Let me ask you a question.
What first interested you about real estate syndications (group investments)?
Most likely, it was the potential to put your hard-earned money to work for you to grow your wealth over time.
My real estate investing career started in the single-family home lane before I pivoted to real estate syndications.
While the single-family home path is a rite of passage for many real estate investors seeking passive income, it takes many years of hard work as a landlord to reach a stage where your passive income finally exceeds your active income.
On the other hand, investing in syndications is a time-tested method to scale quickly and to create wealth without any of the headaches or challenges that come from being a landlord. A syndication is where a group of investors pool money together to acquire a larger asset. In a syndication, an operator or general partner manages the investment and the investors are limited partners and collect passive income. As a limited partner, you can invest in several different assets including apartment buildings, senior living facilities, self-storage, and even ATM machines.
This article specifically outlines the five building blocks of capital preservation and discusses why you should consider investing in an ATM syndication.
Why ATM Investments?
I’ve been investing in ATM machines for over a year. It’s my favorite investment for achieving predictable, double-digit high cash-flow returns every month. Even during the COVID-19 lockdowns and shelter in place-orders, ATM machines proved to be a recession-resistant asset class. There were three major reasons why my ATM portfolio remained resilient during the pandemic.
First, the operator had an institutional background and had relationships with many Fortune 500 retailers. These relationships enabled the operator to bid on extremely attractive location contracts. Second, the business model focused on replacing older machines in proven, high-performing ATM locations. Lastly, the operators focused on serving a large and growing demographic of people who use ATMs at an increasing rate.
Our Number One Investment Priority
The number one question that most of our investors ask us, is how much money they could make if they invested $100,000. Believe me, we love good returns, and those returns are a big part of why we do what we do. However, there’s an even more important aspect that we focus on when we evaluate potential deals.
Can you guess what it is?
I’ll give you a hint.
It’s not nearly as exciting as passive income and double-digit returns.
In fact, it’s more boring than taxes and K-1’s!
The most important thing we focus on in a syndication is capital preservation. In other words, we focus on how NOT to LOSE money.
Why It’s Important to Talk About Capital Preservation
Sure, capital preservation isn’t the most exciting part of investing in syndications, but it IS one of the most critical components of investing. It’s easy to just focus on cash flow returns, potential earnings, and brightly colored marketing packages. But when an unexpected situation arises, you’ll be thankful (for this article and) for a sponsor team that gives capital preservation the attention it deserves.
Capital preservation is all about mitigating risk.
As Warren Buffett so eloquently puts it, there are two rules to investing:
Rule #1: Never lose money
Rule #2: Never forget Rule #1
No matter what you invest in or who you invest with, you should know what to ask and what to look for so you can invest confidently with a team that holds your best interest.
5 Capital Preservation Pillars
At the core of every investment in which we participate, capital preservation is our number one priority. There are 5 building blocks that make up our capital preservation strategy.
#1 – Invest in Opportunities That Have Excellent Debt Financing Terms
The debt financing term is probably the most important consideration in a real estate transaction. Debt makes up the largest piece of any real estate investment. Many failed investments generally occur as a result of some issue related to the debt component. This could include interest rates being too high, operators being unable to refinance, or the loan coming due at an inopportune time.
In the case of my unique ATM portfolio, debt financing was not used to purchase the machines, which significantly reduced the investment’s risk profile.
#2 – Purchase Cash-Flowing Assets
Another proven method for capital preservation is to purchase assets that produce cash flow immediately.
ATMs are cash flowing machines (no pun intended) – especially if your machines are placed in prime, strategic locations. Over 98% of the time, the operators for our ATM portfolio had 2-3 years of historical transactional data on prime ATM locations. This performance data provided valuable insight and bolstered the operator’s ability to negotiate and bid on favorable location contracts to replace existing ATMs in high performing, retail locations.
During the pandemic, many of these retail locations were deemed essential businesses, which included grocery stores, gas stations, discount stores (i.e. Walgreens, Walmart, Sam’s Club, Exxon), and a few other noteworthy retailers.
#3 – Stress Test Every Investment
Stress testing projections help us take a look at how the performance of the investment may adjust based on potentially unpredictable variables. Performing a sensitivity analysis on the business plan before investing allowed us to see if the investment can weather the worst conditions.
My ATM portfolio remained resilient during what could probably be considered the ultimate sensitivity test – the COVID-19 pandemic. During the lockdown with shelter in place, the portfolio experienced an estimated 11% reduction in transaction volumes. A month later, transaction values went back to predictable patterns. A mere 11% dip in transaction volume is a testament to the resilience of the ATMs as an asset class.
#4 – Have Multiple Business Strategies In Place
The core ATM customer is underbanked, credit-distressed, and heavily reliant on cash. Cash is the preferred method of payment for this segment of the population. New technology (i.e. Google Wallet, Apple Pay, Venmo/PayPal) does not pose risk to the core demographic user, because they are slow to adapt to new technology.
ATM demographic users include Electronic Benefits Transfer (EBT) card users, people with little or no credit, and users who use ATMs as their bank branch. The government issues EBT cards to provide recipients benefits to access food and cash. EBT card users alone account for 50-60% of ATM users.
The ATM machines have different forms of value propositions and proprietary software, which include digital media monetization technology. The ATMs generate a small percentage of advertising revenue from digital displays and electronic gift card sales. Valuable user data analytics is also collected from the machines, which creates a lot of opportunities for additional revenue streams.
Banks use Independent ATM Deployers (IAD) to place their branded ATMs in convenient locations. As more and more banks are closing branches, there is a shift towards the use of IADs to help provide banking services for their customers in convenient locations. Regional or national banks pay an IAD anywhere from $50-$250 a month for branding in strategic locations.
#5 – Put Together An Experienced Team That Values Capital Preservation
Possibly the most critical pillar of all is to have a team that values capital preservation. This includes both the sponsor and operator team(s). All of these people should be passionate about their role and demonstrate a strong track record of success.
The more experience they have in successfully navigating tough situations, the better and more likely they will be able to protect investor capital.
The operators in my ATM portfolio had over 100 years of combined industry experience in the institutional sector and were among the top 10 largest owner-operators in the US. Since launching their first fund in 2012, they have never missed a payment to investors. Distributions were paid out according to a contractual fixed rate.
While capital preservation may not be very exciting, it certainly is one of the most critical building blocks of a solid deal. Every decision and initiative by the sponsor team should be rooted in preserving investor capital. The five capital preservation pillars used in syndications and other alternative assets that we partner with include:
- Invest in opportunities that have excellent debt financing terms
- Purchase cash-flowing assets
- Stress test every investment
- Have multiple business strategies in place
- Put together an experienced team that values capital preservation
When browsing for your next syndication investment, go ahead and soak in the pretty pictures, daydream about the projected returns, and imagine how smoothly that business plan might go. Then, take a second pass, read between the lines, and look back through the deck with an investigative eye. Look for hints that capital preservation is as important to the sponsor team as it is to you.