Commercial Real Estate Pro Network

J Darrin Gross Podcasts

J Darrin Gross Podcasts

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Multifamily Syndication with Bruce Petersen – CREPN #209

Multifamily Syndication is the vehicle used by Apt-Guy, Bruce Petersen to purchase over 1100 units consisting of 6 properties of which all are 120 plus unit apartment communities.  In 2016 he was recognized by Austin Apartment Association’s Independent Owner of the Year. Then in 2017, Bruce was awarded the National Apartment Association’s Independent Owner of  the year award.

Why Multifamily 

When Bruce Petersen first considered investing in real estate, he looked to small multifamily because he thought it would be easy and could do it on his own.  However, his real estate mentor suggested that instead of going small, he should raise some money and look for a bigger property. Why? Because bigger properties are easier.  So in 2012, he found his first 48 unit property, and has never looked back.

Multifamily Syndication

Multifamily Syndication is the coming together of individual investors to purchase a larger property than they could on their own.  In each syndication, the sponsor finds the deal, raises the capital then operates and manages the investment.  

All of the investor ownership percentages, investment returns, splits, preferred returns, waterfalls, etc. are defined by the sponsor.  And each sponsor does it their own way. For Bruce, he has chosen to forgo the complicated model that has preferred returns, waterfalls, etc and keep it simple for is investors.  In each of the deals, the split is spelled out for the whole deal from purchase to sale. The sponsor promote, the percentage of equity designated for the sponsor. The range of split for investor / sponsor  goes from 70/30 to 85/15 depending on what is needed to attract investors.    

Market & Property Selection

The market and property must have the following elements for Bruce and his investors to proceed:

  • Dynamic Market 
  • Population, he is not interested in investing in a tertiary market.
  • Population growth where there are more potential renters coming to the market.
  • Multiple employers, he is not interested in a market that is overly reliant upon one employer, ie the government. 
  • Neighborhood crime that is not out of hand.
  • Properties that were built in the 1980’s or newer.  This eliminates the need for costly capital improvement that older properties require.   
  • Identifiable operational issues that can easily be corrected to improve value.

Value Add

The term “value add” can be achieved using multiple value add strategies.  Most often it applies to the investor who purchases a dated property that can be freshened up by doing unit and exterior renovations to give the property a current look and feel.  Bruce and his Blue Bonnet team like to find stabilized properties that do not require any heavy lifting. The value add they achieve is through operations. They find that by listening to residents and providing the easy things the residents want and are willing to pay for, ie; car ports.  This approach has proven to produce a quick return on investment with increased NOI and overall property value.  

BIGGEST RISK

What is your Biggest Risk:

My BIGGEST RISK is liability.  We manage our own properties and there are a lot of moving parts.  Employees, residents, guests, vendors, etc. You have have to entrust people, you coach them and mentor them. You have to hope that when the time comes, they will do the right thing.

For investors that hire out their property management, the risk is impatience.  There are a lot of investors who want a deal so badly, they get to a point that they will buy a bad deal.  Also, nobody knows when the economy is going to shift, but we all know it will. So, be safe and don’t overextend yourself.

For more go to:https://apt-guy.com/

Real Estate Investor Tax Classifications with Nick Aiola – CREPN #208

Each Real Estate Investor Tax Classification has specific benefits and limitations.  Nick Aiola with Aiola CPA takes us through some situations and breaks down the consequences for each.  

Real Estate Investor Tax Classification

The IRS provides three general classes of real estate investor tax payer classifications; Passive, Active and Professional.

Passive: This applies to the investor who invest in other investors deals, ie a syndication.  In this case, they provide the capital and receive income.

Active: This applies to investors who invest on the side ie; flip homes, landlord.  This is not their primary occupation.  

Professional: This applies to investors who spend more than 700 hours active in real estate; analyzing deals, talking with brokers, raising capital, working with contractors, tenants, etc.

Real Estate Income Tax Basics

The purchase price is your basis.  The IRS recognizes that the structure has a useful life expectancy.  For each year you hold the property a portion of the structure is depreciated.  The amount of depreciation is subtracted from your basis, effectively reducing the value of building.  

When a Mortgage is used to purchase the property, the interest paid is allowed to be written of as well.  

Depreciation

Depreciation is one of the most effective tools available to real estate investors to reduce their taxable income.  This is recognized as an expense that is subtracted from income when filing taxes. The amount of depreciation expense is based on the type of property, residential or commercial and if you or your sponsor has done a Cost Segregation Study..  

For straight line depreciation, residential is based on 27.5 years and commercial is based on 39 years.  When cost segregation is employed, a large portion of the building is broken into different class codes of personal property which have 5, to 15 year life expectancy.  The life expectancy dictates the depreciation schedule applied.

Passive: For an investor with less than $100,000 annual ordinary income, they are able to take up to $25,000 above the income generated by the passive income generating property.  This phases out as investor ordinary income grows to and in excess of $150,000. For losses that are not allowed in the tax year, they are carried forward for future tax years.

Active: Same as Passive.

Professional: This investor can claim all losses in the year they are recognized up to the amount of income received.

Sale of Property

The sale of property creates a taxable event.  Depending on the length of time property was held will determine if the gains are ordinary or capital; less than or greater than one year.  

When you have a gain, sell for more than your basis, you will owe taxes on the gain and depreciation you recaptured due to your gain.

The Depreciation recapture will be taxed at 25%, while the Capital Gains will be taxed at 15 – 20% depending on your taxable income.  

For all investors; Passive, Active & Professional;  Depreciation that was previously generated and has been carried forward, may be used to reduce the taxable income upon sale.  

BIGGEST RISK 

Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”  

BIGGEST RISK:  I would say the biggest risk as a real estate investor would face would be failure to prepare. Not analyzing a deal or not understanding the scope of the work involved or understanding what kind of what level of commitment; time or cash it’s going to require from you is detrimental. We’ve seen that cripple people in the past. 

For more go to: https://www.aiolacpa.com/

First Multifamily Value Add Purchase with Branton Blount – CREPN #207

Your First Multifamily Value Add Purchase can be overwhelming.  

Brandon Blount and his partner pulled the trigger and lived to tell the tale of their first multifamily deal and are now looking for their next opportunity.  Reading books, listening to podcast, and talking with investors helped them create the plan, but they soon learned, there is no substitute for experience. The lessons they learned by doing an actual investment don’t compare. 

Branton is former active duty and current reserve member of the US Armed Forces.  His military experience uniquely qualified him to recognize the opportunities a military town can offer.  So, he and his partner jumped into their first deal, a 16 unit value add property.

First Multifamily Value Add

First Multifamily Value Add was a true value add opportunity in all aspects.  The property had deferred maintenance, rents that were well below the market and it was 30% vacant.  All of these issues made acquiring the property difficult, but perseverance paid off. 

Due diligence was enlightening.  To start with, the seller had no records, and the management company had only one lease.  The deferred maintenance was easy to identify, and plan for.

Plan

Having walked each unit, there was a firm understanding of what needed to be done. 

There were 5 vacant units that needed to be updated and rented ASAP.

The color scheme was set, levels of finish set, contractors hired, and there was no time to waste given their hard money loan with a nine month window to avoid any additional points.

The Unknown

As soon as the new management was in place and the light was shined on residents.  In a very short amount of time, tenants who were up to no good decided to move out rather than face the heightened awareness of management.  Instantly, the vacancy rate went from 30 to 75%.  

The additional vacancy was a blessing and a curse.  The blessing, now additional units could be upgraded without the need to work around tenants.  The curse was the loss of rent and the additional funds needed to renovate the additional 7 units.  

Outcome

The first multifamily value add project had the potential to be a show stopper given the wrinkle presented by additional vacant units. However, the additional challenge turned out to be a blessing. It allowed a greater number of units to be renovated right away and get to the higher rents faster.

Once the process was set, the contractors were able to renovate quickly without stopping. When the newly renovated units were leased, the proof of concept gave a local bank the confidence in the project and provide a refinance.  At the refinance, Branton and his partner were able to pay off the hard money loan, and repay the owners for money invested for the capital improvements.

Now there are 13 of the 16 units fully renovated with updated floor coverings, paint, kitchens, baths and appliances that command higher rents. The higher rents increase the NOI, value and ability to refinance.

BIGGEST RISK 

Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”  

BIGGEST RISK:

“Known unknowns”. You know it exists but you know that you don’t know the status of it. So you just have to plan accordingly. And I think on top of that as owners and as investors you have to be able to adapt. I know a lot of people that create a plan and they get so tied to that plan that they lose their flexibility and they and they lose their ability to adapt quickly.  

I think flexibility is the key to adapt to risk. You’re going to adapt and you’re going to overcome it. 

OK. Where do we go from here?  We still have to move forward because the project doesn’t stop. We still got to get to the goal, the finish line. And so I think as investors your ability to remain flexible. You know don’t get don’t get off target. Don’t don’t go off on tangents and change the plan throughout stick to the plan but also understand that on it at any given time 

the plan will change whether you want it to or not.

For more go to:

Email: branton@aom-e.com

Think BIGGER Real Estate with Justin Stoddart – CREPN 206

Think BIGGER Real Estate Show is Facebook Live event where Justin Stoddart shares ideas and methods for real estate professionals to help them build, grow and scale their brand and business.

Justin is real estate and marketing entrepreneur.  He started in real estate as a custom home builder.  Since then he realized his passion was building people rather than buildings.  Today he works with real estate agents as a representative at Old Republic Title in Lake Oswego, OR. 

So many real estate professionals are caught up in the daily grind that must be performed to get the work done, that they have no time to think about, let alone execute, creating a brand and growing beyond the transaction mode. 

There are multiple opportunities to spend money on different tech platforms to advertise and get leads.  But at the end of the day, is a client you work with from Zillow your client or Zillow’s client?

Zillow is working to become the Amazon for residential real estate.  They draw the attention of the prospective buyers, agents pay to be seen on Zillow, and it works.  But will the client remember you, the agent when they are ready to buy again? Unless the agent has distinguished themself as something special, the customer will likely go back to Zillow, not the agent.

In order for an agent to avoid being displaced by tech platforms like Zillow, they need to create value and position themselves as a brand.  If the consumer sees no value in the service provided by an agent, why would the customer look past a tech platform?

Think BIGGER Real Estate

Justin recognized that real estate agents need help to grow their business and their brand.  To help his clients, real estate agents, he created the Think BIGGER Real Estate Show. It is both a resource and an example for his agent clients on how they can bring value, and stay relevant in the eyes of their clients and prospects.

The Future of Real Estate

The future of real estate is certain to change.  Real estate investors and home owners will continue to buy properties.  Presumably, as technology advances and AI is more fully adopted, the division between Fiduciary & Functionary tasks will become more defined. 

Fiduciary tasks: Decisions made by the real estate agent on behalf of the client that put the clients interest ahead of the agent. 

Functionary task: The many task which are necessary to complete a real estate transaction such as filling out a form. Over time, these lower level task will be transferred to tech platforms.  

Ideally, by transferring the lower level Functionary Tasks to a tech platform the real estate agent will be able to work more on the Fiduciary Tasks, to better serve their clients.  

Time previously spent doing the functionary task, will give the agent time to spend educating oneself on where the market is going, engaging the client.  

This higher level will not be for all of your clients, but you will be able to provide this for a small group of your clients & prospects.  When you ask better questions you get better answers. The more you listen and learn your clients wants and needs, the better you are able to serve them.  Ultimately, this better experience will provide a happier client who is likely to refer more clients to the professional agent.  

BIGGEST RISK 

Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”  

BIGGEST RISK:

I think actually interviewed a gal yesterday and she said. I asked her the question which is kind of my signature question get on my shows which is, “what do you do to intentionally think bigger? And I ‘think it’s a great response actually for your question. She said I work too. I work really hard to avoid complacency. And I think the biggest risk that all of us face in a world that’s rapidly innovating and rapidly moving forward is to get complacent with our own personal growth in our own personal network. And I’m going to put up a plug for you. You didn’t ask for this but to have somebody who’s whose business is insurance. But goes about adding value to their clients really modeling media. Modeling marketing at its highest form. I think it’s it’s brilliant on your part because you’re becoming a much more, even if nobody listens to this. I know that’s not ture, we had this conversation before. You’ve got a great audience. That just affect the person that you’re becoming by having these conversations. Just makes you when you show up with a customer you’re so much more valuable to them than had you just been going about as a typical insurance agent. And so I would encourage anybody who’s listening that the biggest risk that you have is to not surround yourself with partners like Darrin and knowledge that’s helping you grow and your business grow. Because we can’t really complain and say, “Oh I’ve had such and such for so many years and you know they’re you know they’ve done fine”. Which I’m all about loyalty, don’t get me wrong. Like I’m not. But what I am saying is all of us need to be aggressively seeking out how to grow ourselves and grow the value to our customers. And sometimes that entails actually taking a look at our partnerships instead of these people becoming somebody that can lead me? Are these people the growing network that can be a value to me and my customers as the competition stiffens. So not growing and being complacent I think is the biggest risk. 

For more go to:

www.ThinkBigger.Realestate

Qualified Opportunity Zones Round II Regulations with Jonathan McGuire – CREPN #205

Qualified Opportunity Zones were created in the 2017 tax plan passed by congress.  

Following is from my second conversation with Real Estate Accountant, Jonathan McGuire, from Aldrich Advisors.  In this we dive into the clarifications provided Treasury Department draft proposal of proposed regulations.  Eventually, final regulations will follow. In the second round, a path from inception to exit strategy has been made clear.  

Qualified Opportunity Zones

On CREPN Radio episode #158 Round I, Jonathan explained what Qualified Opportunity Zones were and their purpose.  For investors with a capital gain, from any investment, they could invest with a temporary deferral on the owed tax if they stayed in for 5 or 7 years.  If they stayed in 10 plus years, the subsequent gain on the investment in the Qualified Opportunity Zone is TAX FREE. 

Click the link to download your Qualified Opportunity Zone Explanation

Temporary Gain Deferral

Temporary Gain Deferral is the initial benefit to investors with capital gains who reinvest their gain into a Qualified Opportunity Fund that invest in a Qualified Opportunity Zone.  The QOZ deferral program last until December 31, 2026 at which time, the deferred tax becomes due. 

Discount on the Original Capital Gain   

If the investor holds the investment for:

  • 5 years by 12/31/2026, the investor receives a 10% discount on the basis for which tax is owed.  
  • 7 years by 12/31/2026, the investor receives a 15% discount on the basis for which tax is owed

TAX FREE BONUS 

If the investor holds the investment for more than 10 years, ALL SUBSEQUENT GAINS ARE TAX FREE!

Round II Clarifications:

Use inside the Qualified Opportunity Zones –  Originally, the understanding was specific to the real estate; new construction, or substantially improved.  The round II clarified that tenants in a QOZ can also take advantage of the tax laws.

TAX FREE GAIN End Date

Round II clarified the end date for the free bonus on the subsequent gain.  The 100% tax free subsequent gain ends in 2047. Previously, there was no recognized end date attached to this.  This will likely create another anniversary date for additional market activity.   

Fund Rules

Fund Rules require that 90% of assets held by opportunity zone fund must be invested in qualified opportunity zone stock, partnership or property.    And, at least 70% of the property inside of the business, etc must be qualified, ie: acquired after 12/17, substantial improvement, original use inside the QOZ, etc. 

More Clarifications:

  • Land will always have original use.  This clarification reduces the amount of substantial improvement required, due to the subtraction of the land value from the purchase price.  The reference point for determining the value of the land is the county assessor tax record.  
  • QOZ allows you to separately recognize the true economic value of the structure and land.  By lowering the value of the structure, this lowers the amount of substantial improvement needed to qualify for the QOZ.
  • Depreciation, if you keep the investment for 10 plus years and sell before 2047, for qualified investments, there will be no capital gain and capital gain tax.  Therefore, the benefit of a cost segregation study is worth even more when considering the basis step up. Because you have no gain, you can have no depreciation recapture.  
  • Paying the deferred tax from your original gain that your deferred into the Qualified Opportunity Zone has been made easier.  Round II explanation provides the option to refinance the property, take cash out so that you can pay the tax due in 2026
  • Property in lieu of cash can be contributed to the Qualified Opportunity Zone.  If you currently own property in a zone, but do not have a gain from a sale, you can contribute the property you hold into the fund, and participate in the investment.

BIGGEST RISK 

Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”  

BIGGEST RISK: I would say the BIGGEST RISK is not taking a serious look at Opportunity Zones. If you don’t do it and put a little bit of sweat equity into this to see if you can you can make a deal fit inside of a zone. If you have a project underway or a potential project that you’re looking at I mean, you would be doing yourself a disservice if you have a property or a business that it’s going to be located in the zone and not take advantage of this. Now maybe you don’t have capital gains so you can’t do anything. But you know maybe you need some investors, and you need capital. Why take a debt interest? Let’s get somebody with equity that wants to have a vested interest in seeing the business succeed and create an investment that works for them and for you. And then it’s a win win on both sides. 

For more go to:

www.aldrichadvisors.com

jmcguire@aldrichadvisors.com

Multifamily Mindset with Tim Bratz – CREPN #204

Multifamily Mindset is key to growing true wealth in multifamily real estate.  

Tim Bratz brokered his first commercial lease for a 400 square foot retail space which rented for $10,000 per month in New York, NY.  When he realized the landlord was going to make almost $2,000,000 over the 12 year lease for this one space, he knew he was on the wrong side of the coin.  He needed to be a landlord instead of a real estate broker if he wanted to create real wealth in real estate.  

Since that time, Tim has flipped single family homes, wholesaled, owned single family rentals, turnkey rentals, and invested actively and passively in multifamily properties.    

The first apartment building he purchased was an 8 unit property for $30,000 which he invested another $50,000 into.  All in he is in for $10,000 per door, and it cash flows like crazy. Since this one property, he stopped investing in all other types of real estate except for multifamily.

Real Wealth in Real Estate

Real wealth is not created on one commission from an individual transaction.  It is created from residual income; getting paid repeatedly, month after month and year after year.  Wealth in real estate is created over time, not by flipping property after property, but by holding the asset and letting it appreciate over the years.    

Multifamily Mindset

Multifamily Mindset for Tim started with the realization that residual income was key.  More wealth has been created in real estate. It’s a proven formula if you stick with it and have a vision.  

The more he learned about real estate, the more he saw an opportunity for him.  He also recognized the power and potential danger of leverage. When the 2008 crash happened, those with too much leverage, lost everything.  While those with cash flowing assets, were able to ride out the storm.   

When the banks were not lending, real estate investors with positive balance sheets and cash flowing properties were able to get loans, because they had cash flow.  This allowed them to buy more and grow their portfolio.   

Getting Started

Your Multifamily Mindset starts with education. Recognize, you will pay for this, one way or another.  If you decide to go it solo, and learn the hard way, on your own, you will pay for your education in costly mistakes and missed opportunities.  If you elect to pay a mentor, you will be able to shorten your learning curve, and gain from your mentors experience, and mistakes so you won’t have to repeat them.  The choice is yours.

There are tons of books and podcasts available for free.  But these do not hold you accountable. How many times have you been to a seminar or read a book that inspired you to do great things.  But as soon as you return home, you get into your regular routine and forget all the excitement and momentum you gained from the event.  Having regular meetings with your mentor or mastermind group, will keep you on track and hold you accountable to yourself so that you reach your goals.  

Tim has learned from books, podcasts and mentors, both bad and good.  He has found his mastermind group has been the most beneficial for him.  His mastermind group is where he learned from other investors who had passed through his current challenge.  

Meeting regularly with his mentor or his mastermind has helped Tim create a portfolio valued at more than $250,000,000 in just over 4 years.

Regular Reflecting

Tim had over 200 doors made up of a mix of single family and multifamily properties.  When he took some time to reflect, the numbers did not lie. NInety percent of his wealth was from multifamily yet it accounted for only ten percent of his time.  This aha, lead Tim to focus only on multifamily from that point forward. 

If you don’t know where you want to go, it doesn’t matter which path you take.  Know your why, and then back into the numbers to get you on the right path for where you want to end up.  When you know what you want, you can ask better questions, on how you can accomplish your goal.    

Take a day, schedule it, and periodically take stock of where you are and compare it to where you want to be.  Then ask questions, and course correct.  This is key to keeping your multifamily mindset. 

Consistency is Key

Consistency is key to building a successful business.  An apple a day keeps the doctor away, not seven apples on Sunday.  

If you want to build a big business, there is no shortcut.  Consistency is the key to growing a big business. If you want to build a big business, recognize that it will take time, and act consistently.  When you do this over time, your efforts will accumulate and you will have success.  

Marketing

Tim recognizes that having a consistent marketing message in front of his key prospects is how he will reach his goals.  This applies to both raising money, and buying apartments. In the communities where Tim is actively acquiring properties, everyone knows Tim buys apartments.  Why? Because, for the past three years, he has marketed to owners, and residential brokers that “Tim buys Apartments”.  

For investors looking to participate passively, Tim stays in front of them, and is constantly building his list.  His consistent actions allows him to raise millions of dollars in a single webinar for any deal he has.  

From his residential wholesale days, where he built his list of buyers and wholesalers, he recognized that wholesalers come across multifamily deals all the time, and usually throw them away.  What if the wholesaler could make a referral fee by sending it to Tim?  

Tim emails his list of wholesalers weekly, reminding them that he buys apartment buildings.  Because these buyers come across multifamily opportunities regularly, and have nowhere to go, Tim has been able to make a win-win-win situation for the seller, wholesaler and Tim.

Syndication Strategy

Tim has a unique syndication strategy for how he structures for his deals compared to traditional syndication models.  Unlike others where investors may not see any return until the building sells, Tim offers a preferred return to investors from day one.  As soon as the property is stabilized and can be refinanced, he pays back the investors their principal, replaces his bridge financing, and keeps his investors in the deal for 10 to 30 percent equity into perpetuity.  

Investor benefits include: tax advantages because the preferred returns are long term capital gains.  The investor gets their capital back for the next deal, and they get the long term equity build from their 10 – 30 percent investment with no capital in the deal.   

For Tim, this has created a constant source of money looking for a return that is ready for the next deal.

BIGGEST RISK 

Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?” 

BIGGEST RISK: The BIGGEST Risk we face is the potential tightening up of the banks.

How do you manage the risk? The model is based on refinancing within 12 to 18 months.  If we see the market shifting, we can refinance sooner, and not take out any proceeds.  Usually we like to wait for 12 months so we can take out some proceeds. This allows us to pay a little more to our investors, and make them happy, and me a little more liquid so I can qualify for more loans.  But if we had to refi before 12 months, we could just refi at our basis, lock into long term debt, and ride out the storm.  

The other thing we do is underwrite our projects as if the loan to value is going to drop by 5 – 10% in 12 – 18 months and we assume that the interest rates will bump up 1 percent.  Do I think these will happen? No. But, I want to be prepared for if they do.    

For more go to:

Face Book: Tim Bratz

Website: Legacywealthholdings.com

Podcast: Legacy Wealth ShowEvent: Commercial Empire

iintoo Real Estate Investing with Shoshana Winter – CREPN #203

Real Estate Investing for accredited investors seeking a passive alternative that utilizes data and technology can now use the online real estate investment platform, iintoo.  

Shoshana Winter managing director for iintoo USA, shares the opportunities for passive investors to take advantage of iintoo’s data science to achieve predictable returns.

Mining the Data

The success of iintoo, is rooted in its data science.  Digging into the numbers and looking for the trends are the key to identifying opportunities.  What are the attributes of a particular market? How close is it to an urban center where housing is not affordable. Is the job market healthy?  What about demand for housing? Does this market or industry have a cyclical basis?

iintoo Investment Options

iintoo has two investment options;  single property or in a fund.  

Through syndication, iintoo provides investors the opportunity to invest in a single commercial property with as little as $25,000.  If you prefer to spread your risk to multiple properties and geographic areas, you can invest in a fund. The fund option has a minimum investment requirement of $30,000.

While the platform is online, and available 24 / 7, they recognize that many investors prefer the confidence that comes with personal contact.  You want to know someone before investing hundreds of thousands of dollars. For this, iintoo provides the high level of touch including in person visits in the office, or video conferencing.  

Debt or Equity

Currently iintoo’s model is an equity investment.  All investments are placed as equity in a commercial property.  In the future, it is expected that iintoo will have a debt option available.  

Realty Shares Acquisition

iintoo in joint venture with RREAF Holdings LLC, announced their acquisition of Realty Shares in May, 2019.  Realty Shares was one of the pioneers in real estate crowdfunding, successfully closing over 1,100 deals in 40 different states.  The acquisition increases iintoo’s investor count from about 50,000 investors to over 200,000. 

BIGGEST RISK 

Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”  

BIGGEST RISK: 2008 looms very large for people.  All the KPI’s are looking for the positive signs.   We know from experience that everything is cyclical.  There’s a new administration, or not; a world event, changes in the job market, unemployment, interest rates, etc.  All of the factors, we know from experience, have the ability to create a seismic shift in investment markets, across the board.  

The book, Irrational Exuberance, that explains how we are in this phase where everything is good, but we are waiting for the other shoe to drop.  Because, we’ve seen it happen. 

Risk is inherent.  

What iintoo does, and tries to do, is to pull apart risk.  We ask, what are people most worried about? We use data. We stay actively involved.  Our thesis is to stay in these investments for short terms, 3 years.

Most recently, we started providing “Equity Protection” for principals on certain funds of our investments.  This provides a second layer of protection. The first layer is a portion of the proceeds go into a retention fund.  These pooled funds are available if an investment goes bad. If the first layer gets exhausted, a second layer is available.  This 2nd layer is through a reinsurance carrier, through Everest Re. and is available if the 1st layer is exhausted.  

For more go to:

Website: www.iintoo.com

Email: invest@intoo.com

Cost Segregation Study with Yonah Weiss – CREPN #202

A Cost Segregation Study is a tool available to real estate investors that accelerates depreciation which lowers the taxable income  and improves cash flow in the initial years of ownership.

Yonah Weiss is life long learner.  Formerly a teacher, he turned to real estate, first as a broker, then mortgage broker and investor who now uses all of his real estate experience to help investors understand the value of Cost Segregation Studies.  Today, he represents the cost segregation firm, Madison Specs, which has performed over 14,000 studies throughout all 50 states.  

Here, Yonah provides insight on how cost segregation can improve the cash flow of your property utilizing this IRS approved depreciation accelerator.

Cost Segregation Study

Simply put, a cost segregation study is a way of breaking down the property into faster depreciation lives than the normal straight line, twenty seven and a half (residential) or thirty nine years(commercial). So instead of taking a small deduction every single year, the IRS actually allows you to reclassify or segregate out the costs of everything in the property to these faster depreciation lives. Thereby, resulting in greater depreciation deductions and greater tax deductions in the early years of ownership which equal greater cash flow.

This detailed report becomes a source document for filing your taxes, and must be updated as you replace building elements.   

Depreciation

noun

noun: depreciation

  1. a reduction in the value of an asset with the passage of time, due in particular to wear and tear.

Straight Line Depreciation

Straight line depreciation is recognized when you pay your taxes, depending on the type of property you have invested in.  The property is separated between land and building, because land does not depreciate. Then you divide your building amount by the appropriate number of years, 27.5 or 39, and take the result as a deduction from the property income.

For example:

Residential Property

Purchase price: $100,000

Est value of land: $20,000

Est value of building: $80,000

Annual depreciation: $80,000/27.5 = $2,909

Each year your basis in the building will lessen by $2,909.  

This amount is subtracted from income to determine the income amount you owe taxes on.

Accelerated Depreciation

In order to accelerate the depreciation of you building, you must have a cost segregation study performed by specialist, engineers & accountants.  They will walk the entire property, document all the components, and classify element, light switches, carpet, toilets, faucets, nail, screw, etc. into different categories representing varying life expectancies.  

The result is instead of taking 27.5 years to fully expense an item, you can do so in 5, 7 or 15 years.

Residential Property

Purchase price: $100,000

Est value of land: $20,000

Est value of building: $80,000

Yonah’s estimates approximately, 30% of the building value gets reclassified into shorter depreciation schedules versus straight line.  Conservatively, experience suggest:

In general up to 20% of the building may qualify for the 5 year classification.

Another 10% is classified as 15 year.

Balance 70% remains in 27.5 year schedule.

Cost Segregation Study first year depreciation:

$80,000 x .20 = $16,000

$16,000/ 5 years = $3,200/ yr for 5 years

$80,000 x .10 = $8,000

$8,000/ 10 years = $800/ yr for 10 years

$80,000 x .70 = $56,000

$56,000/ 27.5years = $2,036/ yr for 27.5 years

1st year depreciation: $6,036

This represents 207% of the straight line option.

As the property value increases, so does the value of the cost segregation and increased depreciation.  

When to do Cost Segregation

The time to do a cost segregation study is as soon as you buy or build a real estate investment.  This gives you the maximum potential benefit. This does not mean you are too late if you have owned the property for a number of years, as there may still be an opportunity for savings.  If this is the case, you can amend your tax returns and reduce your tax liability.

BIGGEST RISK

Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”  

BIGGEST RISK:  I think more than anything in my experience and that risk is actually arrogance. OK so what I mean by that is when you are thinking that you’re going about and you’re making a million dollars and making 10 million dollars and it’s all you you you you’re right. You did it all. You know there is a certain when you start thinking like that you get into a very dangerous situation not just with yourself personally with the people around you. And everyone knows that real estate investing is really a team sport. And there are so many people that are involved. So when you think, just about yourself, and think about how you did it all by yourself and how great I am. And obviously that’s important. I’m not talking about you know low self-esteem here. But real humility means that I’m willing to cooperate and willing to learn from everyone around me.

How to manage the risk:  I realize that I can’t do this on my own I realize that you know whatever talents I have you know are really God given gifts and I have to be grateful for that and recognize recognize that and use them. But at the same time don’t think that you know I’m I’m the best thing in the world because that’s the biggest risk. As soon as you start thinking that history proves itself over and over and over again, you’re bound to fail and you’re bound to lose whatever you have built you lose whatever friends you made et cetera. And it’s just the easy way to lose friends in general. So that’s what I think the biggest risk is.

For more go to :

Website: http://www.madisonspecs.com/

Email: yweiss@madisonspecs.com

Multifamily Syndication with Ben Leybovich – CREPN #201

Multifamily Syndication in Phoenix is Ben Leybovich’s focus.

A classically trained musician, Ben was encouraged to seek an alternative means for generating income after he was diagnosed with MS.  In his search for an alternative to his planned career as a musician, he found real estate.

Since he was located in, Cincinnati, OH, he started investing locally in single family & smaller multiple units. For ten years, he built a real estate portfolio in Ohio, then he moved his family to Arizona for the health benefits.  This is when he began his educational journey into multifamily investing.

His original real estate investment mentor encouraged Ben to continuously grow.  Once you master single family, get a duplex. After the duplex, get a 4 plex, etc.  

He realized managing properties was not his interest.  However, his experience with his smaller properties, gave him valuable hands on experience that provides Ben with a unique perspective on the market, he would not otherwise have.

The Syndication

The dictionary definition of to syndicate is “to pool together”.  

Together, investors can do more than they can on their own.  For multifamily investing, it means pooling investor funds for the purpose of buying a single property.  

As such, Ben and his partner Sam Grooms focus on finding multifamily value add opportunities in Phoenix, AZ where they pull together investors to invest in a large multifamily properties.  

Syndication is essentially a partnership, pulled together investors.  But it is not a democracy. The partners do not have equal say in the decisions.  Instead, there is a division amongst the partners; Limited Partners and General Partners.  

The Limited Partners are able to invest with an expectation of return on their investment, but have no say in how the investment is managed.  

The decision makers are referred to as the General Partners.  All the management and operation decisions for the property is their responsibility of the General Partners.  It is their job to find the property and present it to potential investors following all of the SEC guidelines regarding securities.  

This “pooling together” of Limited Partners with the General Partners forms the Syndication.  

Why Multifamily?

Why did Ben get into Multifamily?   

The answer is multi faceted. When Ben asked his real estate mentor, “How do I know if I am moving in the right direction?”   The mentor answered, “Make sure each step is slightly bigger than your last. Doing this, will assure that your continued growth.”  So the natural progression is towards multiple units.

The experience of building his portfolio gave Ben an education on how people, markets and assets behave as the market goes through its cycle.  As he moved through the cycle, he was able to ask questions, “why did this happen?” His answers were available from the rearview mirror perspective.  Ben attributes eighty percent of his real estate investing education from this rearview perspective, being invested in the market. The balance he learned from reading books.  

The experience gained from over 10 years as an investor gives his syndication business a real sense of what is likely to happen as opposed to a theoretical view from just reading.   

Plus, from a mathematical perspective, larger multifamily properties just make more sense especially when comparing the expenses of operating smaller properties.  

Underwriting

Ben & Sam are very methodical about their underwriting.  Given the market cycles, they always underwrite for a 10 year hold.  This is not because they want to hold for 10 years, but because this length of time, allows them to safely ride out any down turn in the market.   At this point in the market, if they did not do this, they could get stuck with the need to sell or refinance when the market is not favorable to do so.

Cash Flow

Today’s cash flow is tomorrow’s “Cap X”, capital expense.  Every investor looks for cashflow. But if you have not owned a building for four or eight years, you have not experienced a Capital Expense Cycle.  The Capital Expense Cycle is a function of building mechanicals as they get used up and need to be replaced. The replacement of these systems are capital expense.  

The cost of replacement is significant, and is why the IRS provides for depreciation and cost segregation studies to help investors plan and prepare for these events.  Ideally, your positive cash flow is put into reserve so that you have funds for these events.

With this in mind, Ben underwrites for a minimal amount of cash flow starting in Q4.  As the value add improvements get implemented, the cash flow will continue to increase.  

Appreciation

The true measure of profits in real estate is defined by appreciation, regardless if you are buying and selling single family or multifamily.  

In single family properties, homes sell based on what the neighbors homes are selling for.  This market gives the investor no opportunity to push the value.

In multifamily, the market value is established by market cap rates and the property net operating income.  Multifamily investors have some control over income and expenses which gives them control over the net operating income.  When you increase the NOI, you increase the value. Your ability to increase NOI is the appeal to multifamily investors.

Multifamily Market Outlook

The Multifamily Market Outlook is favorable based on multiple data points.  The Federal Reserve’s set goal is to keep inflation at 2%. This is manageable and will naturally push the cost of rent up.  

Add to this the growing demand for rental housing due to population growth, formation of families and the growing segment that does not want to own a property.  

The cost of new construction is prohibitive when compared to cost to rent for a potential buyer making the median income.  This will keep the amount of multifamily supply from growing out of control and the demand high.

Exit

How do I exit this syndication?  This is a reasonable question from someone who has pooled their money with others.  Ben is very conservative, and underwrites to a 14% internal rate of return for 10 years.  He does not want to be in for 10 years, but does not promise any returns to his investors until the ultimate sale.  

Only after the value add plan has been substantially implemented, does Ben begin to project cash flow, usually by Q4.  His experience has taught him that cash flow needs to be accumulated for future capital expenses. By keeping the property well maintained, he can drive future sale value.  

BIGGEST RISK

Each week I ask my guest what is the Biggest Risk they see that real estate investors face.

BIGGEST RISK: The BIGGEST RISK is always, you don’t know what it is.  Strictly buying for cash flow without an idea for how you are going to get out.  

How to manage the risk:  Underwrite each deal for a 10 year hold.  Not because I want to hold it for 10 years, but for safety if we need to.

For more goto:

www.justaskbehwhy.com

Email: ben@justaskbenwhy.comPodcast: Multifamily Syndication Unscripted

BIGGEST RISK with Scott Hollister

From an investor and rehab standpoint the two big issues that people get hung up on are under estimating the rehab cost and under estimating the time to complete the project.  You’ll find that if you go forward that type of lending, they’re always going to ask, “What’s your exit strategy? What’s your backup exit strategy? What’s your third exit strategy?  That’s what I try to find. If I can’t refinance out, can I quick sale? Can I fire sale it? Can I do some type of creative strategy? What does it look like on a commercial note? What does it look like on a fixed 30-year, you know Fannie and Freddie note?  I try to play out that worst case scenario, “can I weather that storm?” Then I back into the deal.