Compound: A New Way to Earn Rental Income from Condominium Ownership

Today, I’d like to review and introduce you to Compound, a real estate investing company that operates differently than others you may have become familiar with in recent years.

I see the name Compound as a double entendre, as they will offer you an opportunity to build your own “compound” with ownership shares in multiple condominiums while earning interest in the form of rental income that can compound, as well.

A few things that set Compound apart from other crowdfunded real estate platforms:

  • No leverage
  • A singular focus on Class A condos throughout the world
  • Rental income without being a landlord (not unique, but attractive)
  • Low (or no) investment or performance fees

 

Compound currently has their first offering available in Miami, and I am an initial investor. Additional offerings in Austin, TX, New York City, Nashvile, and San Francisco will be available in 2020, and they have plans to invest in luxury properties around the globe. They were recently among a number on real estate startups featured in the Wall Street Journal.

As is true of many of the investment opportunities I discuss, if you choose to further explore available offerings or invest in one, this site may be compensated. I thank you for supporting our charitable mission. [Update 1/29/2020: For full disclosure, as of today, I am a very minor stakeholder in Compound, owning shares representing < 0.01% of the company which were granted for consulting work.]

 

Compound: A New Way to Earn Rental Income from Condominium Ownership

 

Traditional Condominium Investing

 

If I wanted to invest in a condominium for income and potential appreciation, I would take the following steps.

First, I would scout out different markets that I believe could offer both steady rental income with a high occupancy rate and the potential for price appreciation over the long-term. If my current city offers both, I’d look to invest close to home.

Next, I’d scour the current MLS listings, looking for the right property at a fair (or better yet, discounted) price.

In the meantime, I’d be lining up financing and ensuring I had 20% or 25% of my intended purchase price ready for a down payment.

If you’ve purchased a home before, you’re already familiar with the next steps. Line up showings, identify your property of choice, make an offer, negotiate, and hopefully agree to terms.

Set up and preferably attend the home inspection, run a title check, buy title insurance, set a closing date, and buy your property!

To earn rental income, you must identify and approve a suitable tenant. You can do this yourself or outsource the work to a property manager.

The same is true of collecting rent, taking care of maintenance issues and repairs, and dealing with such as non-payment or late payments.

All of it is work, but there’s a reason many real estate investors choose to do the work. It can pay well.

With condominiums, you are less likely to have significant maintenance and repair needs as compared to single family homes. In higher-end “Class A” neighborhoods, you’re also less likely to have non-payers or frequent turnover.

On the other hand, luxury condos in sought-after areas typically are not going to give you rents that meet certain metrics like the 1% Rule, where the monthly rent is 1% of the purchase price. That’s the price you pay for stability and low upkeep.

I lived in a higher-end condo for three years as a resident and rented the unit out for 7 or 8 years beginning in 2007 before I finally decided to sell it when the real estate market had rebounded. The rental income did not meet the 1% Rule, but I had just two stable tenants who stayed for a few years each and gave me timely, reliable income over that timeframe.

 

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Condominium Investing with Compound

 

Browse the available offerings, which have been identified by Compound’s team as attractive buys.

Read the private placement memorandum for the investment(s) you’ve chosen.

Submit money for the purchase via ACH transfer or wire and electronically transmit proof of your status as an accredited investor.

Compound will find a tenant, collect rent, and send you rental income semi-annually.

After an anticipated hold period of three to five years, the property will be sold, and the proceeds will be disbursed to investors.

 

Unique Aspects of Compound

 

No Leverage

 

The biggest difference between the two styles of condiminium investing, aside from the time commitment of the DIY version, is the fact that the Compound investment will be unleveraged.

Compound plans to purchase these properties outright with cash sourced from investors. Each property is divided into 100,000 shares with each share representing 0.01% of the property.

Initially, the minimum investment is 1,000 shares, or 1% of the property, and the offerings are open to accredited investors (those with income of $200,000 as an individual, $300,000 as a couple, or a net worth (excluding primary home) of $1,000,000).

Eventually, Compound plans to lower the minimum investment and open it up to non-accredited investors, pending SEC approval.

Most crowdfunded and syndicated real estate offerings use leverage, often in the range of about 60% to 75%.

A property purchased with 20% down as an individual would be 80% leveraged with a mortgage.

While leverage, when used responsibly, can increase returns and allow you to buy a more expensive property than you could buy with cash, it can also work against you.

When an 80% leveraged property loses 20% of its value in a downturn, you’ve lost your entire investment. When an unleveraged property loses 20% in a downturn, you’ve only lost 20% of your investment. The more highly leveraged a property is, the more risk (and potential upside and downside) there will be.

 

 

Liquidity

 

As of now, an investment in a Compound property will be similar to many other real estate investments in that it will be illiquid.

This is also true of other crowdfunded real estate investments, whether it’s a value-add multifamily deal on a platform like Alpha Investing or Crowdstreet, or an eREIT via RealtyMogul or Fundrise. You cannot take your money out until the investment cycle is complete.

However, Compound is setting up a secondary market where shares of the condominiums can be traded with other investors. Their goal is to roll this out later in 2020.

 

Get Compound app
the compound app

 

Fees

 

The way the company is set up, there are no direct fees to the investor. Compound does not charge an asset management fee, nor do they take a promote or other incentivized management fee.

They don’t mark up the property’s purchase price. The share price reflects the actual purchase price, plus actual closing costs, and reserves for ongoing expenses of property ownership ($35,000 in the case of their first offering of a $445,000 Miami property).

How does Compound make money?

The company will be acting as the buyer’s agent in all purchases, and potentially acting as the sales agent when properties are sold. These commissions are typically around 3% of the purchase price for both the buyer’s and seller’s agents, and are paid for by the seller.

When the secondary marketplace is fully functional, I anticipate transaction fees to be a part of the cost of doing business there.

I’m personally not a fan of transaction fees. As an investor in their first offering, I was offered a fee-waiver for life. Compound will extend that same no-fee offer to the first 20 investors that are referred from Physician on FIRE. [Update 2/15/2020: The initial 20 waivers have been granted, and Compound has agreed to offer 10 (1 now remains as of 2/15) additional fee-waiver for investors willing to commit a minimum of $20,000.]

 

 

 

The People Behind Compound

 

I’ve had the pleasure of speaking with two of the people behind Compound, CEO Janine Yorio and Jawwad Khan, the Head of Business Development.

They’ve assembled a team with extensive real estate experience.

Janine Yorio, a Yale grad, has managed over $2 Billion in structured real estate investments, and has launched several publicly-listed REITS in her prior work with Northstar Capital. She was previously head of real estate development for Standard Hotels, and she now focuses on Compound exclusively.

She was recently featured in this excellent interview at Thrive Global, and you can read her perspective and why she built Compound on Medium.

Jawwad Khan tells me that he’s the “black sheep” in a family full of doctors, having chosen to go into business instead. He has experience in both corporate finance, having worked at Barclays Capital among others, and has also been a part of the startup world as a cofounder of ShareTrade, Inc.

They have a passion for real estate investing and fintech, and Compound brings the two together for the masses nicely.

You can see the rest of the team and their impressive credentials, which include a Harvard Law grad, experience at Morgan Stanley and numerous real estate developers, as well as billions of dollars previously managed here.

 

How to Invest with Compound

 

I have purchased 2% of the condo (2,000 shares) in the Reach Brickell City Centre in Miami.

Prices in that market have softened a bit, and the unit is being purchased by Compound at a 23% discount to its prior purchase price. This potential bargain is a good illustration of the risks of real estate investing. There is no guarantee you will make money on any real estate investment, including this one. The lack of leverage will keep you from losing your shirt, though.

If you are interested in learning more about this particular opportunity, you can do so here.

You can also download the well-designed Compound app for Apple or Android from their homepage here.

Tax reporting, regardless of the number of shares or properties you have ownership in, is simple as you will receive one 1099-DIV.

If you have more questions about the particulars of how this works (and you should), those questions may very well be answered in Compound’s FAQ. You can also contact Compound with specific questions here.

I will repeat that an investment like this can be risky. I could lose money, and so could you.

However, there are a few things I like about this platform. Recall these unique aspects of Compound:

  • No leverage
  • A singular focus on Class A condos throughout the world
  • Rental income without being a landlord (not unique, but attractive)
  • Low (or no) investment or performance fees

 

An investment of at least $20,000 in the Miami Brickell offering will get you a lifetime fee-waiver on the Compound platform for up to 10 additional investors. You can learn more here.

 


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22 thoughts on “Compound: A New Way to Earn Rental Income from Condominium Ownership”

    • Hi Duke33,

      Each Series of Compound Projects, LLC will elect to be taxed as a real estate investment trust (REIT). This allows for depreciation to be passed through to investors up to an amount equal to the net income (can reduce taxable income to zero, but won’t result in a pass-through loss as per your comment). Since the asset is being acquired without debt, there wouldn’t be much negative taxable income anyway that would be passed through.

      Dividends will typically come in three forms – (i) return of capital dividends (which are generally not taxed and instead reduce your tax basis for future capital gain consideration), (ii) capital gain dividends (which are generally taxable at long-term capital gain rates), or dividends from current or accumulated earnings or profits (which are generally taxed at ordinary income rates).
      However, because each investor’s tax considerations are different, we recommend that you consult with your tax advisor.

      Here’s a link to our FAQ (https://getcompound.com/frequently-asked-questions/). Happy to answer any other questions you may have!

      Best,
      Jawwad
      Compound

      Reply
  1. Subscribe to get more great content like this, an awesome spreadsheet, and more!
  2. How about a discussion of projected cash on cash returns? Without that, there is no way to know if this is a good investment. As an experienced real estate investor, I would doubt the returns on this investment would be reasonable.

    Reply
    • Compound addresses this question in their FAQ:

      “What about traditional real estate metrics such as cap rate or cash on cash?

      Of course, we know what they are, and we acknowledge that in most real estate investments, they’re incredibly important. But the cold, hard truth is that when it comes to condominiums, they’re almost irrelevant. Condos do not sell on the basis of their ability to generate income. Instead, their value is largely based upon supply and demand. Think of condominiums more like a commodity–like oil or gold–that have both a real-world value and an economic value that makes them a store of wealth. When the market thinks they are rare, their value increases. Neither oil nor gold throws off any current income, and yet, they are very valuable assets to own.”

      Pro Formas are best educated guesses. That’s tough to do when capital appreciation is a significant component of the potential return.

      Best,
      -PoF

      Reply
      • Of course condos sell on the basis of supply and demand. And yes, cap rate is less important than in other types of real estate investments.

        But to ignore how much you will earn on your investment from year to year, that means it would be pure blind speculation to invest in this. Caution to everyone out there who would consider this. It is like saying “trust me, this is great” but with no backup to that statement.

        Thank you, but no way……

        Reply
        • I agree that the capital appreciation component can be considered speculation. We don’t know for sure if the value will increase or decrease.

          The same can be said of the stock market, and I’ve invested millions there.

          Both stocks and real estate have increased considerably in value over the long haul, and I expect that long-term trend to continue.

          Given the people behind this and their resumes, I think it’s a stretch to call this “blind speculation.”

          That being said, I do state and repeat in the article that this investment absolutely has risk. There’s a reason most real estate investments like this are only available to accredited investors, i.e. people who can afford to lose money.

          Best,
          -PoF

        • Hi Ziggy,

          As Leif mentioned, this is an investment that is primarily focused on appreciation and not income. In general, there’s a tradeoff between income and appreciation. The income component of this investment is not “being ignored”, we just don’t believe this to be very material in the analysis of this investment; appreciation is more important. We are estimating the annual dividend for Reach to be ~2% and the majority of our condominium investments will yield between 1%-3% annually. Here’s an interesting paper that includes some great research on the topic: https://www.nber.org/papers/w21804.pdf

          Thank you for your question!

          Best,
          Jawwad
          Compound

  3. It looks like the charge a 0.50% annual asset management fee on their Miami condo offering, so not sure what you mean when you said they don’t charge an asset management fee?

    Reply
    • Hi Alan,

      We were planning on charging an annual asset management fee, but decided against it. I can assure you that we do not charge ANY asset management fee. Can you let me know where you see this fee showing up?

      Thank you,
      Jawwad
      Compound

      Reply
      • It’s after you login and look at the offerings. There seems to be a discrepancy; when you actually go to fund it, it lists asset management fees to be 0%.

        Reply
        • Alan, thank you for bringing this to my attention. That was what we were charging everyone else, but through PoF, readers will receive fee-waivers on this and all future investments.

  4. I know leverage can go both ways but at the end of the day if used properly is one of the main benefits of real estate. Why pay all cash?

    Also this is class A condos which would be the first one to get hit in a recession and the last one to recover. Also Why choose this property class where the opportunity to add value is slim to none

    Is investing with the hope of appreciation not speculation? Is that not exactly what this website preaches should be avoided? I don’t get this one

    Finally, I think its a hard sell to convince an experienced real estate investor to invest in real estate without the traditional benefits of depreciation, tax benefits including passive losses (that could offset some passive income) and cash flow.

    Finally, I think

    Reply
    • There are some benefits to all-cash real estate investing. Two of my favorite real estate investors and bloggers have discussed them. See posts from Passive Income MD and Coach Chad Carson.

      Any time I invest in any asset class, I’m hoping for a positive total return. That’s true of stocks, bonds, and real estate.

      One thing that I love about investing is that there are no called strikes, as The White Coat Investor likes to remind us. You can pass on as many investments as you like and it won’t count against you. I’ve let many balls pass me and haven’t been called out yet.

      Cheers!
      -PoF

      Reply
    • Hi Marimel

      – Including leverage in this strategy not only increases the risk associated with the investment but also substantially increases transaction and operating costs which we wanted to avoid.

      – We can’t predict when or if a recession will occur but what gave us comfort with this property is that we are buying at 23% off the peak pricing of 2016. You are correct- this is not a value-add type investment. It’s a buy at what we believe is an attractive price and then sell when the market is stronger.

      – All real estate investments include some type of speculation. For a property that you are buying for income, the total return you’ll receive during your hold period will be determined by the ultimate future sales multiple (the market).

      – Since the property will be held in a REIT, investors will receive depreciation benefits up to the net income of the REIT, whereby dividends can be paid out as a return of capital (not taxable).You are correct, this structure does not allow for a pass-through of losses (which results in a deferral of that tax liability).

      We also wanted to bring to market a differentiated real estate investment product. I don’t think there’s much difficulty in finding traditional cash flowing real estate. We aren’t saying one is better than the other but we do believe in diversifying into different asset types and investment types within real estate.

      Reply
  5. Thanks for covering Compound as I had seen the announcement but hadn’t looked into it. The earlier Comments are also helpful to see some of the pros and cons. We have opted not to invest at this time, as we are prioritizing opportunities to lend and individually pick our deals, but we are also looking for more international real estate, and this could be an interesting play if Compound does decide to go abroad.

    Reply
  6. When was Compound formed (don’t see this on website) and how many apartments thus far bought? Any sold?

    Comment on this sort of investment at this (likely way past top) part of the cycle?

    Reply
    • Compound was formed in 2019 and is currently raising funds for their first acquisition.

      This goes without saying, but you don’t want to invest at the top of the cycle. The condo that I (we since 2% will be mine) are purchasing is selling at a 23% discount from its most recent purchase price. The goal is to find properties that are priced attractively in desirable areas. I think this first one fits the bill.

      Best,
      -PoF

      Reply
      • Ok got it, thanks. With respect, this is a pretty speculative play, in that Class A properties get hit the hardest in a downturn, and the company is brand new with no track record; wish you success though! As long as you did get it discounted, at least will have a bit of a buffer there.

        Reply
  7. Will we hve to file any NY state or Florida state tax returns? The headquarters is in New York. The 1099- Dividend we get will have the distributions itemized into capital gain, ordinary dividends and return of principal, state taxes witheld in their 1099- div. every year across all properties in one 1099-div ?

    Reply
  8. Must you invest $20000 all in the Miami Brickell offering to get the lifetime fee waiver or can you spread it among other investments on the site currently?

    Reply

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