What is a Delaware Statutory Trust?
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Real estate investors focus so much time and effort on getting into the deal. Once they have a deal, it's all about creating cash flow, net operating income, and profit at a future sale.
For the investor who has held a property for twenty years and depreciated it to near zero, a conversation with your accountant can be shocking when you realize the potential tax consequence of selling.
If this is you, the depreciation recapture and capital gains tax can leave you feeling trapped and asking yourself, “How can I keep my profits?”
Most real estate investors have heard of the 1031 Exchange. In its simplest terms, the 1031 Exchange allows you to defer paying taxes from the sale of an investment property if you abide by the 1031 Exchange requirements including:
Tenant in Common or Delaware Statutory Trust.
In order to invest with other investors, you must choose one of two structure options to preserve the 1031 exchange.
The Tenant in Common notable limitations include:
The Delaware Statutory Trust characteristics / requirements for Investors:
Typical Delaware Statutory Trust Risk Profile
DST eligible properties will controlled by the sponsor/ operator, stabilized and provide consistent income. Financing will be in place. The property will be a Class A asset that is newer, larger, and located in a major metro area.
The investors considering a DST looks more at risk avoidance and principal preservation, than appreciation.
If your goal is to preserve your principal, gain consistent income, and get into a larger, newer, stabilized asset, a Delaware Statutory Trust might be the answer.
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*Realized 1031 is not an Investment Adviser or CPA and does not provide investment or tax advice. Any information presented in the podcast or other materials is for illustrative purposes only. Securities offered through the Realized Marketplace are exclusively through WealthForge Securities, LLC, a registered broker/dealer and member of FINRA/SIPC (“WealthForge”). Certain members of Realized are registered representatives of WealthForge.
Investing in real estate for passive income in retirement may seem risky to investors who would rather trust their retirement funds to fund managers and mutual funds.
Bill Manassero, host of the popular Old Dawgs REI Network Podcast, found that there are at least seven reasons for seniors to invest in real estate.
Bill started investing in real estate after he turned sixty. As veteran stock market investor, the decision to invest in real estate was easy, based on the opportunity to create passive income and preserve capital.
Once he got started, he realized he could accomplish a lot more with additional units. So, he set a goal to acquire 1000 units within six years to allow him the passive income he wanted and leave a legacy for his children, grandchildren and Haitian charity.
Before making your first real estate investment, Bill recommends taking four steps:
The most important question to ask before investing:
Experience is the most valuable teacher. Look to an experienced investor who can mentor you. Any investor with multiple properties and years experience investing can provide stories and lessons they learned the hard way, so you won’t have too.
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They say hindsight is 20/20, and I have new knowledge to share that would have been good to know when doing a plumbing inspection.
Recently we purchased a 12 unit apartment building in FL. Our due diligence checked all the boxes, except for one; a thorough plumbing inspection.
When I spoke with our plumbing inspector, he provided two options;
For those who have not had a plumber scope your lines, it is comparable to a colonoscopy for your building. The plumber puts a camera through the pipes to see what’s inside.
Given my experience, as a property owner, investor and as an insurance broker, I felt confident that the waste line stack inspection was appropriate. On a couple of properties we own, we have had to replace the waste line from the structure to the street, as well as water mains due to tree roots growing into the waste lines, and growing roots pressing against the main until it broke the line.
If I knew then what I know now, I would have selected the complete plumbing inspection including the all the lateral waste lines. But then, I would not have had the opportunity to meet Ann McClellan with Roman Plumbing of Central Florida, who I highly recommend if you are in Central Florida and have an old building with older plumbing.
Old buildings have old plumbing. If you are considering buying or currently own a building that is older than thirty years, you have some potential repairs in your near future.
The easiest way to test the plumbing and see if there is a problem. Turn on all the fixtures to see how the drains handle the water. You will learn a lot. If all the water disappears down the drain, you are in great shape. If not, well, you will have to figure out what the problem is and how to fix it.
The water main supplying water to the property from the city is an underground pipe until it gets inside the building. From the building to the street, it is difficult to recognize a problem until you get your bill. If all fixtures are turned off, and you observe the water meter moving, you have a leak. Also, if the bill is abnormally high, you likely have a leak and need to replace or repair the line.
Inside the building, broken supply lines will give themselves away when they leak. Look for wetness, staining, and sounds of running water for clues for where the leak is.
The biggest danger is if no one is around when a pipe breaks. Water that runs for a long time can cause damage throughout the property.
The main stack from the roof to the street is made from some of the most durable material, cast iron. Failure in these is usually detected when the drain backs up. Standing water can cause older pipes to rust, which opens the pipe to outside elements, roots, etc.
Lateral waste lines, when under cabinets, can be easily identified. Once they go behind the wall, problems are not as easy to recognize. In a block building where corroded pipes leak, it will fester and cause unwanted odors.
Hot water heater
The average life expectancy is 7 - 10 years. If yours is older, you are on borrowed time. If you see any rust, or leaking on the ground, you will need to replace.
Faucets, dishwashers, garbage disposals, all wear out and need to be inspected regularly. Faucets need to regularly have the washers or cartridges replaced. Be sure to look for drips under the sink in the cabinets in addition to in the sink or tub.
Toilets that run continuously are probably in need of a new flapper. If you find water on the floor, or the floor around the toilet is soft, check the supply line fitting.
A wobbly toilet is a sign the bolts holding the toilet to the flange need to be tightened or replaced. When replacing any bathroom flooring, always replace the wax ring and the bolts.
For more contact:
Roman Plumbing of Central Florida
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Clean Carpet is a must for landlords looking to attract new tenants. The cost to replace carpet is significantly more than the cost to clean it if cleaning is possible.
The prospective tenant’s first look at an available unit is a lasting one. Stains, smells, and worn spots will keep a tenant from renting your unit.
For your FREE Guide for Property Owners & Manager click here
If your market has low vacancy rates, you may be able to get away with less attractive carpet. However in a market with higher vacancies where tenants have more opportunity to chose from available units, you will need attractive flooring to compete.
The average life expectancy of carpet varies from five to ten years depending on quality of carpet, traffic, care, etc It is estimated with regular cleaning that the life can be extended up to twice the average.
The manufacturers recommend that you clean the carpet once per year. Realistically, this may be more timed to tenant turnover. Some landlords and property managers offer free annual cleaning to their tenants. This can be a smart way of gaining access to the property to inspect for any needed repairs, as well while extending the life of your carpet.
Cost of Accepting Pets
Many tenants have pets, and landlords are willing to accommodate. Oils in the pet’s coat combined with the size and type of a pet, can accelerate the need to clean and cost to replace the carpet sooner. Something to consider when agreeing to allow tenants with pets.
How to Choose a Carpet Cleaner
The IICRC provides the carpet cleaners with training and ongoing education for professionals wanting to stay on top of the latest tools and techniques for cleaning carpet. This designation is a good starting point to look for when considering a carpet cleaner to hire.
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Real estate investing strategies vary from investor to investor. Some prefer the fast cash of Flipping, while others prefer the long view of Buy and Hold. Active investors make it a full time occupation, while passive investors may remain employed beyond real estate. There is no one way to invest in real estate. The important thing is to do your homework, and get started.
Why do real estate?
Many people feel they need to get into real estate because it is in the news, low interest rates, big rent increases, and everyone is doing it. Because everyone is doing it is not a reason to get in.
How to get started?
No matter who you are, or when you start, the first deal is always the most difficult. It’s new to you, and there is a lot to learn. Regardless of how much you think you know, you will quickly learn lessons you did not think about before investing in real estate.
Know the numbers!
If you think you are making money because the rent you are collecting is more than what you need to cover the mortgage, you may be upside down. Don’t forget to account for things like, taxes, repairs and vacancies.
For your FREE Deal Workbook, CLICK HERE:
What strategy is right for you?
Flip for cash?
If you decide to flip, you can make some amazing returns fast. To be successful at flipping, you have to understand the marketplace! Know the most you can pay for the property and the most you can invest in the upgrades. If you mess this up, you can lose.
As a precaution, it is best to also know what your plan B is. If the market changes, how much can you rent the property for? Many investors start out as flippers, but end up as landlords because the market changed.
Buy and hold?
The marketplace is dynamic. It goes up and down. If your plan is long term, you may struggle in the beginning, but if you can weather the downs, you will come out ahead in the end. Some basic principles of wealth building through real estate investing:
In the beginning, it can be a struggle when you borrow every dollar you can, and cross your fingers that nothing breaks, and that everyone pays on time.
Overtime, the equity due to principal reduction and appreciation can be significant. But nothing grows if nothing starts.
In order to be successful, you have to do your homework. Talk to investors, learn the lingo, understand the market, and don’t do something because you fear that you will miss out.
Owning one property is manageable for most investors. One problem, one unique solution. However, for true wealth, multiple units are the goal. To accomplish this without going crazy, or broke, you need systems for success.
Systems provide direction, a playbook, for what to do when you or your staff face a situation. Knowing what to do, how to do it and who to call when a crisis shows up, gives you the confidence to have a predictable outcome and freedom to focus on other matters like growth.
We spoke with Matt Faircloth from The Derosa Group about systems for success. Matt is an investor, flipper and multifamily syndicator. In order to grow, he developed systems that are written in pencil because he recognizes that if a better solution is recognized, he wants to use it.
1) The first step is to do a Market Analysis. If it is your local market, it is easy to know the different areas of town and their reputation.
If you are not familiar with the area, you need to find the answers to the things you cannot change:
Additionally, answers to these questions will tell you if the area is on the upswing:
2) Evaluate the Property:
If the area checks out, it’s time to evaluate the property:
Do the numbers work? This is where you go line by line with the information available in the offer. (Click here to get a FREE DEAL WORKBOOK)
3) Physical inspection: The key to the inspection, don’t start inside the units. Start with the systems. What is lurking that is going to cost you money:
If you have a major expense and the seller is not willing to work on the price, move on.
Bonus: If you can, ask tenants you see what do they think of the property.
Then look in the units. What can you do to add value?
4) Make the offer
5) Due Diligence: You have thirty days to confirm everything you believe to be true now.
Usually there will be something that comes up. This is your chance to address the seller to renegotiate if needed. If everything comes together, you will be the owner of a property.
6) Operation: Now you need systems that cover the day to day operation including:
7) Refinance: If you are in a syndicate, this is the time to pay your investors.
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Due Diligence is a timed process for the buyer to inspect and confirm the information about the property and the deal before any money is lost. Most buyers focus on the physical characteristics and the financials of the property. They look at the condition and age of systems, roof, maintenance, etc. On the financials the focus on the Net Operating Income. If everything checks acceptable, they move forward.
These simple and obvious features are easy to identify and verify. However, they are only part of the story.
In order to know the “rest of the story”, you need to meet with the seller and determine why they are selling the property. The seller’s motivation can open the door to opportunities in creative financing.
One of Doc Haller’s students, presented an opportunity to purchase a $3M property operating in excess of 10% NOI. There was only one problem, the student lacked the $1.2 M required to close.
During the due diligence, several things were learned by reviewing the tax returns and the loan documents:
If you know why the seller was selling, you can get creative with your offer. In this case, the buyer was able to apply the knowledge gained during due diligence to offer a creative solution:
The buyer provided a Letter of Intent to purchase the entity.
The bank tried to stop the transaction, but realized they had no leverage to call the note. However, the bank did call the ten percent guarantee, $200,000 from the seller.
In light of this requirement from the bank, the seller requested an additional $250,000 collateral from the buyer, until the seller was reminded of a forgotten fact.
Hidden in the tax returns, beyond the view of the accountants and attorneys, was a note on the tax returns. In exchange for the cost of the tenant improvements & betterments for the restaurant tenant, the seller had received thirty percent ownership of the tenant, a restaurant that annually provided in excess of $80,000 income to the seller!
The buyer now had the leverage. Instead of keeping the stock ownership of the tenant restaurant, the buyer agreed to dividend the stock ownership of the restaurant to the seller, which was clearly valuable to the seller.
By examining all the seller information available to the buyer, the buyer was able to:
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Free White Paper: “How to Escape the Residential Rut”
Commercial real estate active training program with Doc Haller special offer:
For listeners of CREPN Radio, Doc is offer a 50% off discount. The course normally sells for $2,000, avaliable to listeners of CREPN for half off:
1 payment = 50% Discount code: CREPN
6 payment of $200 Discount code: CREPN6
The first thing a real estate investor needs to decide, is what is your strategy? Everyone hopes to buy low and sell high. Few consider the riches available by investing in bare land.
The Land Geek, Mark Podolsky, shared his journey from a workaholic investment banker to a two hour per week passive income professional investor in bare land.
Mark’s investment banker training taught him that a company with fifteen percent EBITDA was a good company. When his new work colleague showed that investing in land he could make 300 percent, he had to see for himself.
Sure enough, when he took the three thousand he had saved for car repairs and turned it into nine thousand, in less than thirty days, he was hooked. In just eighteen months of investing on the side, he was able to surpass his income as an investment banker.
So, he traded in his one hundred hour work weeks, for what is now no more that two hours per week.
How Can You Make Money in Bare Land?
Throughout America, there are parcels of land owned by people who no longer value the property. The clues are are easy to detect.
Mark sends out twenty letters each day to the owners of these unwanted properties. The letters are short and to the point and include the price he is willing to pay. The response rate averages three percent reply, a success by direct mail marketing strategies.
When he finds a willing seller, he can acquire the property in just seven days and resell the property in as little as thirty days for as much as three hundred percent return on his investment. Sometimes, he makes more, upto one thousand percent.
How can you make more in bare land?
The secret to making money in bare land is to make it more than just a transaction by offering seller financing. These small value properties are not what banks are looking for, so the buyer will either need to purchase with cash, or be willing to agree to seller finance terms.
Using a land contract and promissory note, you can get your purchase price back as a down payment, and offer terms for as long as you want. The longer the term, the greater your return.
Mark has figured out the pain points and automated whenever possible. This includes payment collections. His motto is if you only have one form of payment, you have none. So, he makes it a practice to collect a primary and a back up payment, so that he never misses a payment.
In 2016, Mark completed 192 deals using this system.
To learn more about investing in bare land and get your Passive Income Blueprint
Winter is the season for property owners everywhere to experience property damage caused by weather; snow, ice, rain, flooding and landslide.
Unfortunately, almost fifty percent of businesses affected by a major loss, never reopen. Failure to plan is a plan to fail.
In an emergency, you need help and you need it fast.
Emergency Ready Profile, click here.
What can you do to make certain you stay in business after disaster strikes?
To learn more about what can be done to prepare for an emergency, we spoke with Servpro representative Marla Rockhill.
A good first step to reducing the property damage is to create an emergency plan. The information contained in an emergency plan is easy to find on a normal day, but it can seem impossible to find in the face of an emergency.
Essential information in an emergency plan include:
Creating an emergency plan can be the difference between staying in business or not.
The water used to put out the fire becomes a potential mold problem. Standing water will quickly seep into walls, floors & ceilings and create a mold factory which can lead to additional health hazards.
Most property owners facing a large loss, have no idea where to look for help. Getting to know a restoration contractor before you need one is a good idea.
Restoration contractors have the needed equipment and training to clean up the damage quickly and minimize your down time.
For a free Emergency Ready Profile, click here.
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