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Comparing Real Estate Funds: DLP Housing Fund & Origin Investments IncomePlus Fund

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Recently, we compared two similar private real estate funds from Trion and 37th Parallel. We’ll continue in that tradition today by looking at two larger, evergreen real estate funds from DLP and Origin Investments.

My own passive real estate investing journey started with eREITs via platforms like Fundrise and RealtyMogul. I invested in syndicated value-add equity deals from Crowdstreet and Republic Real Estate.

The eREITs are well-diversified with investments in dozens of projects, but they don’t necessarily offer the highest tax efficiency. While selecting individual projects gives you more control and a sense of connectedness to the project, connectedness does nothing for your returns, and you have to select quite a few projects to be well diversified.

Later, I invested in real estate funds from DLP and Origin Investments. These offer a good balance of tax efficiency, diversification, and income in a set-it-and-forget-it style that index fund investors are accustomed to.

The goal of this post is not to declare a winner but to look objectively at what they offer while comparing and contrasting two rather similar funds. Physician on FIRE has a referral relationship with and/or accepts flat fee advertising payments from several of the companies mentioned above and this site may benefit if you choose to work with them.

 

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In reviewing the information below, you’ll find more similarities than differences with both the companies we’re examining and the funds they’re putting together.

Both DLP (founded in 2006)and Origin Investments (founded in 2007) have been in business since shortly before the Great Recession. Each company offers at least a few different funds to suit investors with varying goals. Origin offers three funds, while DLP currently offers four funds, and Origin also allows investors to invest in individual “sidecar” deals that its funds invest in.

Some of the information below was found directly on the companies’ websites. Additional information came from the PPM (Private Placement Memorandum) that’s available upon request and from the helpful representatives from DLP and Origin.

 

Projected Returns

 

The DLP Housing Fund projects returns of 10% to 12% after fees.

Origin’s IncomePlus Fund aims 1% lower with projected returns of 9% to 11%.

 

Fund Term

Unlike the closed-end funds we recently analyzed, both of these funds are considered to be “evergreen.” There is no date at which the assets in the fund are scheduled to be sold and the fund closed.

This allows the investor more control over the tax consequences and timing of realizing capital gains from investments in these funds.

There may come a time when the fund(s) are scheduled to close, but I would expect that timeframe to be measured in decades, and I would hope for plenty of advance notice. It is worth noting that Origin was acquired by Kovitz Investment Group, but that operations and fund management have not changed and the co-founders will remain with the company for years to come.

 

Fund Structure

 

Both DLP‘s Housing Fund and Origin‘s IncomePlus Fund utilize a REIT (real estate investment trust) structure, although you’re technically investing in an LLC with a REIT subsidiary in either case.

An advantage of the REIT structure is that the cash distributions that are taxable (a small percentage — most are “return of capital” and therefore not taxed) qualify for a 20% tax reduction thanks to Section 199A from the 2017 JOBS Act.

Both funds also utilize 1031 exchange strategies within their funds to defer taxes as they sell assets and acquire others.

 

Capital Calls

 

Investing in a private real estate fund works a bit differently than investing in stocks and bonds. You can’t just hand over your cash and be fully invested the next day. Deploying capital on real estate projects takes time.

When interest rates were next to nil, this cash drag on money waiting to be called was a real nuisance. At least in early 2023, you can earn 3% go 4% in high yield savings and money market accounts on the cash that’s yet to be invested in the fund.

When you pledge an investment to either of these funds, there may be a waiting period, but your cash will be called all at once (as opposed to incrementally over time), and the waiting period is typically less than 60 days for either of these two funds.

Origin reports that there has been no queue (100% of capital is called immediately) for quite some time.

 

Co-Investments by the Company and Its Principals

 

As an investor, it’s important to see those responsible for the fund willing to invest money of their own into it.

I was happy to see that this was the case with both funds. Origin’s principals have invested more than $10 Million of their own money into the IncomePlus Fund, and DLP invests a minimum of 5% into the Housing Fund ($100 Million when the fund reaches its $2 Billion fund size goal).

 

Fund Size

 

DLP has increased the target from $1 Billion to $2 Billion for its Housing Fund, while Origin targets $750 Million to $1 Billion for the IncomePlus Fund. Compare this to the $40 Million to $100 Million fund size of the smaller funds analyzed previously.

When mature, the DLP fund is expected to hold 2x to 3x the assets of the IncomePlus Fund.

For the IncomePlus fund, Origin has targeted a total of 30 to 50 investments, and they’ve made 28 thus far as of February, 2023 with several more in the pipeline. DLP reports holding over 10,000 units (i.e. apartments) in the Housing Fund.

 

Geography

 

The DLP Housing Fund owns real estate investments in AL, AR, KY, LA, MS, NC, OH, OK, PA, TN, and WV. It primarily makes equity investments in workforce housing communities in secondary and tertiary markets.

Origin’s IncomePlus fund similarly steers clear of the northeast, midwest, and pacific northwest, investing in AZ, CO, FL, IL GA, NC, NV, SC, TN, UT, TX, and VA. They have a buy, fix, and hold strategy

 

Asset Type

 

Since 2020, Origin’s IncomePlus Fund has focused primarily on acquiring Preferred Equity interests, which is essentially a hybrid between debt and equity. Preferred Equity investments enjoy a higher position in the capital stack as compared to common equity, which means it will be paid back first and is less likely to lead to a capital loss.

As of early 2022, 58% of the fund is in preferred equity, 22% is in the core-plus equity category, 15% in ground-up development, and 5% in cash. It is a more conservative strategy, which matches the slightly lower projected return. To maintain projected returns, the fund was amended to allow for up to 20% ground-up development, which comes with higher risk and projected returns.

Origin’s investments tend to be in Class A multifamily category (high-end / luxury), which also tends to be conservative as compared to lower class housing.

The DLP Housing Fund invests primarily in value-add equity in workforce housing (Class B/C), focusing on areas where the rent is no more than 30% of the tenants’ household income. As of early 2023, 59% of the fund is in JV (joint venture) preferred equity investments.

Common equity investments tend to have a higher risk and return profile as compared to debt or preferred equity, but lower than that of ground-up investment.

Notably, both Origin and DLP also offer funds focused exclusively on new development. Origin has Growth Fund IV and DLP offers a Building Communities Fund.

 

Investment Minimum

 

The minimum investment in Origin Investment’s IncomePlus Fund is $100,000.

The minimum investment in DLP’s Housing Fund is $200,000.

 

 

Liquidity

 

Unlike the closed-end funds we looked at recently, these evergreen funds have a built-in mechanism to provide investors with liquidity options, so their money isn’t necessarily tied up for years.

DLP offers investors a chance to request a partial or full redemption of their shares annually with no penalty in the spring once K-1s have been delivered, which happens no later than mid-March and the redemption period lasts through April. Requests will be honored by the end of September (typically much sooner) as long as the liquid assets of the fund permit a redemption at the time.

Origin Investments offers investors a quarterly opportunity to request a redemption, but as is typical, the right to cash out upon request cannot be guaranteed. There is a one-year lockup, and if an investor has been invested for less than five years, there is what I would call an early withdrawal penalty that starts at 10% at the one-year mark and decreases by 2.5% each year until it’s gone at the five-year mark.

 

Investment Fees and Distribution Waterfall

 

The returns from past investments and the projected returns on these funds are reported net of fees, that is, after all fees have been paid. That makes the discussion of fees less relevant, but you should still know what you’re paying and what you’re paying for.

The bulk of these fees are the cost of doing business. Performing due diligence, record keeping, tax filing, investor relations, and marketing all cost money. Fees help cover these necessary functions of a private real estate company. You cannot compare such fees to the expense ratio of a mutual fund, a fee that covers a much narrower range of functions.

When you invest in Origin‘s IncomePlus fund, an administrative fee of 0.5% to 2% is applied to your initial investment, depending upon the size of your investment (and it’s 0% if investing $5 Million or more).

Origin’s fees include a 0.5% acquisition fee on each investment made within the fund; this is a fee you won’t actually see as it’s reflected in the regularly updated NAV (net asset value). The annual asset management fee is 1.25%, a reduction from the 1.5% charged in their previous funds. Last is a 10% performance fee (down from 20% in earlier funds) assessed only after the annual 6% preferred return has been paid out. After investors receive their 6%, 50% of the additional dollars are retained as a catch-up until Origin captures 10% of the fund’s increase in value, after which additional dollars are allocated 90% to the investor and 10% to Origin.

DLP does not charge an origination fee in the Housing Fund, and they also give investors a 6% preferred return.

The management fee for most investors will be 2%, although investors with $1 million or more will have this fee reduced to 1.5%, and it drops to 1% with $10 Million invested. Once the 6% preferred return has been realized by the investor, DLP also does a catch-up, keeping 100% of the profits until they’ve captured 20% of the preferred return, after which additional dollars are allocated 80% to the investor and 20% to DLP.

The management fee was recently increased by 0.5% for six-figure investors in the fund, but the preferred return and targeted after-fee returns have not changed.

Again, these fees are accounted for in the projected returns and actual reported returns of these funds. In both instances, further specifics can be found in the Private Placement Memorandum.

 

Will Investors Need to File Multiple State Tax Returns?

 

No. One of the advantages of REIT structure is that the fund can file an aggregate return and individual investors do not have to file state income tax returns in such instances.

 

How Much Leverage is Used?

 

The amount of leverage in each fund will vary a bit within the fund from one project to another, but it’s good to know how much leverage can be expected to be utilized, on average, within the funds.

Origin’s IncomePlus Fund targets a 60% loan-to-value ratio (currently stands at 48%), and DLP’s housing fund leverage tops out at 65% of ARV (after repair value).

Based on these metrics, I wouldn’t consider either fund to be highly leveraged, but Origin takes a more conservative approach.

 

 

What are the Funds’ Track Records?

 

As mentioned above, both companies survived the housing market crash of the late 2000s and have grown substantially over the last decade and a half.

Origin’s IncomePlus Fund was launched in April of 2019, and it returned 4.5% in those 9 months of 2019. Total returns in 2020 were 1.4% (the unit value was adjusted down 6.9% in March of 2020 as the pandemic began), 2021 was a bounce-back year with returns of 21.2%. The 9% to 11% target was met in 2022 despite a turbulent latter half of the year with a total return of 9.3%.

The DLP Housing Fund was launched in January of 2020, and as of late 2022, the fund has returned approximately an annualized 27% to investors over three years, with 2021 being a banner year with investors realizing a nearly 46% return.

 

Must One Be an Accredited Investor to Invest?

 

For both of the funds in question, the answer is yes. Non-accredited investors are usually eligible to invest in diversified funds organized into eREITs, such as those from Fundrise (minimum investment $10) and RealtyMogul (minimum investment $5,000).

Most attending physicians qualify as accredited investors. You must have either a sufficient income (two years of $200,000 as an individual or $300,000 as a couple) or a million dollars in assets not counting your primary home.

 

A Summary of Differences

 

There are a number of similarities between these two funds. Both focus primarily on multifamily commercial real estate, offer a tax-advantaged preferred return of 6%, are REIT-based evergreen funds, and come from companies with lengthy and impressive track records.

In terms of assets, Origin’s IncomePlus fund takes a more conservative approach with a preponderance of preferred equity in recent years and a focus on Class A multifamily properties.

DLP, on the other hand, focuses on workforce housing and common equity investments in its Housing Fund.

The return profiles of the last few years reflect the different risk tolerances, as the DLP Housing Fund has easily outperformed the Origin IncomePlus Fund.

Returns are net of fees, but there are differences in the fees charged by these two funds.

Origin charges an administrative (origination) fee on your initial investment, whereas DLP does not, but Origin’s 10% performance fee is half that of DLP’s 20%. Both of these are quite low, by the way, as a 70% / 30% or 60% / 40% split of profits after the preferred return has been met is not uncommon in the industry.

The management fees for DLP are 2% annually for six-figure investors, while Origin’s annual management fee is 1.25% for all.

Origin splits profits 50% / 50% with investors to collect its catch-up fee of 10% of the upside, whereas DLP collects 100% until it has it has captured its 20% of the upside.

Finally, the minimum investment is twice as high at $200,000 in the DLP fund as compared to $100,000 in Origin’s fund. The DLP fund is also slated to be about twice the size at maturity.

 

Where Can I Get More Information?

 

To learn more about Origin’s IncomePlus Fund, visit Origin Investments and download the PPM. They also regularly offer webinars, and the schedule can be seen on their events page. An update on this particular fund will be given tomorrow (2/15/2023) and registrants will be sent a replay link.

For more information on DLP’s Housing Fund and other funds, visit DLP and download the PPM. DLP also offers regular monthly webinar updates and live dinner events, and their schedule can be found on the events page.

Additionally, I’ll be joined by DLP Founder and CEO Don Wenner for a live webinar with Q&A this coming Friday afternoon. If you can’t make it live on 2/17/2023 at 4pm Eastern / 1pm Pacific, pre-register and you’ll get access to a recording. Register here.

 



 

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3 thoughts on “Comparing Real Estate Funds: DLP Housing Fund & Origin Investments IncomePlus Fund”

  1. Do you know if the recent finding by a jury in the Middle District of Louisiana finding Baton Rouge Venture LLC, a company owned by DLP entities and persons, liable for “bad faith” damages, and a follow up lawsuit from the counterparty to those damages claiming that those properties were refinanced with affiliated DLP entity debt funds over a lis pendens? If so, what would you think the impact to DLP would be?

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  2. Subscribe to get more great content like this, an awesome spreadsheet, and more!
  3. I have invested with both Origin and DLP and have been happy with the results thus far. Nice long term investment as a theory rather than individual syndication that will go full circle in 2-7 years and then face a tax burden, so the ability to 1031 within the fund is really helpful. Good with the accumulation phase of ones career and providing tax protected regular distributions during retirement. It sounds perfect in many respects. I checked with DLP and for a large enough investment they will let you 1031 INTO the fund, so that’s something we are thinking of as my mother in law is getting older and no longer wants to manage 3 of her rental properties. A clear downside is the lack of control. Less work and truly passive- but I am increasingly worried about vulnerability to major changes in management or fund structure to which the investor has no recourse. Case in point, DLP increasing management fees this year by 0.5% from 1.5% to 2% for investments under 1M (A 33% increase). Not the end of the world, and likely trying to both get more money and disincentivize small <1MM investors. But it makes me wonder what is next. If the company needs more money in the next real estate downturn does the preferred return and high water mark structure get the axe with a stroke of the pen? I'm continuing my current investments with both Origin and DLP but moving new new funds heavily towards old fashioned stocks and possibly individual property syndications with fixed terms but buying those within a retirement account to minimize taxes on the round trip investment. Will wait and see how things shake out over the next few years before deciding on any other major changes.

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