A turnkey real estate investment strategy can be an excellent way to profit from real estate for an investor wanting diversification.
John Larson with American Real Estate Investments, works with investors who want a hands-off investment in markets like Dallas, Houston, St. Louis, and Kansas City.
Turnkey real estate firms match investors with properties that have been renovated and come with a screened tenant in place. When you invest in turnkey real estate, you have minimal involvement with the property, tenant and management of the property. You collect a monthly check.
Investors working with a turnkey company benefit from the experience and expertise of a company with boots on the ground. Their physical presence provides an intimate local market knowledge, access to off market properties and relations with reputable contractors. Many turnkey companies have their own crews to help further contain cost.
To start, the investor identifies what they are looking for with the turnkey firm. Then the company finds a property that meets the investor requirements. As soon as the property is acquired, the company manages the renovation, and placement of a tenant.
Risk versus reward
For a higher rate of return, you will need to look in less desirable neighborhoods and be unable to attract tenants with job stability. John’s experience shows it is better to aim higher given all the opportunities to acquire higher end properties, tenants and rent to higher.
For more security, lower cash flow, but greater potential appreciation, consider properties located in owner neighborhoods with high average incomes and desirable schools.
When you purchase a higher end property and renovate to a level that a potential homeowner would expect, you create more exit opportunities.
If the market appreciates beyond expectations, you can more easily sell to a potential homeowner that wants to own in the neighborhood.
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Real estate investing strategies require that investors pay attention to Big Trends in Real Estate. They are changing where we live, work and play.
Real estate expert John Wilhoit takes us through three distinct recent lifestyle changes that are shaping the real estate marketplace.
Mobility changed during the recession. Children who would normally leave home after graduating from college, continued to live at home. The lack of employment opportunities forced them to stay in place.
The longer the economy stalled, the go and seek mindset changed for the average American’s mobility. Instead of moving for nonexistent jobs away from home, and starting a new life, they stayed in place.
Now the economy has improved and the jobs have come back to where people live. Help is wanted and you do not have to move to find employment.
How we Shop
The internet has changed retail forever. The younger generations, due to their lack of funds, do not shop for things. They are more interested in an experience. Major retailers are struggling to figure this out. Most are realizing the need to consolidate space to match the decreased demand.
The unforeseen challenge local communities will have to face is how to make up the loss in property tax receipts. If the retail space goes away, or is significantly reduced, this will affect local tax base.
Traditional suburbs were a place where people lived and commuted from Monday through Friday to the city for work.
Some suburbs outside major metro areas have transformed into Hyper-Suburbs. They now provide the ability to work, shop and go to school without leaving.
It can be argued that the big box retailer is responsible for initiating this change. As your need to travel downtown decreases, and employment opportunities grow, you no longer need to leave for what you want.
This transformation provides residents the opportunity to take advantage of all that their community has to offer.
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Real estate investing requires that you consider your entity selection in order to both benefit from the tax code and protect your assets from unnecessary liability.
CPA Patrick Camuso takes us through the considerations and benefits of an LLC versus a S Corporation.
Operating as a sole proprietor leaves you exposed for liability that an entity can shield your from.
In order to determine which entity option is best for you, it is recommended that you start with a clear understanding of your real estate investing strategy.
The first question you need to answer is will you be passive or active. If your goal is to buy and hold, and you turn over all of the day to day investment and property management decisions are handled by others, your are passive. An LLC is a good option for a passive investor
If you will be operating a more hands or, “active”, business that flips, or includes a lot of transactions, you are likely a good candidate for an S Corp. Especially when your income increases beyond $60,000 per year from your real estate investing. There are additional tax codes that you can benefit from when you are filed as an S Corp.
An S Corp does expose you to self employment tax. Working with your CPA to determine what a reasonable compensation is, you can limit the amount of your income that is applicable to self employment tax. Additional compensation can be received as distributions that are not subject to self employment tax.
The S Corp comes with additional accounting costs. You will need to weigh the cost of accounting against the tax benefits if your operation to determine when is the right time to file as an S Corp.
Additionally, if you create multiple entities, remember to maintain the corporate veil and keep separate accounting and accounts for all income and expenses.
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The 1031 Exchange is a section in the IRS tax code that allows investors to defer paying capital gains taxes. If your are a real estate investor, this is a great opportunity to keep your gains when investing in a like investment property.
Bill Exeter with Exeter 1031 Exchange has been working with investors as a qualified intermediary for over thirty-four years. He provides specific steps and useful information for investors considering an exchange.
FREE A Guide to 1031 Exchanges click here
The intermediary applies the money to the new property.
You have 45 days to identify a replacement property and another 135 days to complete the purchase of the replacement property. The sale and purchase of the two properties must be completed in 180 days to avoid a taxable event.
You should contact a qualified intermediary during the sales negotiation when the sale seems likely to be completed.
The key to a successful 1031 exchange is planning. It takes coordination with all of the interested parties; lender, broker, title agent, qualified intermediary, attorney, accountant, etc.
If you can Identify and tie up the replacement property prior to selling your property, the process tends to go much smoother.
Can you purchase the replacement property before you sell your property? The 1031 Exchange can work in reverse. You will contract with the qualified intermediary to act as the buyer of the new property. When you sell your first property within the 180 days of the new purchase, the proceeds will go through the qualified intermediary and be applied to the replacement property.
The price varies among qualified intermediaries. The full cost of the service ranges from $700 - $5,000 depending on the degree of difficulty and the service provider.
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A new client of mine is the focus of this case study. The situation is one that reminded me of the challenge property owners face when looking shopping for insurance for old buildings.
The particular property is like many in the Portland downtown. It is a 9,000 square foot one story brick building with wood trusses built in 1927. The tenant is a retail business with a showroom. The building is wide open with a small mezzanine and a small area walled off for some storage. There is one bathroom, and a small break room with a sink. There are two perimeter walls visible to the sidewalk and busy city street which are showroom windows. The other two walls are solid brick, with no openings.
The estimated replacement cost estimate generated by a replacement cost estimator used by insurance companies. $1,332,780.00.
The current rents are $12,000/ month, $144,000 annually.
Building systems: It is widely held belief that building systems have a limited life expectancy. Therefore, insurance companies require that systems, roof, electrical, plumbing & heating and cooling systems be replaced every twentyfive to forty years. If not replaced, a carrier will require an inspection from a licensed contractor stating the condition of the system is sound.
Current code does not require the building to be sprinklered based on square footage and occupancy.
The owner received a notice from his insurance company notifying him that they would not be offering renewal due to the age of the building. When he contacted his agent, the agent, said there was nothing he could do.
I discussed with the building owner the history, and prepared applications in order to tell the story of the building to potentially willing carriers.
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