Fundraising Rules are complex sections of Regulation D that must be followed to stay out of trouble with the SEC.
Syndication is a popular real estate investment strategy for raising capital used by real estate syndicators. The legal cost to comply with the rules and regulations can be prohibitive.
Failure to follow the rules can result in being classified as a “bad actor”. A Bad Actor can be prohibited from future involvement in SEC fundraising.
Amy Wan started Bootstrap Legal, to simplify the legal process and reduce the cost for syndicators. Bootstrap utilizes technology to expedite the first draft process from client to attorney. This technology interface saves clients 10-15 hours of attorney time.
For discussion purposes, we will focus on the four most popular federal rules regarding raising money from a pool of passive investors for real estate investment. For each rule, we will look at:
** For the official SEC details, go to:
In all cases, the success of your fundraising campaign is directly correlated to the awareness you are able to bring. So, don’t forget the marketing. If you don’t bring awareness to your campaign, you will not succeed.
For more go to: https://bootstraplegal.com/
Connect with Amy on Linkedin: https://www.linkedin.com/in/amyywan/
Depending on what you are trying to achieve will determine which valuation is important. Appraisal is more art than science.
Ken Kramer is the Co-founder and Managing Director at Rushton Atlantic, LLC. Rushton provides third party appraisals, valuations, for its clients; banks, insurance companies, governments, and property owners.
Income: based on the income the asset can produce over the life left in the asset.
Fair Market/ Market: the value agreed upon by a willing buyer and seller in a particular market.
Cost/ Replacement Cost: considers how much will it cost to replace or rebuild the property, building, with a new building.
As an investor, your primary interest is the income the property can produce. Can the property generate enough income to cover its operating expenses, reserve for capital expenditures, make the mortgage payment, resulting in a profit for you?
You are likely be interested in the market value as well. Are you getting a good deal? Can you sell it for more than you bought it for?
Your lender’s perspective will be more market value oriented. A commercial property’s value is directly correlated to the net operating income; income minus operating expense. The NOI divided by the local capitalization rate (cap rate) will provide a market value.
The difference between the market value and the mortgage is lender’s margin of safety. If you fail to make the mortgage payments, the lender will take the property back through foreclosure. When this happens, the bank wants to be able to sell the property quickly, which is likely at a discount near the mortgage balance. .
The insurance company’s perspective is based on the cost to replace the building you own. The bank will require that you purchase insurance on the property to protect you and the bank from loss.
The best insurance coverage will provide replacement cost coverage. If the building is damaged or destroyed, your insurance company will compare the limit on your policy to the amount needed. Assuming there are no issues, they will pay for the building to be rebuilt, restoring your income and the asset the bank lent against.
As you can see, different parties have different valuation considerations.
The buyer, wants to know income value, and the market value.
The bank wants to know the market value.
And the insurance company wants replacement cost value.
If a buyer gets a good deal this could be based on the economic potential due to a weak operator or the opportunity to develop the property into something greater. In either case, there is no reason the acquisition price should reflect the cost to replace the property.
Likewise, market value could be driven by the location. If the ground is valuable, it could be the driving force behind the value that the bank lends against.
If the structure is small, and simple, the replacement cost could be very small in relation to the market value determined by the bank.
The insurance company is not concerned with the income nor market value. It’s promise to the insured is to replace the property.
Remember, appraisal is an art form. Values can move from year to year and Market Value does not equal Replacement Cost.
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A good Lender Relationship is critical to an effective real estate investment strategy.
Jimmy Moncrief of Real Estate Finance HQ, is an accidental real estate investor. He had a solid income from his analyst/ partner position at a hedge fund, yet he struggled to get a loan for an investment property.
Jimmy did not even need the loan. He could have paid cash for the property, but he recognized the benefit of leverage. So, where is the most likely place to get leverage? The traditional place to get leverage is from a bank.
But, if you don’t understand the rules to financing, your ability to get a loan will be limited.
First, decide what is important to you.
These are critical to determining the path you want to travel.
If you chose to just dip your toe into the real estate investment world, you might purchase a single family property, near your home. You can purchase it in your own name and get conventional financing; put 20% down to get a 30 yr mortgage. Most of this can be done online or through email with little or no relationships necessary.
If you really want to grow your portfolio, you are going to need a solid lender relationship. That’s right, get to know a banker. Infact, if you can develop multiple relationships, that’s even better.
When should you get to know a Lender?
Don’t wait to start. The sooner you can create a lender relationship, the better your chances of success will be. Get to know how a lender looks at a deal and what they need from you in order to approve a loan. This knowledge will give you the ability to work with your real estate broker to negotiate a number that will works for you and the bank.
Too many would be investors spend all their time chasing a deal. Then they try to find financing. While this may work for the networked investor, it likely spells failure for the novice investor.
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Insurance Coverage Moratoriums happen daily during late summer and early fall across the US. If there is a natural disaster in action, the insurance companies will close the casino and refuse to take any new bets.
2017 has been particularly significant. Think about it. There have been:
Insurance companies take premium from policyholders in exchange for a promise to rebuild if certain disasters happen. The company underwrites your risk to do all they can to stay away from risk they do not want. And they collect what they hope is an appropriate amount of money to pay claims when they do happen.
Companies compete for more premium. Investors look for positive return on their money. Policyholders look for ways to save on insurance and increase the return on their real estate investment. The greater the distance between disasters, the cheaper insurance gets.
After several years of infrequent disasters, the cost to policyholders is low, but the risk rises. For every year there is not a significant disaster, statistically, disaster is more likely to happen.
So what can you do?
Don’t wait to purchase your coverage. Purchase your coverage before disaster is eminent, and be prepared.
For Hurricanes you can safeguard your property and make certain you have insurance.
Flood falls into two categories.
Wind is mostly a problem around the Gulf of Mexico and the Eastern shore from Florida north. Insurance is available, but the deductible is a percentage of the limit. This is unlike a standard property deductible which is a flat dollar amount.
Earthquake insurance is directly related to the soil beneath the property and the proximity to a fault line. Like Wind insurance, the deductible is a percentage.
Insurance is never fun to pay for, but don’t let your real estate investment strategy go without it. Build the cost into your operating budget. Don’t bet against yourself. Buy the coverage before there is a moratorium and you cannot purchase coverage.
Prior Episodes for reference:
Seismic Retrofitting http://bit.ly/2yd9PRZCREPN22dl
Earthquake Preparedness: http://bit.ly/2yGmPmaCREPN17dl
How to Save on Flood Insurance: http://bit.ly/2i3suvnCREPN35dl
If you need help on any of your insurance needs, please reach out and I will do all I can to help.
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Good Bookkeeping is a must for Real Estate Investors for many reasons.
Dave Rice with Key Bookkeepers provides multiple reasons and benefits for real estate investors to set up systems and keep accurate records. Together, they can help you accelerate your real estate investment strategy.
FREE: Five Key Bookkeeping Mistakes Made By Real Estate Entrepreneurs http://bit.ly/2y02fwv5MistakesREIMake
If you want to be viewed as a business by the IRS, you need to act like one. The IRS counts on good bookkeeping to substantiate your business.
Good Bookkeeping gives you the actual numbers you need to determine if you are making money or if there is room for improvement. Are you collecting all the rent? Are you properly categorizing expenses?
When filing your taxes, these numbers are the keys to lowering your taxable income. This alone can boost your actual returns.
When you are looking for money from a lender, your best bet is to make it easy for a lender. They want to see how good your bookkeeping is. If your records only consist of a tax return, you will not make a strong impression. But, if you can easily produce multiple complete years of records and year to date records, you make it hard for the lender to say no.
Don’t forget the value of your commercial real estate. The Net Operating Income is simple to determine: Annual Income minus Annual Expenses. This result divided by the local market cap rate is an indication of what your property is worth.
Poor bookkeeping can result in one of two things when you are trying to sell your property.
Low Ball Offer
If the buyer is experienced and looking for a deal, they will only accept records that you can substantiate. Poor bookkeeping will lower your NOI and ultimately lower a potential buyer’s offer that reflects your actual numbers.
If a buyer is looking for a property that has good bookkeeping, and you don not, they will dismiss your property.
Ask any experienced commercial real estate broker. If you want to maximize the number you can get for your property, it starts with good bookkeeping. Keep your rents at the market rate and take good care of your property.
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Lease Lock is working to change the Rent Payments & Security Deposits hassle that have been a part of renting apartments forever.
Reichen Kuhl, the founder of Lease Lock, had plenty of money in the bank, but not enough income to qualify for a rental. Frustrated, he set out to create a solution for people in his situation.
His idea was to cosign for strangers who could not qualify based on their credit to rent an apartment. Were there other people like him who needed a cosigner to rent an apartment? Were Landlord’s willing to change their real estate investment strategy that required deposits?
He put up a website and tested his idea. On day one received 200 applicants. In three months, none of his clients defaulted and he proved there was a market for Lease Lock.
Lease lock provides a FREE insurance policy to landlords of 100 units and more. The landlord requires that the tenant to put up a deposit, usually equal to one month of rent. Or, the tenant can pay a non refundable fee to Lease Lock. The fee is usually less than half of the required deposit.
When the tenant is approved by Lease Lock, the tenant pays the fee to Lease Lock. The Landlord is provided an endorsement on their Lease Lock policy to protect them from loss caused by the resident. There is NO COST to the Landlord for this.
Challenge with Deposits:
With Lease Lock
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For investment opportunities
A good Commercial Real Estate Mentor can teach you the lessons they have learned and give you the shortcut to building real wealth.
There are many different segments of commercial real estate to choose from. Commercial Real Estate investment strategies work best when they are focused. Your mentor will help you focus and develop your strategy.
You can search online, listen to podcast, watch videos, read books, and get all the answers. If you act, you will likely have some success. But, in order to get over the hump and grow exponentially, you need guidance from someone who has mastered the the skill.
Real Estate is a people business. You need to have people in your network that you can go to when you have questions. Peter Harris is a successful commercial real estate investor who has been mentoring commercial real estate investors since 2003.
Track Record: Is the mentor successful in commercial real estate? Does the mentor own commercial real estate? An active investor will readily recognize potential challenges and help you find the answers. The real estate market is always moving through the cycle. An experienced mentor can help you prepare for the difficult times so you can prosper when others are struggling.
Available: Real estate Investing is full of deadlines and short windows of opportunity. There will be questions that need answers right away. Will your mentor be regularly available to answer your questions. Will they be there after the sale?
Income: Where does the majority of the mentor’s income come from? Is it from selling seminars, books and student fees? Look for a mentor who makes the majority of their income from their own commercial real estate investments.
Teacher: Are they a good teacher? Can they listen to your questions and effectively communicate the answers? If they only tell you what to do and never answer your questions, you will struggle.
Invested: Is the mentor invested in your success? If they only sell you the course, what is their motivation to guarantee your success? Don’t be afraid to share the gain of your deal with the mentor that helped you get it.
Complete: Can the mentor help you all the way through the process to the operation of the property? The real value is created by improving the net operating income, NOI. If the mentor relationship stops once you buy the property, you can miss out on the potential to solidify your future.
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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