The preferred equity investors receive a priority return, while the equity investors (LPs) share in any residual returns the investment generates.

The Return Hurdle

The return hurdle, also known as the preferred return or the hurdle rate, is a minimum return on investment that must be achieved before distribution of profits. This target rate is usually set as a percentage of the invested capital, and it is designed to ensure that the limited partners receive a minimum return on their investment before the general partner begins to earn its share of the profits.

The return hurdle is a critical component of a private equity investment’s waterfall structure, which is a methodology used to allocate returns and profit distributions among the participants in an investment.

The return hurdle is typically set to a relatively low rate, such as 8-10%, to ensure that the limited partners receive a positive return on their investment before the general partner begins to earn its share of the profits. It is a good practice for an operator to include initial capital as a part of the return hurdle to offer additional risk mitigation in their real estate equity waterfall models.

The Preferred Return

A preferred return, or “preferred yield” or “hurdle rate,” is a minimum rate of return guaranteed to a particular class of investors, such as preferred shareholders, before other investors, such as limited partners, receive any returns on their investments.

The preferred return is typically specified in the investment agreement and is paid out before any other share of the cash flow distributions are made to other individual investors.

In real estate investments, the preferred return compensates first tier investors such as a large private equity fund for the higher risk and larger initial investment they take.

It provides some certainty for the preferred shareholders about the minimum return they will receive on their investment. The Preferred Return trades upside for lower risk, whereas the limited partners trade risk for larger upside returns such as capital gains.

The Promoted Interest

Promoted interest, also known as a “promote” is an incentive compensation structure to compensate general partners (GPs) to earn a share of the profits generated by the investment beyond their management fee. 

In a promoted interest structure, the GP earns a share of the profits generated as various equity waterfalls are met. The amount of the promoted interest earned by the GP is proportional to the profits generated above the performance targets.

For example, the GP might earn a 10% promoted interest on profits above a 20% return threshold.

Promoted interest aligns the interests of the GP and the LPs in the investment. By earning a share of the profits generated by the investment, the GP has the correct incentives to maximize returns for all parties involved.

Promoted interest is also a way for GPs to earn additional compensation for exceptional performance.

Who pays for the Promote

Another important consideration is who pays for the promote. In other words, where is this promote percentage applied to?

While this could be structured in a number of ways, it is common to be paid by either the partnership or instead by the investor’s share of cash distributions.

Let’s look at where management would apply the promote percentages:

Promote Calculations

If the partnership pays for the promote, then the sponsor would first get its promote percentage, and then it would get its pro rata share of the remaining partnership cash flow.

The sponsor’s share of cash flow is calculated as follows:

GP Distribution % = Promote % + GP Pro Rata Share x (1 – Promote %)
For example, suppose the GP owns 10% of the partnership and the LP owns 90%. Then, suppose that the GP will earn a 20% promote after a 12% preferred return hurdle is achieved. In this case, the GP Distribution % would be 20% + (10% x 80%), which equals 28%.

If the investor pays for the promote instead of the partnership, the sponsor would first get its pro rata share, then it would get the promote percentage based off the investor’s share of cash flow:

GP Distribution % = GP Pro Rata Share + Promote % x LP Pro Rata Share

We calculate the GP Distribution % is calculated as 10% + (20% x 90%), equals 28% using the above example.

Notice that both of these calculations lead to the same result. The distinction here is the investor would prefer the first scenario in case the sponsor has to be replaced because that means the original sponsor would share in some cost of replacement.

This is a minor detail, but important when considering who the project managers are and what to review on a deal-by-deal basis.

Again, although these are two common ways of calculating the promote, the important thing to remember about waterfall structures is that there is no one size fits all solution. The partnership agreement spells out these terms and conditions.

The Lookback Provision

A lookback provision is a private equity or real estate investment agreement clause that gives the investment manager the option to adjust the preferred return in certain circumstances.

This structure allows the investment manager to “look back” at the performance of the investment over a specified period of time, such as a given year or several years. Suppose the investment has performed better than the preferred return. In that case, the investment manager may adjust the preferred return upward to a higher rate to reflect the higher returns generated. On the other hand, if the investment has performed worse than the preferred return, the investment manager may choose to adjust the preferred return downward to a lower rate to reflect the lower returns generated by the investment.

The lookback provision is included in investment agreements to ensure the preferred return is aligned with the project’s returns generated by the investment. The lookback provides the investment manager with the flexibility to adjust the preferred return to ensure that the investment remains attractive to investors, while also allowing the investment manager to share in the benefits of any outperformance of the investment.

In conclusion, a lookback provision is a clause in an investment agreement that gives the investment manager the option to adjust the preferred return based on the performance of the investment over a specified period of time. Management uses this provision to ensure the preferred return remains aligned with the actual returns generated by the investment.

The Catch-Up Provision

A catch-up provision is a clause in a private equity or real estate investment agreement that allows for the payment of accumulated preferred return in the event of sufficient future investment performance.

In a cumulative preferred return structure, if the investment does not generate sufficient returns to cover the cumulative amount of preferred return that has accrued, the preferred return will accumulate and be paid out at a later date when the investment generates sufficient returns.

The catch-up provision specifies the conditions under which the accumulated preferred return will be paid out, such as a certain level of investment performance or the sale of the investment.

The catch-up provision assures investors that they will eventually receive their accumulated preferred return, even if the investment does not generate sufficient returns in the short-term. It also allows the investment manager to defer the payment of the accumulated preferred return until the investment is in a better position to generate sufficient returns to cover the cumulative amount of preferred return that has accrued.

This article is for informational purposes only and should not be taken as investment advice.

Estimated reading time: 11 minutes

A high-income earner is an individual who earns a significant amount of income, typically above the average income level for their demographic. 

In the United States, for federal income tax purposes, someone who earns more than $170,050 as a single person, a married person filing separately, or a single head of household, or more than $340,101 as a married person filing jointly is a high-income earner.

However, the definition of a high-income earner may vary depending on location, occupation, and industry. 

The IRS does not have an official definition of a high-income earner. Still, the IRS does consider certain income levels subject to higher tax rates or additional taxes for tax purposes. 

As of 2022, the highest marginal federal income tax rate for individuals is 37% and applies to taxable income over $523,600 for single filers and $628,300 for married filing jointly. 

The IRS also applies additional taxes, such as the 3.8% Net Investment Income Tax, to individuals who earn above certain income thresholds. For Example, the Net Investment Income Tax applies to individuals who have modified adjusted gross income (MAGI) over $200,000 for single filers and $250,000 for married filing jointly. Lets review some of the best Tax Relief Strategies for High-Income Earners:

High-Income Earners

High-income earners earn more than $170,050 as a single person, a married person filing separately, or a single head of household, or more than $340,101 as a married person filing jointly.

If you fall under this category, working with a skilled accountant or tax advisor is crucial for the best ways to approach local taxes, federal taxes, and overall tax planning.

In addition to taking your standard deduction and other deductions, there are many things you can do to lower the amount you pay. Here are five strategies for high-income earners to reduce their taxes:

[divi_switch_layout id=”1311″]

Change the Character of Your Income

Changing the character of your income is one way to reduce your tax burden. You can convert your SIMPLE, SEP, or traditional IRA to a Roth IRA if you are over the age of 59 1/2 and you meet the five-year rule.

Roth distributions are tax-free and will not increase your modified adjusted gross income (MAGI). MAGI is used to calculate the 3.8% Medicare surtax.

Business owners may want to restructure their business entity, mainly if they operate as a sole proprietor, LLC, or an S-Corp.

You should work with an accountant to determine if restructuring your business is worthwhile. Invest in real estate syndications and tax-exempt bonds, or invest in index mutual funds and exchange-traded funds.

These investments are an effective way to diversify the taxation of your income after retirement.

Another one of the strategies for high-income earners is change of character is changing W-2 Income to Passive or Investment income.

Related Article: Passive vs. Residual

W2 Income vs. Earned Income

Earned income is reported on a W-2 from labor at a workplace. When considering Tax Strategies for high income Earners, it’s important to understand that earned income is subject to federal and state income tax and Social Security and Medicare taxes (also known as payroll taxes). 

The tax rate for earned income is based on the individual’s tax bracket, determined by their total taxable income. 

Earned income is the highest taxed income.

On the other hand, investment or passive income is earned from sources such as rental properties, stocks, bonds, and mutual funds. 

Investment Income

Investment income is not earned through active work and is often considered “passive” because the individual is not directly involved in generating the income. 

This will be subject to federal and state income tax and capital gains tax if the income is generated from selling an investment that has increased in value.

The tax rate for investment income can vary depending on the type of investment and how long the investment is held.

One key difference between earned income and investment income for tax purposes is how they are taxed. 

Earned income is taxed at ordinary income tax rates, ranging from 10% to 37%, depending on the individual’s tax bracket. 

Payroll taxes, which are Social Security and Medicare taxes, are also deducted from earned income. 

On the other hand, investment income is subject to different tax rates depending on the type of investment and how long it is held. For example, long-term capital gains tax rates are lower than short-term capital gains tax rates, and certain types of investments may be taxed at a lower rate.

Another critical difference between earned and investment income is how they are reported on tax forms. Earned income is reported on a W-2 form from the individual’s employer, while investment income is reported on various tax forms depending on the type of investment. 

For example, dividends from stocks are reported on a 1099-DIV form, while rental income is reported on a Schedule E form.

While both earned and investment income are subject to taxation, how they are taxed and reported on tax forms can differ significantly. It’s important to understand these differences to report and pay taxes on all types of income properly.

Max Out Your Retirement Contributions

High earners can take advantage of the tax-reducing benefits of their retirement plans by contributing the maximum amount.

For the tax year ending 2022, the maximum 401(k) contribution and 403(b) contribution is $20,500, while the maximum contribution for SIMPLE IRAs is $14,000.

Remember that if you are over 50, you may take advantage of catch-up contributions of up to $6,500 (401k) and $3,000 for 401(k) plans.

Roth IRAs are tax-free retirement accounts that can help you to reduce your tax burden and save money on your taxes, even if you are in one of the top brackets.

Roth IRAs

1. Tax Benefits: Contributing the maximum amount allowed to your retirement accounts, such as a 401(k) or traditional IRA, can provide significant tax benefits. Contributions to traditional retirement accounts are made with pre-tax dollars, which can reduce your taxable income and lower your tax bill for the current year.

2. Compound Interest: Retirement accounts are designed to help you save for the long term, and contributing the maximum amount allowed can help your savings grow significantly over time. With compound interest, your savings can grow exponentially as you continue contributing and earning interest on your existing savings.

3. Employer Matching: Many employers offer matching contributions to retirement accounts, which can provide additional savings for your future. By contributing the maximum amount allowed, you can ensure that you take full advantage of any employer-matching contributions available to you.

4. Retirement Readiness: Contributing the maximum amount allowed to your retirement accounts can help ensure you are financially prepared for retirement. With the rising cost of living and increasing life expectancy, it’s more important than ever to start saving early and make the most of your retirement contributions.

5. Lowering Your Taxable Income: Contributing the maximum amount allowed to your retirement accounts can also help lower your taxable income, providing additional tax benefits. By reducing your taxable income, you may be eligible for additional tax credits or deductions, which can lower your overall tax bill.

6. Flexibility: Retirement accounts offer flexibility regarding when and how to access your savings. While there are penalties for withdrawing funds before age 59 ½, you can generally access your retirement savings penalty-free once you reach this age. This can provide a reliable source of income in retirement and give you the flexibility to manage your finances according to your needs.

Fund 529 Plans for Your Children

You may be eligible for tax credits such as the Child or Earned Income Tax Credit. These credits can reduce your tax liability dollar-for-dollar and are popular Tax Strategies for high income Earners.

529 Tax-Advantaged Plan

A 529 tax-advantaged savings plan is designed to help families save for future education expenses. The benefits of a 529 plan include the following:

1. Tax Advantages: Contributions to a 529 plan are made with after-tax dollars, but the earnings grow tax-free. When the funds are withdrawn to pay for qualified education expenses, they are tax-free. This results in significant tax savings over time, particularly for families who start saving early allowing their investments to grow.

2. Flexibility: 529 plans are designed to be flexible and can be used for various educational expenses. This includes tuition, fees, books, room and board, and even some K-12 expenses in certain states. In addition, the funds can be used at any eligible college, university, vocational school, or other post-secondary institution globally.

3. High Contribution Limits: There are no annual contribution limits for 529 plans. Many plans have high lifetime contribution limits that can exceed $300,000 per beneficiary. This allows families to save significant money for their children’s education.

4. Anyone Can Contribute: Anyone can contribute to a 529 plan, regardless of their relationship to the beneficiary. This means grandparents, aunts, uncles, and even family friends can contribute to a child’s education savings.

5. Low Impact on Financial Aid: The assets in a 529 plan are considered an asset of the account owner (usually the parent), not the beneficiary (the child). This means that the impact on financial aid eligibility is relatively low and may be excluded altogether in some cases.

6. Estate Planning Benefits: For families with significant assets, a 529 plan can be a valuable tool for estate planning. Contributions to a 529 plan are considered a gift for tax purposes, reducing the donor’s taxable estate. In addition, some states offer additional tax benefits for estate planning purposes.

Invest in Businesses that Pay Dividends

Investing in companies that pay qualified dividends can provide tax benefits. The maximum federal tax rate for qualified dividends is 20%.

Investing in commercial real estate syndications allows you to have ownership shares and dividends that the depreciation can deduct.

Real estate syndications are investments in which a group of investors pool resources to purchase and operate real estate properties.

Syndications are usually limited liability companies (LLCs) or limited partnerships (LPs), with one or more general partners managing the investment.

Syndications

Investing in real estate syndications can provide several benefits for investors, including:

1. Diversification: Real estate syndications allow investors to diversify their investment portfolios by investing in various properties and markets. By pooling their resources with other investors, they can access opportunities that may not be available individually.

2. Passive Income: Real estate syndications allow investors to earn passive income from rental properties or other investments. Limited partners typically receive a share of the profits from the investment without having to manage the property actively.

3. Professional Management. Real estate syndications are managed by experienced real estate professionals with the expertise to identify and manage large properties. Investors can benefit from this expertise without having to manage the property themselves.

4. Tax Benefits: Real estate syndications offer tax benefits to investors, including depreciation deductions and the ability to defer or reduce taxes on capital gains through 1031 exchanges.

5. Access to Larger Investments: Real estate syndications allow investors to participate in more prominent real estate investments than they can afford. This can provide access to higher-quality properties and potentially higher returns on investment.

6. Limited Liability: As limited partners, investors in real estate syndications have limited liability for the debts and obligations of the investment. This can help protect their assets in case of any legal or financial issues with the investment.

Interested in reviewing deals that we invest in Passively? Join our Supply Chain Investor Club

Real estate syndications can offer Tax Strategies for high income Earners. Syndication offer the opportunity to diversify portfolios, earn passive income, access professional management and expertise, receive tax benefits, participate in more significant investments, and have limited liability. 

Donate to Charity

Charitable contributions are the most straightforward of Tax Strategies for high income Earners. The IRS offers a dollar-for-dollar reduction for charitable donations to qualified charities. High-income earners or high-net-worth individuals may also consider a Charitable remainder trust. 

​A charitable remainder trust (CRT) is an irrevocable trust that allows the trust creator, or grantor, to provide income to one or more non-charitable beneficiaries for a specified period, with the remaining assets ultimately distributed to one or more charitable organizations. 

The trust is designed to generate income for the beneficiaries while providing significant tax benefits and supporting the grantor’s philanthropic goals. 

​

Estimated reading time: 5 minutes

You can see many multifamily properties when you drive in your town. Not all are created equal. As an investment, multifamily properties are not “classified” equally either. Let’s get into the various Multi-family property classifications and Your investment strategy in this article.

If you could shop for an apartment, some were less expensive. Some apartments have very nice features. 

Various apartment classifications will affect the debt stack, cash flow, insurance profile, and overall risk. Understanding your investment goals and how they align with the various property classification types will help narrow your choices when determining if an investment suits you.

What are A, B, C, and D? 

In investment terms which of these property types are classified as core assets, and which can be considered core-plus assets? 

If you want to pursue a conservative investment strategy or prefer a more aggressive one with the potential to deliver a higher yield, which class of multi-family property should you be looking to invest in? 

All these questions and more will be answered in this article. 

[divi_switch_layout id=”1311″]

Classification – Class A 

Class A multi-family properties are buildings that are less than ten years old. 

The fixtures and fittings will be of the very best quality. The amenities will be comprehensive and of a luxury standard. 

While Class A properties tend to generate a lower yield percentage, they can grow exponentially, and they tend to hold their value even in major economic downturns. In terms of their investment profile, they are considered to be core assets. 

An article on multi-family investing at millionairedoc.com explains why Class A apartment buildings, with a ‘core asset’ risk profile, offer a lower yield percentage:- “Owners purchase these properties using lower leverage, therefore with lower risk. 

 REITs and institutional investors purchase these assets for an income stream.  

The lower risk profile results in lower returns in the 8-10% IRR range.” 

A property in the Class A category would not likely have a “core plus” risk profile unless it were slightly downgraded in some way, perhaps by a less favorable location, housing type, or several other factors.

Related Article: What is a Multifamily Syndication and How can I participate

Classification – Class B

Class B properties are older than class A properties. Usually, class B properties have been built within 20-30 years. 

The quality of the construction will still be high, but there could be some evidence of deferred maintenance. The fixtures and finishings will be less high quality, and the amenities will be limited. This offers the investor room for return on investment as the property is upgraded to meet its A-Class peers in rent.

12 Must-Know Items to Ask When Buying Apartments(Opens in a new browser tab)

Classification– Class C

Class C properties have been built within the last 50-60 years. They will have deferred maintenance. 

The property may be in a lower-income area. Sometimes crime can be a factor in C-Class neighborhoods. 

Fixtures and finishings will be old-fashioned and of low quality. Amenities will be limited. 

Class B and Class C properties can be candidates for a ‘value add’ investment strategy. 

By bringing deferred maintenance issues up to date and employing an interior and exterior renovation, you can increase tenant occupancy and receive a higher return on your investment. 

In his article, ‘What are the four investment strategies?’ Ian Ippolito explains why pursuing a value add investment strategy is a higher risk:- “Much of the risk in value-added strategies comes from the fact that they require moderate to high leverage to execute (40 to 70%). Leverage does increase the return, but also increases the risk, and makes the investment more susceptible to loss during a real estate cycle downturn.”

What is a Real Estate Equity Waterfall?(Opens in a new browser tab)

Classification – Class D

Class D properties are generally more than 50 years old. The property will be showing signs of disrepair and will be run down. 

The construction quality will be inferior, and the location will be less desirable. The property may suffer due to prolonged and intense use and high-level occupancy.

Class C and D properties can qualify for an ‘opportunistic’ investment strategy. Strategies such as a complete overhaul due to gentrification or building repurpose strategy. 

Because these properties require significant renovations, they are the highest-risk investments but can also yield the highest returns.

Summary

In broad terms, the US multi-family real estate market continues to give excellent returns for well-informed investors. 

This information will assist you in assessing your multi-family real estate investment goals. For further assistance, please connect with our team.

If you would like to see the deals we are investing in, please join the Supply Chain Investor club.

In the competitive business world, retaining top talent is crucial for the success and growth of any company. Companies often offer financial incentives to keep high-performing employees, such as bonuses, stock options, and other benefits that can tie them to the organization. This is known as Golden Handcuffs, a term that describes financial benefits companies use to keep their key employees from leaving.

[divi_switch_layout id=”1311″]

Definition

Golden Handcuffs is a legal agreement between an employer and employee that stipulates a set period during which the employee will receive financial benefits, often in the form of a bonus, in exchange for staying with the company. 

This employee retention tool is used to reduce employee turnover and ensure that the best employees remain with the company.

There are different types of Golden Handcuffs plans, including stock plans, supplemental executive retirement plans, loan repayment benefits, and vacation homes. 

These plans are designed to provide financial inducements to key employees to stay with the company for extended periods.

Types of Handcuffs

Stock Options

One of the most common forms of Golden Handcuffs is the employee stock option plan. 

This plan allows employees to buy company stock at a discounted price, usually over several years of service. 

The idea is that the employee will see the value of the stock increase over time, creating a financial benefit that will be meaningful to them.

Golden Handshake

Another form of Golden Handcuffs is the golden handshake, a type of financial benefit paid to employees when they leave the company. This benefit entices employees to stay with the company through transition, knowing they will receive a future compensation payout when they leave. The negative connotation of the golden handshake has led many companies to move away from this type of benefit.

Other Perks

In addition to financial benefits, companies may offer other incentives such as a company car, life insurance, or a free gym membership. These benefits create a good life for employees and support their physical and mental health, creating a culture that supports the highest sense of life evaluation.

Golden Handcuffs aims to reduce the risk of top employees leaving the company, taking their knowledge and skills with them. Gallup poll research shows that employee turnover can cost businesses up to 213% of the annual salary of the departing employee. This financial impact can be devastating, particularly for small business owners.

Golden Handcuffs can be particularly effective for senior management and high-paying jobs. 

These positions often require a significant investment of time and training, making the loss of a key employee a significant financial loss for the company. By offering Golden Handcuffs, companies can reduce the risk of losing their most valuable asset.

However, Golden Handcuffs plans can also create career uncertainty for employees. While they may be financially tied to their current employer, they may need more career opportunities to pursue their purposeful careers. Employees may feel trapped in their current job and need help exploring new career opportunities that would better fit their skills and goals.

Breaking free from Golden Handcuffs can be challenging, mainly if the employee has been with the company for many years. The vesting schedule for stock options and other benefits may require a certain amount of time before the employee can receive the full benefit. Additionally, non-disclosure agreements and trade secrets may limit the employee’s ability to move to a competitor.

There are ways to break free from Golden Handcuffs. The best way is to have a plan for a future exit. Employees can create a path for leaving their employer when the time is right. This may involve exploring new career opportunities, networking with other professionals, or acquiring new skills that make them marketable to potential employers.

Employees need to understand the terms of their Golden Handcuffs plans, including the time frame for vesting and the financial impact of leaving the company. This information can help them make informed decisions about their career and financial goals.

In some cases, breaking free from Golden Handcuffs may require legal assistance. An experienced employment lawyer can review the terms of the agreement and help the employee negotiate a release from the contract. The plan may involve paying the penalty or forfeiting some of the financial benefits associated with the plan.

Ultimately, the decision to break free from Golden Handcuffs is a personal one that requires careful consideration of the employee’s career goals and financial situation. While these plans can provide financial stability and security, they can also limit career opportunities and create a sense of dissatisfaction with work.

John Steinbeck once wrote, “The best-laid plans of mice and men often go awry.” This is true for Golden Handcuffs plans as well. While great compensation packages may provide a sense of security in the short term, employees should carefully consider the long-term impact on an employee’s career and life goals. 

In recent years, the tech industry in San Francisco has become known for its generous Golden Handcuffs plans, offering high compensation and a great culture to attract and retain top talent. However, some software engineers have begun questioning whether these plans are worth it, given the high cost of living and the pressure to work long hours.

The Peace Corps, on the other hand, offers a different type of Golden Handcuffs. Volunteers who complete their service receive a readjustment allowance, which employees can use to pay off loans or pursue further education. While the financial benefits may not be as significant as those offered by high-paying jobs, the meaningful work and social change volunteers experience can be a powerful motivator.

In the end, the key to breaking free from Golden Handcuffs is to find meaningful and fulfilling work. This may involve taking a lower-paying job that provides more opportunities for personal and professional growth or pursuing a career that aligns with one’s values and purpose.

Golden Handcuffs can be valuable tools for companies to retain top talent and reduce employee turnover rates. They can also create career uncertainty and limit employment opportunities to pursue their careers. By planning for future exit and finding meaningful work, employees can break free from the limitations of Golden Handcuffs and pursue a career that aligns with their values and purpose.

For more information on syndications similar to what we invest in, sign up for our newsletter and for the Supply Chain Investor Club.