Origin Investments Review and Deep Dive

Hi everyone,

Today, we’re looking at Origin Investments — a top player in real estate, offering private investment opportunities to accredited US investors.

The company has evolved from an idea in 2007, to a fully-fledged investment platform with 3,000+ investors. In this issue, we’ll look at Origin Investment’s real estate fund offerings, and analyze what sets them apart from the rest.

Quick Summary

  • Type: Multi-family real estate funds
  • Requirements: Accredited investors
  • Location: US only
  • Minimum investment: Varies, typically between $50k – $100k
  • Avg gross IRR: 24%

The real (e)state of play

We’ve discussed the real estate market extensively over the past few weeks, because the dynamics are fascinating. Here’s a quick refresher:

  • In our analysis of the market, we suggested that the price of homes has another 15-20% to fall before they begin to steady.
  • The uncertainty around inflation and rising interest rates has played a big part. The avg monthly mortgage repayment in the United States is $1,162. That’s up 31% since 202, and the highest it’s ever been

Interest rates probably won’t hit the absurd 20+% of the 1980s, but repayments are only going one direction for now – up.

Yes, prices are falling. But thanks to interest rates, owning a house becoming a lot more expensive.

However, there’s a reason that over 60% of Americans have invested in property. They call it “real” estate for a reason. People will always need a roof over their heads.

When owning a house is too expensive, people turn to renting. So it makes sense why the current market is really favoring landlords. Vacancy rates for investment properties in the US are the lowest in three decades, even as rents have risen over 10% since 2021.

Covid had a huge impact on vacancy rates, as people flocked from metro cities into regional areas, partially due to the WFH phenomenon.

Origin Investments’ portfolio is comprised of multifamily apartment developments, which are perfect for renters.

What is Origin Investments?

Origin Investments is a private real estate fund manager that builds and protects the wealth of accredited investors by giving access to investments in private multifamily real estate funds, typically reserved for institutional investors.

Origin Investments already has more than $1b in equity under management.

The founders

It took two people with very different backgrounds to co-create Origin.

Michael Episcope, a Chicago native, traded commodities professionally, starting at the ripe age of 19. He then retired from trading and wanted a new challenge – investing his own wealth in private real estate, so he secured a Master’s Degree in Real Estate, and joined forces with David Scherer.

caption for image

Co-CEO David Scherer earned his undergrad at Harvard (while playing football) before becoming president of a private hedge fund.

caption for image

The “Origin story” (hehe)

Both founders owned a lot of private real estate. They loved the alternative asset class as a way to grow and protect their wealth. However, throughout their journey, they realized a major problem with property investment: All the best deals were reserved for institutional investors.

So Scherer and Episcope founded Origin Investments with a clear goal: To create a thoughtful, data-driven investment fund that can provide access to deals that most accredited investors would normally miss.

What sets Origin Investments apart?

Origin is a little different from other businesses.

Scherer and Episcope have contributed $75m of their own money to Origin’s real estate portfolio. The team is always trying to profit for the investors, rather than from them. (After all, Origin’s owners are investors themselves.)

Origin’s team of investors and wealth managers is dedicated entirely to risk management and protecting your capital. They do this in three ways:

  1. Not taking outsized risk
  2. Using non-recourse debt
  3. Avoiding cross-collateralization (where two or more properties are used as security for a mortgage)

Origin is one of the world’s top-ranked private equity real estate portfolio managers. According to the real estate database Preqin, Origin is in the top 10% of RE fund managers and consistently outperforms most of its competitors.

Origin’s proficiency comes through comprehensive due diligence and capitalizing on risk-adjusted return opportunities.

Their team of industry experts in data science, deal acquisitions, and investment management, have experience managing over a billion dollars’ worth of real estate across the US.

Origin Investments’ portfolio hasn’t realized any losses to date and boasts an average gross IRR of 24%. The team’s average equity multiple is an impressive 2.10x.

Origin Investment Funds vs REITs

What we found interesting about the Origin Investments business model is that they don’t offer individual properties. Instead, investors buy a large stake in a fund.

So, Origin Investments’ offerings are similar to REITs, but with a few key differences:

  • Tax-friendly. Origin’s funds are structured in a tax-friendly manner so that the depreciation and interest deductions flow through to investors; with REITs, these advantages aren’t passed onto the investors.
  • Support. You don’t always receive the same level of personal support and service from a REIT that you do from the Origin Investments team.
  • Exclusivity. Some properties available in Origin Investment’s funds are exclusive. Other funds and non-institutional investors cannot gain exposure to these same assets.
  • Fees. REITs typically profit through management fees, whereas Origin Investments profit through investment growth and rental yields.
  • Superior yields through vessels like Freddie Mac Bonds and rental yields.
  • Outperformance. Origin Investments back themselves in to outperform the majority of competing for RE funds, including REITs.
  • Quarterly updates. They release quarterly updates for investors. Private REITs don’t.

Multifamily real estate investment opportunities

Each Origin Investment fund has slightly different assets, hold periods, and investment goals. However, you must be an accredited investor to invest in any Origin Investments funds.

Growth Fund IV

  • Target net IRR: 14—16%
  • Asset type: Multifamily properties
  • Hold period: 4+ years
  • Investment objective: Growth
  • Minimum investment: $50k
  • Target net equity multiple: 1.7-1.8x

Origin Investments Growth Fund IV targets multifamily properties in the southwest and the southeast United States. Specifically, Texas, Tennessee, Arizona, Colorado, Georgia, and Florida are represented.

These cities and submarkets have been chosen due to their growing populations and demand for rentable locations.

That’s the core of the Growth Fund IV’s investment strategy – the rising need for rental properties. Certain US cities are becoming inundated with new residents yet lack the means to house them properly – 700,000 new apartment units were rented out in 2021 but only 360,000 new apartment units were actually developed.

Origin Investments believes the supply-demand gap is only going to exacerbate. The fund targets high returns by developing new multifamily complexes in cities most affected by this imbalance. Rent growth in these areas is already outpacing the rest of America by nearly 3%, a figure likely to climb.

The fund will build properties from the ground up. During the first 4+ years, returns will primarily be generated from capital appreciation (as the buildings are completed and increase in value).

Afterwards, you can simply call it a day, take your potential profits, and exit your position. Or you can continue holding ownership in the fund (and defer capital gains on the sale).

IncomePlus Fund

  • Target net return (annualized): 9-11%
  • Asset type: Multifamily properties
  • Hold period: N/A
  • Investment objective: Passive income and capital growth
  • Minimum investment: $100k

The IncomePlus Fund retains the investment philosophy of Growth Fund IV, but, as the name implies, focuses less on capital growth and provides monthly distributions through rent for people looking for a steady income stream.

Right now, the annual yield for the fund sits at 5.6% – which significantly outperforms other income investments like bonds and treasuries.

The distributions generated from the multifamily properties can be re-invested into the fund to allow for compounding growth (similar to reinvesting dividends from a publicly traded stock).

Those who are targeting yield can take advantage of the tax benefits – 94% of all distributions were sheltered from taxes as a tax-based return of capital.

The depreciation on the fund’s buildings covers most of the fund’s distributions, making them tax-free (the returns of capital do reduce the cost basis in the fund, which can lead to a larger capital gain when selling the investment). Taxes are also minimized as the fund holds the properties for extended periods to minimize capital gains.

QOZ Fund II

  • Target net IRR: 10-12%
  • Asset type: Multifamily properties
  • Hold period: 10+ years
  • Investment objective: Growth and tax benefits
  • Minimum investment: $50k
  • Target net equity multiple: 2.25-2.5x

Qualified Opportunity Zones are a US government initiative brought to life in 2017. Investors can reinvest capital gains to help build real estate in communities that require economic development. Some examples of assets that can be sold and thewith the capital gains proceeds reinvested in a QOZ fund are stocks, real estate, a private business, precious metals, cryptocurrencies and art.In return, the government allows significant tax advantages.

  • Tax deferral. Capital gains from other investments can be reinvested into the QOZ Fund – this can generate tax savings of up to 72% (as compared to reinvesting capital gains in a non-QOZ vehicle).
  • Tax elimination. Hold your investment in the QOZ Fund for 10+ years to avoid the capital gains tax (CGT) entirely.

Origin’s QOZ Fund II is targeting ground-up development in the same markets as Origin Investment’s other funds – southwest and the southeast US.

QOZ Fund II is a long-term investment. Properties must be owned and maintained for at least five years post-construction, and the best tax advantages come after holding for a decade.

However, once development is complete, investors will be treated to a steady rental yield on top of the growth experienced during the construction phase.

Multifamily Credit Fund

  • Current net yield: 7.1%
  • Asset type: Leveraged Freddie Mac bonds
  • Hold period: 7 years
  • Investment objective: Passive income
  • Minimum investment: $100k
  • Egan-Jones credit rating: A-

Freddie Mac is one of the industry’s most prominent multifamily RE businesses. They’ve recently devoted billions of revenue to offering bonds to fund managers and investors across America. Recently-acquired mortgages in multifamily properties back the B-piece bonds acquired by Origin Investment.

Origin landed on B-piece assets for this bond due to their inherent risk protection – investors are well-shielded from potential capital loss (in some cases, the mortgages can suffer losses up to 30% before investors in the fund would begin to have capital losses).

The properties backing the bonds are scattered across America to provide some geographic diversity.

The holding period for the fund is seven years. Through this time, investors will receive expected distributions amounting to 7.1% annually. This beats out most other fixed-income investments in the industry, like Corporate and Municipal bonds.

The fund’s structured like a REIT to provide a 20% tax deduction on all taxable distributions. Profits through interest can be taxed as a typical REIT distribution, instead of as income.

What we like

  • Tax advantages. The tax benefits on offer, particularly in the QOZ and IncomePlus funds, are great for high-net-worth investors needing to offset capital gains. Taxes can be deferred through the pass-through of property depreciation and interest.
  • Low fee structure. Private REITS/real estate investment funds typically pay a fee to advisors to sell the investment. Origin sells the funds directly to investors, resulting in a reduced fee structure and increased returns.
  • Investor friendly capital structure. Funds are only requested from investors after an attractive property has been identified – an investor’s funds are not tied up while waiting for Origin to source properties. In addition, Origin takes their management fee only after a successful sale or from operating cash flows, not at the time of acquisition – this aligns Origin’s incentives with investors.
  • Transparency. Origin provides quarterly updates on investments along with guidance on construction projects and planned acquisitions.
  • Exclusive Opportunities. Origin offers access to investments such as the Freddie Mac bonds in the Multifamily Credit Fund that that other investment vehicles may not allow; Origin has authorization to bid on these types of bonds due to their extensive multi-family operating history and long relationship with Freddie Mac.
  • Strong team. Origin Investments is made up of other 30+ experienced employees.
  • Multifamily focus. Multifamily complexes have demonstrated strong historic growth potential, are a necessity in the current market, and provide solid rental yields.
  • Skin in the game. Origin Investments makes most of its income off of its own investments. The founders themselves have over $75m in the team’s property portfolio.
  • Cash flow. A couple of the Origin Investments funds offer monthly cash flow, which can be a great way to make your money work for you. We’re particularly bullish on rental yields at the moment too – a great way to offset declining capital growth in the real estate market.

Potential risks

  • Residential property concentration. None of the Origin Investment funds currently open for investment have exposure to non-multi family real estate (industrial/office/specialty/single-family). This could reduce returns if rental vacancies increase or rental rates decrease in the future.
  • Future Deal Flow. With multi-family rentals being a relative bright spot in an increasing cloudy real estate market, Origin may face competition to source strong properties at attractive valuations.
  • Specific market focus. The majority of their funds are focused on the southwestern and southeastern US markets. If these sub-markets were to experience a prolonged downturn, the returns and yields from funds would be severely impacted.
  • Uncertainty around real estate. Nobody really knows what’s going to happen to the real estate market in the face of inflation and rising interest rates. At the moment, most property markets are contracting globally.
  • Higher minimum investments. Origin Investment’s funds are only accessible to accredited US investors. Additionally, the minimum investment figures are either $50k or $100k, which may be on the higher side for some.
  • Construction delays/cost over-runs. Construction can sometimes take longer, delaying when rental income begins to be recognized. Cost over-runs could reduce future returns. (These risks are mitigated by Origin having completed $1.6b of ground up developments).

Closing thoughts

The real estate landscape’s pretty rough right now. Interest rates are rising while property value’s falling. Even as rental yields increase, investing in a rental property carries risks.

But what if you could get the same exposure without worrying about rising mortgage costs, property management, etc? This is what Origin Investments provides — a way to get involved in a tax-advantaged manner in real estate markets with strong long-term demographics, without a commitment to a mortgage at decades high rates.

With an average IRR of 24% and ranking in the top 10% of property fund managers across the globe, it’s the performance of the Origin Investments portfolio that really sets them apart.

There’s no need to reinvent the wheel when you do a job extremely well. That’s what’s made Origin Investments tick for over a decade now.

Disclosures

  • None of the authors of this issue currently own any shares of any Origin Investments property.
  • We have no Origin Investments shares in the ALTS 1 Fund.

This issue has been a sponsored deep-dive, meaning Alts has been paid to write an independent analysis of Origin Investments. Origin Investments has agreed to offer an unconstrained look at their business & operations. Origin Investments is a sponsor of Alts, but our research is neutral and unbiased. This should not be considered investment advice, but rather an independent analysis to help readers make their own investment decisions. All opinions expressed here are ours, and ours alone. We hope you find it informative and fair.

Share

Author

Stefan von Imhof

Stefan von Imhof

Stefan von Imhof is the co-founder and CEO of Alts.co.  With a background in alternative asset analysis, valuations, and due diligence, Stefan was born for this world. His alternative investing  newsletter has grown into Alts.co — the world's largest alt investing community, with over 230,000 investors. Originally from Boston and later Santa Barbara, CA, he now lives in Melbourne, Australia with his beautiful wife.

Related Posts

Bright spots in commercial real estate

It’s easy to forget how broad commercial real estate is. There at least four bright spots in the market, and today we’re looking at each one.

lucha libre

Let’s invest in Mexico

Tequila Industry Cash Flow Part 1, Tequila Industry Cash Flow Part 2, STRs in Puerto Vallarta, and More!

Recently Published

Curious about Fractional Real Estate investing?

Get rich analysis on opportunities across Crowdstreet, Fundrise, LEX Markets, and Groundfloor


Join the club. Start here.

    Join thousands of subscribers.
    Absolutely spam-free.