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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Three Steps to Financial Freedom. Can it be so easy?
Financial freedom is the goal for every working adult around the world. So why do so many people struggle to get there?
Tim Rhode has come full circle. He was a poor student, part time grocery clerk and found his passion and created financial freedom through real estate.
Before you can invest, you have to be aware of your ABC’s of your personal finances.
Once you have money to invest, you can pursue Financial Freedom.
The three steps to Financial Freedom:
Step 1: Awareness
It all starts with awareness. This includes getting educated about your surroundings and the people in it and where the path of progress going.
With some basic awareness, you have to jump in because you can’t win the game if you aren’t in the game.
Now you have to be willing to grind and focus.
Step 2: Become a Master
The grinding starts to pay off after you have some experience. You will start to recognize the next level of the game and how you can play it.
Exchange into bigger opportunities. In real estate, the 1031 Exchange is a vehicle for deferring the taxes from a real estate sale. Because you still have the would be taxes to invest, you are able to leverage up into properties that are more easy to operate.
It takes time
Quit looking for the shortcut to getting rich. Everyone has heard a story about the overnight success. But the reality is that true success takes time. If you are willing to invest in yourself and your time, doing what works, over time, you will have success.
Remember, education is a lifelong pursuit. You have to commit to continuously educating yourself.
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Buy and Hold Investing is the standard for most Canadian real estate investors.
Jesse Fragale bought his first rental when he was at college. Recognizing a good thing, he grew his student housing portfolio with multiple single family and condo rentals.
You might think student housing equals keg parties and irresponsible tenants. While this may be true, it was a guaranteed way to push market rents in a rent controlled market.
Jesse is a Commercial Real Estate broker in Toronto, where the rent control policy caps rent growth to a maximum of 1.8%. The only time a landlord can increase rent by more is after a tenant moves out, which is frequent in student housing.
Interestingly, the policies meant to help tenants gain affordable housing, has prevented investors from entering the market to build more units. It is estimated that over ninety percent of all apartment housing in Canada was built prior to 1970.
Instead of building new apartments, investors have purchased condominium units and placed into rental. Until now, condos have evaded rent control. Ontario has proposed changes to rental housing policy to close the loophole and bring condos under rent control. Ontario’s 16 new housing measures
Jesse and a partner recently purchased an eleven unit property. Two vacancies allowed for market rate rent increases. Also, there is a possibility of creating an additional unit from a large laundry room. These measures will dramatically increase the value of the property.
Buy and Hold for the long run
The 1031 Exchange available in the USA, allows the investor an option to defer paying capital gains tax when a seller buys a larger property. No such option exists in Canada. Due to the lack of a 1031 exchange, most Canadian investors buy and hold focusing on the long .
Jesse would like to grow the portfolio substantially in the next five years. However, given the challenges in Canada, he is considering his options in the US.
For more, contact Jesse Fragale at:
Where are the Multifamily Market Opportunities?
Find a market with jobs, low rental housing supply and rents that are affordable.
The Multifamily market has been cooking for several years as the demand for rental housing created by the crash and millennials who choose to live in cities.
As the cycle continues, investors begin to ask, “how long can this last?”
If you are a developer or investor, the ability to look at a specific market and identify the characteristics in play are critical to your success. Firms like firms like Axiometrics, acquired by RealPage, specialize in providing monthly multifamily market data.
Primary markets with the most demand and development, are showing signs of oversupply in the class A units. In these markets, free rent concessions have begun to show up and rent growth has slowed.
Say goodbye to rent growth of 12, 14 and 16% year over year is no more in most markets. The healthy markets for the near future suggest 2 - 3 % annual rent increases.
Are there still multifamily market opportunities?
While primary markets ability to absorb all of the new units has begun to cool, the secondary and tertiary markets still show signs of opportunity for investors and developers.
What’s the key? The fundamentals of opportunity remain the same. Where are the jobs? Where is supply tight, and rent is still affordable.
Tech jobs pay well and drive up the demand for high end housing.
Things to watch?
The cost of construction is rising based on the tight labor market. This has not slowed development, but it is driving the cost of developing new units and repositioning older units.
Millennials continue to want to live downtown, are not getting married and do not want to move to the suburbs. Until then, multifamily demand should remain strong.
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A local real estate investor can grow big, and gain efficiencies not available to investors who spread their portfolio over multiple markets.
Brian Murray, founder of Washington Street Properties shares how he moved from his position as a college professor to a full time real estate investor in Watertown, NY. His focus on local real estate has created multiple opportunities for growth and the ability to contain expenses.
Advantages to investing in local real estate
There is no substitute to seeing your portfolio daily. If you find something is not right, you can address it immediately. This nips the problem in the bud and can reduce the cost of the fix.
Local knowledge provides you the real time ability to know if your rents are too high or too low, and to make adjustments accordingly. This helps maximize income.
Opportunities for growth
When you are visible in the community, brokers, owners and potential tenants know who you are. Brokers and Property owners looking for a buyer will contact you first because they know what you have done and that you can close.
When you have more properties in a single market, you can accommodate tenants needs for more or less space
Contracts for service.
Many investors focus on just one asset class which supports the notion of specialization. However, if you specialize in one local market, you can gain pricing advantages from vendors not otherwise available. The same service provider for roofing, electrical, parking lots, plumbing, carpet cleaning, lawn care, etc. can service multiple properties for you. When vendors have the opportunity to do more work for you, they are willing to provide a discount.
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