Is your real estate investment strategy evolving? Learn how Nabeel Mahmud has progressed from single family to Multifamily.
Since his youth, Nabeel has been an entrepreneur. In grade school, he sold his extra halloween candy. In junior high, he developed an internet bulletin board and sold access to his friend. Today, he is growing his real estate portfolio while working a corporate job.
His progression is impressive. He started with a single family, added a duplex, then a quad plex and now an 18 unit multifamily property.
He credits his ability to grow in multiples to applying the systems he learned in his corporate to his real estate investments. He developed a template and systems for his real estate and continues to improve and use with each successive deal.
His long term goal is to acquire enough income from real estate to replace his corporate job and win the time flexibility not afforded from a corporate job.
Most recently, Nabeel entered into a contract to purchase an 18 unit apartment.
Rather that call on the old listings, Nabeel reversed the process.
He first identified a property he wanted. The property was desirable because of its location and the well kept grounds and exterior. Recognizing the high level of care on the outside, he assumed it would carry to the interior.
The building was not listed for sale, so he approached the owner to see if he was interested in selling. The owner said, “no”.
A year later, Nabeel followed up with the building owner. To Nabeel’s surprise, this time, the owner said he was ready to sell.
After some brief conversations, they recognized that they were on the same page regarding price. Next, the seller wanted confirmation of finances from Nabeel to proceed. This was reasonable, and Nabeel provided the requested information.
The due diligence period ensued, with inspection, financing, and confirmation of the seller records.
When we recorded this conversation, they were two weeks away from closing.
For more contact Nabeel at:Nabeel@ayatpropertygroup.com
Commercial Real Estate Investing involves many opportunities to make mistakes. Here are 5 mistakes to avoid.
This type of investor believes that the more information they get on the property, the better will be their purchasing decision. Unfortunately, in most instances, that’s not the case. As the saying goes these investors, “Can’t see the forest for the trees.” They are too involved in the details of the purchase that they forget the big picture. Savvy real estate investors don’t get caught up in the minutia. They generally focus on a small subset of issues to get comfortable with, and this determines whether or not they’ll make an offer on a property.
Not only does the detailed oriented approach complicate the buying decision, it also lengthens the time necessary to come to a decision. Many times, another buyer comes along while Mr. Analysis-by-Paralysis continues slogging through the details and “steals” the property away from him. In reality, the seller is tired of all the nitpicky questions the original buyer has bombarded him with. He is relieved someone else is swooping in to save him from the first buyer.
The opposite of the first mistake is the investor who does only a cursory due diligence on the property. This usually takes two forms: the first mistake is not reviewing the historical operating statements and current rent roll carefully. It’s not uncommon that a property’s Profit and Loss Statement is not transparent to the average reader. Lots of important information can be hidden in the property’s operating statements. They need to be teased out by asking the seller good, penetrating questions. For example:
Those are a few questions that may be appropriate to ask.
The second mistake is only doing a cursory physical inspection of the property. If you’re buying apartments, you need to have your building inspector inspect every unit, the roofs, the laundry areas, the attics, the crawlspaces, etc. Find a well- qualified inspector to represent you who will provide a detailed report of the physical condition of the property.
If you are buying a property with a group of investors make sure that those who are in the investor group have the same goals and exit strategy as you do. It’s not uncommon to find out after it’s too late that individuals in the investor group have different motivations for owning the property than you do.
Before you decide to be in an investor group that is purchasing a property, have a meeting with the potential investors. Ask the managing member of the LLC to outline his goals and exit strategy for the property. Also get a feel for whether you would want to be stuck with these investors over the investment life of the property. If you don’t like what you hear from the managing member of the LLC or your gut tells you not to invest with one of the investors in the group because of their abrasive behavior, pass on the opportunity. It’s better that you pass on it than regret it later.
One of the biggest mistakes investors make is not having sufficient cash reserves available for unexpected expenses. This is especially true for multi-tenanted office and retail properties. For example, an investor owns a multi-tenanted office building. He’s owned the building for years and it has cash flowed beautifully. But instead of putting some of the positive cash flow into a reserve account for future needs he puts it all into his back pocket.
Then one day one of his larger tenants moves out and the property no longer cash flows like it once did. Now the owner has to contribute his own cash to keep the mortgage current. He would like to get the vacant space market ready but to do the tenant improvements and pay a leasing commission will cost him more money than he has in his savings. The space remains vacant because he tries to do the leasing himself to avoid paying a leasing commission. And years pass with an under-performing property.
And the sad thing is, it didn’t need to. If the owner had established a reserve account for the eventual cost of tenant improvements and leasing commissions he would have had the funds to get his property re-tenanted.
A 1031 exchange allows investors to defer their capital gains tax when they reinvest their equity into a like kind-exchange. Deferring the payment of your capital gains taxes to a later date is a HUGE advantage to real estate investors. But sometimes investors are so eager to not pay their capital gains taxes that they pay way too much for their exchange property.
If you can find an exchange property at a market price then do a 1031 exchange. But first find out what the capital gains taxes would be if you didn’t do a 1031 exchange. No one likes to pay the IRS if they don’t have to. I get that. But don’t over pay for the exchange property. Sometimes it is better to pay your capital gains tax than to get stuck with a property that will never be a good investment because you paid too much for it.
These are the five mistakes I’ve observed over the years that real estate investors make when buying commercial real estate.
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Learn how a W2 employee’s real estate investment strategy has grown from an accidental landlord to a multifamily syndicator.
Lane Kawaoka is an engineer from Hawawii who followed the normal path. He got a good education, a good job and saved to buy his first house. Shortly after buying his home, he realized that he was so busy working that he was never there.
Checkout Lane’s website and podcast: Simple Passive Cashflow
Lane realized he was paying a lot for a home he was never in. That's when he made the decision to make his home a rental. The result was a lot of extra beer money.
Lane continued to work hard as an engineer, and aggressively saving for another down payment. He was on his way. As time went on, he was no longer able to find properties that could cashflow.
As his real estate holdings continued to grow, so did his knowledge and experience. He realized that appreciation was out of his control in single family rentals. He needed to find cash flow and appreciation he could control.
Recognizing the lack of control in single family is what Lane and most investors realize when they compare single family to mulitfamily real estate.
Multifamily provides multiple benefits when compared to single family real estate. You must get educated In order to recognize the difference. This requires many hours spent analyzing deals to determine when a deal is a real opportunity. is
To learn more go to: simplepassivecashflow.com
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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CREPN #102 - Should You Lease or Own a Commercial Building with Allen Buchanan
How do you know if you should Lease or Own a Commercial Building for your business needs?
The economy is growing, rents are rising, and commercial real estate space is more difficult to find.
So what questions should you answer to know if you should lease or own a commercial building for your business needs ?
Allen Buchanan is a principal with Lee & Associates in Orange County, CA and a true commercial real estate pro. He has specialized in industrial space sales and leasing since 1984 and provides the following tips for business owners considering purchasing a commercial building.
Questions to ask before buying commercial real estate
Where is the market in the cycle? Commercial real estate is very cyclical. It is important to consider what is the current state of the market. Is space plentiful or limited? Are capital markets willing to lend with favorable terms? Is there an expected growing demand for space like you need?
Who are You?
What type of company is yours? What are the space needs for your business? Do you expect to outgrow your space in the next three years? Are you making money? A lender will look for a favorable track record including, have you been in business for at least five years?
If you are stable, have a proven track record, and anticipate the continuation of your business and have the time to benefit from long term appreciation, buying might fit be for you.
What are the Steps to Buying Commercial Real Estate?
If you have been in business for a while, you likely have received numerous calls from commercial real estate brokers. If you are thinking about buying, interview a couple of theses brokers and find out if they can potentially be a resource for the time it takes to find a property.
Find out if you are eligible for financing. The commercial real estate broker can point you to a potential lender. Typically SBA loans and brokers provide some
How long will it take? To be successful, you should plan on one to two years before you are moving into a new property. The lengthy process includes:
What are the Benefits to Ownership?
Long term, for the right situation, you can benefit significantly through:
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How do you transition from investing in Single Family Rentals to Commercial Real Estate?
Most people recognize single family properties because they live in one. It’s recognizable and comfortable. The barrier to entry is low. Banks are willing to lend on the borrower’s credit score, job history and the property appraisal.
Many investors start in single family residential, and never consider commercial real estate. While single family rentals is an investment strategy, the most significant increase in wealth consistently comes from investing in commercial real estate.
For investors who are stuck in single family or just getting started, and possibly afraid of larger properties, here are the steps needed to get into commercial real estate.
The Steps to Transition
Get the Knowledge
You need to make some connections with a few key professionals.
You need to have a clear understanding of who you are and what you are looking for. Explain your “why” to the broker and ask for input from the broker to gain confirmation you are on the right path, or learn what might be a better option for you.
Ask to See Some Opportunities
Now that you have an understanding of what is required, and a level of investment you feel comfortable pursuing. It’s time to analyze some opportunities. Ask a broker to show you some deals.
Look at potential deals and even deals that have already closed and run the numbers. The more you do this the more comfortable you will become, and you will be able to recognize a good opportunity when it presents itself.
Analyze as many deals as you can.
Pull the Trigger
You will never know everything about real estate investing. Each investment will teach you something new. Your team will help you make a good decision. In fact, the larger the deal, the more help you will get. Why? Because the bank will not let you make an investment into a property if the numbers do not work.
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