The most successful investors know that it is best to allocate investment across several asset classes whose returns are not completely correlated with each other.  Most of them have assets in cash, equities (stocks), debt instruments (bonds) and real estate.  The latter asset class, real estate, is frequently under-represented in investors’ portfolios, but real estate adds an important element of stability in an investor’s returns, owing to the remarkable stability of real estate appreciation over time compared to other asset classes. 

Real estate has been under-represented because good property investment vehicles have not been easily available.  For many investors, their home has been their main real estate investment.  Others have branched out into Real Estate Investment Trusts (REITs), which have become increasingly popular in recent years.  REITs have offered good liquidity, good overall returns (especially in recent years), but tend to be volatile, with returns that may vary widely year-over-year.  Their other big drawback is since REIT dividend income is fully taxable at ordinary income tax rates; they are best suited for tax-advantaged accounts, such as 401(k) plans and IRAs.

Many large fortunes in real estate have been amassed by buying and holding properties to generate significant returns through cash flow and appreciation, and by taking advantage of their tax benefits, notably depreciation, long-term capital gains tax treatment, and the ability to defer tax liabilities through the use of 1031 tax-deferred exchanges.  Buying and holding properties offers some of the very highest returns, stability, and tax advantages available.  

Meridian Pacific’s objective is to provide investors with a real estate investment alternative to REITs for buying and holding cash flow properties with superior returns and low volatility with the all of the tax benefits of direct real estate ownership.

Meridian Pacific Real Estate Investment Philosophy 

While there are a myriad of successful investment models in real estate, they all share only one or both of the following fundamentals to build financial wealth: 

1. Cash flow growth
2. Equity build-up  

Most homeowners are familiar with equity build-up, which is driven by the appreciation of a home and/or paying down a mortgage balance over time.  Equity build-up increases one’s net worth in real estate assets.  

Cash flow relates to deriving rental income in excess of all of the cash obligations and costs incurred, including the servicing of mortgage debt.  To the extent that costs can be reduced and rents appreciate, cash flow will grow over time. 

Some of the best and most stable investment models combine both equity build-up and cash flow growth.  For each property Meridian offers for sale, the pre-tax gains from cash flow growth and equity build-up are added together and projected out over a ten year period under a set of modest assumptions about property, rent, and expense appreciation.  The resultant total return on investment (ROI) is then expressed as a compound annual growth rate, or CAGR.  The ROI CAGR is the best single metric for judging the investment potential of an individual property, and it can be used to compare real estate investment returns to other investment classes, such as equities (stocks).  Meridian seeks to achieve a 10-year ROI CAGR of greater than 18% per year over a ten-year period for its investors.

Meridian Pacific Properties offers buy-and-hold investment opportunities that seek to combine appreciation and equity build-up with cash flow growth.  Meridian acquires, renovates, and sells single and multi-family residential properties in and around Jackson, Mississippi, usually with tenants already in place.  The properties are selected with very strict and specific criteria relating to property appreciation potential, cash flow growth, and risk.  We are careful to choose desirable suburban locations in good neighborhoods away from the inner city to optimize appreciation potential.

Importantly, we focus on always providing high cash flow properties, meaning that after putting as little as 10% down on a property, the investor will realize positive cash flow, even after expenses related to vacancy, repairs and maintenance, property management fees, taxes, insurance, and mortgage payments.  It is important for investors to choose structurally and cosmetically sound properties, obtain excellent tenants, and use a professional property manager.  

Meridian guides investors through the entire investment process.  We assist with choosing the specific properties for investment, putting together the purchase contract, obtaining a mortgage, setting up a legal entity to hold the property (optional but recommended), going through the closing process, and getting pre-qualified property management in place.  If an investor is pursuing properties pursuant to a tax-deferred 1031 Exchange, we can assist with providing a qualified accommodator. 

Investment Risks and Risk Mitigation 

Investing in all forms entails a certain amount of risk, and it is well-known to investors that investments that have more risk associated with them tend to yield greater returns.  The challenge---and the opportunity--- is to mitigate risk through knowledge and managing those risks that are controllable. 

The list below is not intended to be fully comprehensive, but rather detail the primary risks investing in residential real estate: 

• High vacancy rates.  It is simple enough: vacant properties don’t generate rents, which harms cash flow.  Vacancy rates can be harmed by such factors as broken leases by tenants, a preponderance of transient versus long-term tenants, tenants who damage the properties before vacating (extending repair and maintenance time), ineffective property managers who are slow to re-lease properties when they are vacant, and damage from natural and man-made disasters (i.e. fire, flood, and wind).  

Meridian Pacific works with property managers who carefully screen the backgrounds of prospective lessees before leasing its properties to look for “5-star tenants” that meet internal criteria for housing turnover, employment, credit, and criminal history to mitigate risks of vacancy, non-payment of rent, causing property damage or creating other disruptions.  While Meridian can make no guarantees about the behavior of its tenants after they sign a lease, its goal is to improve the odds of getting vacancy rates below the 7-8% industry average. 

It is key to use an outstanding property manager to manage the properties.  The property manager is the lynchpin for getting high rents, good tenants and low vacancy rates.  Meridian is happy to provide property manager references. 

• Failure to pay rent.  Inevitably some tenants encounter difficulty meeting their lease obligations and fail to remit their rent on time.  While often the result of poor financial management, sometimes there are unplanned changes in circumstances that create financial difficulties, such as loss of employment, disability, death or illness of a family member, divorce, etc.  

Well-written lease agreements contain provisions for security deposits that can be used toward unpaid rent, late payment penalties and define the eviction process.   As with mitigating the risk of vacancy, it is important to have good pre-screened tenants and a strong property manager to increase the odds of uninterrupted rents.  Compared to other states and regions, Jackson enjoys “landlord friendly” laws; if eviction is necessary, it is a 4-5 week process, not several months like in many other states.  

• Excessive repair and maintenance costs.  All properties will have repairs and maintenance associated with normal wear and tear on the roof, paint, carpeting, plumbing, appliances, landscaping, and the like.  The larger and more expensive a home is, the higher these costs tend to be.  Repair and maintenance costs tend to be excessive when the tenants cause damage, when the property at the time of purchase had a lot of deferred maintenance required, or if there is weather damage.  

Meridian takes pride in the standard to which we renovate properties.  We have specific criteria that properties must meet before we will offer them to our investors.  Well-maintained properties are extremely desirable and command higher rents and better tenants.  They also minimize deferred maintenance costs in the early years after acquisition.  Also, careful screening of tenants helps reduce the amount of damage caused by tenants. 

• Owner liability.  Property owners are subject to the risk of tenant lawsuits and property damage.  Maintaining general liability insurance coverage  of at least $500,000 per property is very important.   A number of investors purchase supplemental umbrella insurance coverage to supplement their liability insurance.  Other investors investors hold their investment properties in a Limited Liability Company (LLC) in addition to their property and  liability insurance.  

Meridian is pleased to assist investors with finding an insurance agent and, if desired, can provide guidance to help form an LLC for holding properties.  

• Lack of property appreciation.  There is no assurance that a particular property will appreciate year-over-year, and in some cases it might depreciate.  Appreciation is affected by such factors as local demographics, crime rates, quality of school districts, how well other homes in the neighborhood are maintained, how well the property in question is maintained, interest rates, the regional unemployment rate, local inflation and cost of living rates, growth in wage rates, natural and man-made disasters, proximity to shopping and transportation, supply of and demand for housing, and similar factors, to name a few.  In different neighborhoods, the weights of these factors vary greatly.  Some of these variables are controllable when selecting properties to begin with, and some are not predictable, such as certain kinds of natural disasters.  Over the course of time, appreciation rates will vary according to changes in these factors.  

Meridian is very selective about the properties that it procures.  While we cannot guarantee appreciation rates, we acquire specific Jackson, MS properties in carefully chosen neighborhoods to improve the odds of good long-term appreciation.  With local associates on the ground in Jackson, we stay close to what is going on in the community to assess the impact of change on our properties.  Fortunately, our properties provide excellent cash flow, and therefore are not reliant on appreciation to deliver exceptional returns.