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Commercial Real Estate Pro Network

Commercial Real Estate Professionals who work with Investors, Buyers and Sellers of Commercial Real Estate. We discuss todays opportunities, problems & solutions in Commercial Real Estate.
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Now displaying: November, 2018
Nov 15, 2018

Qualified Opportunity Zones, a late add to the 2017 Tax Code, are designed to stimulate neighborhoods in need of investment.

Kathy  Fettke, author, investor, syndicator and host of RealWealth Show Podcast shares her views on the new tax law.  For investors with capital gains who are looking for a way to lessen their tax liability, this just might be the answer to your prayer.

Markets cycles are affected by supply, demand, interest rates, etc.  When needed, the tax code is a proven tool the government can use to stimulate growth and change the behavior of investors.  Opportunity Zones are the newest iteration for investors looking to lessen their taxes and get a better than average return on their investment.

Have a Capital Gain?

Do you have an unrealized capital gain?  Unlike 1031 Exchange, the Qualified Opportunity Zone is not exclusive to real estate investors.  All investors, who have taxable gains from the sale of stocks, bonds, business, real estate, etc are eligible.  You have up to 180 days from the sale that caused the gain to invest in an opportunity zone fund.

The opportunity zones are in neighborhoods needing a jumpstart.  New investment will likely not be a cash flow opportunity. Instead, over time, the expectation would be for significant appreciation.  It takes time to improve a neighborhood. The goal is to find a neighborhood with momentum that will attract other investors. If you find this, and you can be patient, the reward will be worth it.  

Disclaimer: The information presented is is for discussion purposes only.  

The QOZ details are developing.  It is up to YOU to engage a tax professional for advice on how to proceed and benefit.  

Where are the QOZ?

There are over 8,000 qualified Opportunity Zones in the US.  States had 90 days from the date of the act to apply to the US Treasury for zone status.  To find one near you do an internet search, “opportunity zone map”, or click: ttps://www.cdfifund.gov/Pages/Opportunity-Zones.aspx

How Qualified Opportunity Zone Works

  • To qualify, you must have taxable gains.  Ordinary income is not eligible.
  • Taxes on the original gain are deferred.  If you stay in the investment for 5 yrs and get a 10% discount on the tax owed.  Stay in the investment for 7 years, you you get a 15% discount on the taxes due, and 7 years to pay them.  
  • Bonus: if you stay in your new investment for 10 years, the subsequent gain on the new investment is TAX FREE; not subject to Capital Gains TAX!
  • So far, the use of a Qualified Intermediary is not recognized as a requirement.     
  • Your gains must be placed in a “Qualified Opportunity Zone Fund”.  This can be your fund, or in another’s fund, just not a single member LLC.
  • The “fund” must invest in a property located in a designated QOZ.
  • The property must be improved.  You can do new construction, or substantially improve an existing building.  Substantial improvement example:
    • Purchase Price: $1,000,000
    • Land value: -$  500,000
    • Existing Structure Value: $   500,000
    • Investment required to be substantial: $500,000

 

For more go to:

RealWealthNetwork.com

Nov 8, 2018

Multifamily Syndication Structure and Fees provide a significant opportunity to make money.  Who better to ask about the numbers than the sponsor of twenty-six syndications, Vinney Chopra.

To buy a large multifamily property, it takes the coordination of several like minded investors.  The General Partner, finds the deal, builds the team, and gets the commitment from the limited partner investors to close the deal.  

Members of the LLC

The owner of the property is the LLC entity created specifically for this property at closing.  Members of this entity are the General Partner, sponsor, and the Limited Partners, investors. The range of ownership depends on the specific deal, but a split range of 20-40% for the General Partner and 80-60% for the Limited Partners is common.  The specific opportunities are spelled out in the private placement memorandum. The opportunities to make money are numerous for the Limited Partners including:

  • Distributions; this is from the operational cash flow.  Distributions can be tied to a preferred rate of return for the LP’s.  This payment can occur as frequently as monthly - quarterly. The LP and GP can participate in the excess over the LP’s preferred return on a predetermined percentage split.
  • Disposition: When the property is sold, the equity gain is split between the GP and LP based on the ownership split.   
  • Refinance: If the market supports it, a refinance can return the investors capital before selling the property.  

So what’s the reward for the General Partner?  Below are the various ways to get paid as the sponsor of a syndication.

Acquisition Fee

The acquisition fee ranges from 2 to 4% of the purchase price.  It is the sponsor’s reward for putting the deal together and raising the funds needed to close.  A good rule of thumb for the capital raise is 30-35% of the purchase price. The money raised will cover;

  • Down payment 20-25% of purchase price
  • Closing cost
  • Annual insurance
  • Annual taxes
  • Syndication Fee
  • Real Estate Legal Fees
  • Capital Expenses deferred maintenance ( more if significant improvements needed)
  • Acquisition Fee

Loan Sponsor “Enhancer” Fee

In order to borrow the funds needed to close the deal, the lender one investor guarantee the loan.  This individual must have a personal net worth greater than the loan amount. The fee for this obligation ranges from a flat fee to a percentage of the General Partnership.

Asset Management Fee

Throughout the course of holding the property, the asset manager is responsible for overseeing the property manager and any repositioning of the asset if a value add plan is to be executed.  A sponsor will also prepare and provide regular reports to investors on the property’s performance. The Asset Management fee is typically 1-2% of annual collected income.

Property Management Fee

If you have enough units, consider creating a property management firm.  This is an excellent opportunity to serve your investors and collect a fee.  Fees range from 4-10% of the total income collected depending on the size of the property.  When you are the property manager, you can negotiate better deals with your suppliers for the benefit of your investors.  

Refinance Fee

While operating the property, if the market supports, there may be the opportunity to refinance and return some equity to the investors.  The proceeds of the refinance are paid to the investors to return their investment capital. When you can return the investors original capital and continue to pay them a quarterly distribution makes investors happy.  The sponsor can charge a refinance fee, 1%, for doing the work necessary to complete the refinance.

Disposition Fee

When it’s time to sell the property, sponsor will charge 1 - 2% of the sale price.  The fee is for the work required to prepare the property for sale. This includes: conduct property tours, gather the broker price opinions from four different brokers, and meet with CRE Brokers.

For more, go to:

www.vinneychopra.com

Text: SYNDICATION to 474747

Multifamily Investment Syndication

 

Prior CREPN Radio Multifamily Syndication episodes with Vinney Chopra

CREPN #145 - Why Multifamily Real Estate Investing with Vinney Chopra

CREPN #149 - Why Multifamily Syndication is a Great Option for Real Estate Investors

CREPN #153 - Building Your Multifamily Syndication Team with Vinney Chopra

CREPN #157 - How to Attract Capital & Communicate with Investors with Vinney Chopra

CREPN #161 - Multifamily Underwriting with Vinney Chopra

CREPN # 165 - Letter of Intent & Purchase Sale Agreement with Vinney Chopra

Nov 1, 2018

Real Estate Investing has benefits that are not always recognized by investors.

Tyson Cross is a former Teacher turned Commercial Real Estate Broker and investor based in Portland, OR.  His journey from educator to investor is a common progression for investors; awareness to action.

Invest in What You Know:

Do you understand the fundamentals of the stock market?  You know you need to invest, but where? How? If you have a W2 job with an employer sponsored 401K, that may be all you do.  In this options, the only control you have is the amount you put into your account and which investment fund you select. Your employer contribution and the market performance are out of your control.  

Outside of your 401K, you can choose any traded stock on the exchange.  What do you know about any of the companies on the stock exchange?

Now, think about real estate.  It’s everywhere; big cities to rural towns.  In every city, people need a home, and over time, what happens?  Rent and the cost of housing go up. If you understand this, you understand the upward trend line for real estate market fundamentals.  Your understanding of this makes the benefits of investing in real estate tangible.

Stocks vs Real Estate

Your 401K is essentially a savings account.  Every payday, you buy shares, which over time adds up to a substantial sum.  What’s not so well understood is that when you are ready to take your money out of your 401K, you have to sell shares.   When you sell them, they’re gone! The remaining shares have to increase in value for you to stay even. This is out of your control.

Real Estate is not as liquid as stock.  However if you keep your property for several years, you can borrow against the equity.  The proceeds from the loan can be used to invest in additional properties, or taken as cash.  Neither use is a taxable event.

Don’t forget the cash.  Investment real estate valuation can include positive cash flow from day one.  

Leverage & Control

The increase in value difference between a percent of a small number, your 401k or a big number, a leveraged asset, like real estate.  

Example: If you have $100,000 saved in your 401K and the market goes up 8%, you made $8,000.  Not bad.

If you purchased a property worth $500,000 using your $100,000 as a down payment, and the value goes up 5%, you made $25,000, which is more like 25% return against your $100,000 investment.  

The difference between the $8,000 and the $25,000 is $17,000!  This is the power of leverage.

The percentage increase or decrease in value is directly proportional to the amount you have saved.  With leverage, you benefit from a large number increasing by gives you the benefit of a big asset increasing in value

The Benefits of Real Estate Investing

Real estate provides the opportunity to control an expensive asset with help from leverage, a loan.  You collect rent from the residents and pay off the loan over time. Now let’s look at the benefits unique to Real Estate.  

  • Equity / Principal increase: As the loan balance gets paid down, the difference between the market value of your property and your declining loan balance is your growing equity.  
  • Cash flow; If you purchase your property right, it will income from day one.  This is after your operating expenses and debt service. If you maintain it and keep rents at the market rate, you will always have cash flow that keeps up with inflation.
  • Appreciation; When you sell in the future, it should be for more than your purchase price.  Commercial real estate value is determined by dividing the annual Net Operating Income by the market Cap Rate.  You have no control over the Cap Rate, however, you have direct input regarding the NOI. If you are able to increase your NOI, you will increase the value of your property.  
  • Depreciation; This is a gift from the IRS.  It is an amortized expense tied to the life expectancy of your building.  The gift is that you do not have to actually spend the money to get the benefit.  When you subtract this expense from your income, it reduces your taxable income.

The Risk

There are no guarantees in life.  But, for those who take action, real estate investing is a proven path for wealth accumulation  If you know why you are investing, get educated, get your mindset right, focus, and take action, and you will overcome the risk and be successful.

For more go to:

www.Tysondcross.com

tysoncrossre@gmail.com

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