Real Estate Fundamentals

9 Ways To Find Distressed Properties For Sale Near You Are you new to real estate investing or a professional interested in trying a new investing strategy? Chances are you are looking to find a distressed property for sale. Distressed properties offer undervalued deals that are very attractive to investors. This helps to increase your profit margin. Below you will find a discussion on creative ways to find distressed properties, including buying distressed properties, and some important tips to keep in mind. What Is A Distressed Property? A distressed property is either physically or financially (or both) unmaintained by the current owner. For the sake of real estate investing, distressed properties (otherwise known as pre-foreclosures) are homes in which the owner has been unable to keep up with mortgage obligations and is therefore at risk of falling into foreclosure. However, it is worth noting that a pre-foreclosure is exactly what it sounds like: the owner is merely at risk of foreclosure and not currently in the process of it. Some properties are found to be in poor condition due to neglect, or because it is at risk of being foreclosed upon. Who Invests In Distressed Properties? Both homebuyers and real estate professionals frequently choose to invest in distressed properties. Homebuyers hoping for a fixer upper and lower purchase price, may find these homes to be an excellent opportunity. Distressed properties can also give homebuyers a chance to break into fast-moving markets, as there may be less offers to compete with. Real estate investors are typically interested in distressed properties for the same reasons. Distressed homes often have a lower purchase price, and in many cases feature highly motivated sellers. These characteristics can help investors secure more profitable deals. How To Find Distressed Properties: 9 Creative Hacks Distressed properties represent particularly attractive investment opportunities. Not only can they offer wider profit margins than traditional deals, but they can also represent less competition. This is because oftentimes, investors are unsure how to actually find and invest in distressed properties. There are several ways to find these opportunities, but the following hacks are among the best: Look For Neglected Properties Check Tax Records Find Properties With Delinquent Mortgage Payments Consider Probate Options Peruse REO & Bank Owned Property Listings Drive For Dollars Talk To Out-Of-State Owners Check The MLS Search Online Look For Neglected Properties When it comes to the physical appearance of a distressed home, there’s one telltale sign to keep in mind: neglect. To find distressed properties for sale, start by selecting a target neighborhood then be on the lookout for signs of homes that may be neglected. A distressed property may have: Multiple notices placed on doors or windows Peeling or faded paint Indoor and outdoor lights not turned on at night A yard with overgrown weeds or neglected lawns Broken windows or any other needed exterior repairs Uncollected mail or newspapers More often than not, a neglected home and yard mean the owner has given up trying to maintain the property. That could mean two things: either the owner doesn’t want to maintain the home or can’t afford to. If you come across the latter, you may find a motivated seller willing to part ways with the home at a discount. Check Tax Records Delinquent taxes are public record and could suggest a homeowner is in financial trouble. If for nothing else, those who can’t pay their taxes may also not be able to pay their mortgage. Delinquent taxes are often a motivation to sell. Find Properties With Delinquent Mortgage Payments Not surprisingly, homes with delinquent mortgage payments represent the epitome of distressed properties. Those who can’t pay their mortgage are at risk of foreclosure and may be willing to sell at a discount if it means avoiding foreclosure and all of the financial woes that accompany it. Fortunately, you can find public records of delinquent mortgages at local courthouses. Consider Probate Opportunities The probate court is yet another creative space to find distressed properties. A great opportunity for investors is probate property. As a result of a significant life event such as divorce or a death in the family, these properties have been left behind. In many cases, those inheriting the home may not want it. This represents the chance to take it off their hands for a good price. It should be noted that making an offer on a probate sale requires a special process, as the property is being sold through an attorney or an executor. Peruse REO & Bank Owned Property Listings Real estate-owned homes, or REOs, are those properties that lenders have already repossessed. That said, lenders aren’t in the business of holding real estate inventory and would rather get rid of non-performing assets. As a result, savvy investors may convince said lenders that selling them the home at a discount is their best move. Drive For Dollars A traditional method to find distressed properties is hopping in the car and driving around. Ben Reynolds, CEO and Founder of Sure Dividend, says, “driving around neighborhoods can be a fun adventure to do when trying to find distressed homes.” Assuming you already have a target neighborhood in mind, drive around and look for properties that stand out from others. Look for signs such as an overgrown yard, broken windows and shutters, exterior paint that is faded or peeling, notices that are posted on any doors, and junk mail and newspapers left uncollected. If you find a property that meets any or all of these descriptions, be sure to write down the address to start investigating. According to Reynolds, “There might be something about seeing the property in person that could be missing from professional images of the property, such as the neighborhood’s atmosphere and sounds and smells that could deter homebuyers or renters from the property.” These factors can help you determine whether you have a sound lead. Talk To Out-Of-State Owners Various circumstances can cause homeowners or investors to move out of state, … Read more

How To Do A Title Search: A Beginner’s Guide What Is A Property Title? A property title is a document that names the rightful owner of a property. Only the person on the title has the right to sell the property. As an investor, you need this information to ensure that the person selling you a property is, in fact, within their rights to do so. This can get a little complicated if there are any liens on the property. The property owner has to settle any liens or claims before they can rightfully make a sale. What Is A Title Search? A title search is simply the process of examining public records to determine a property’s ownership. The search can uncover whether or not there are any liens on the property. Other unexpected legal issues can also come up, which we’ll go over next. Conducting a title search requires sifting through a lot of legal documents and public records. The purpose is to uncover as much available information as possible so that the buyer can make an educated purchase decision. Other than real estate investors, mortgage lenders and other creditors also initiate title searches. What Can A Title Search Uncover? As mentioned before, a title search can uncover some unexpected legal issues. As an investor, you want to know of these right away. Ideally, these issues are addressed and resolved before the transaction goes through. In some cases, the legal issue can be enough reason to walk away. Your lawyer or title search company can help assess the gravity of the following common legal issues: Easements: An easement is when an individual other than the owner was given the right to use the property. You’ll want to find out who this individual or entity is, why they have the right to use the property, and in what capacity before you make any decisions. Covenants: Covenants are legal restrictions that put a limit on what you can build on the land upon which the property sits. As an investor, this might kill your deal if you were planning on making expansions or are building an additional unit on the property. Caveats: You might be most familiar with this term, which means that another party has shown interest in the property. Find out what kind of offer your competitors have made, and see if you can better their offer or make a stronger case for why you are the ideal buyer. Title search companies and attorneys rely on the following sources to conduct a title search: Property deeds County administration land records Federal and state tax liens Divorce documents Custody and child support documents Bankruptcy documents Financial adjudications Estate planning documents Why Do You Need A Title Search? Conducting a title search is a measure of minding due diligence and protecting yourself. Finding out the owner of your target property is just the first step, and you should be careful to investigate further. This is because you want to make sure they own the title free and clear. If not, you could find yourself with a property that is riddled with claims and liens. For instance, you might be unpleasantly surprised when finding out that the current owner has an old claim against their title. They might not even be aware! In another example, the debts of previous owners tied to the property could come back to haunt you. Debts could include unpaid property taxes, fees from HOAs (Homeowners Associations), or bills for home improvement projects. If you were to skip the title search process, this means that you could potentially be unaware of these serious problems. This is why most lenders require title searches and title insurance before they’ll set you up with a mortgage. When To Get A Property Title Search Title searches usually take place during closing. The closing process takes place after a buyer’s offer has been accepted but before the ownership of the home has officially transferred from seller to buyer. However, a property investor will sometimes pay a title company to run a search, independent of the home-buying process. You might do this if you’re interested in a property and have reason to want to find out whether or not the property is free of any entanglements. How Much Does A Title Search Cost? A title search costs as little as $150 but as much as $1,000. This cost is dependent on whether or not you’re doing a basic land report or a full report of ownership and encumbrances. It can also vary by state and by how much information you’re looking for. The cost of title searches is typically included in closing fees. How To Do A Title Search In 5 Steps Now you should have a foundational understanding of what a title search is and what it’s used for. Now, it’s time to learn how to do a title search. We’ve broken it down into 5 steps: Examine Chain Of Title Check Property Taxes Inspect The Site Uncover Judgements Close The Deal 1. Examine Chain Of Title A chain of title shows the ownership history of a property. When examining the chain of title, you should be able to view the current owner and prior owners, all the way back to the original owner of the property. You can obtain this information by looking up public records online. If you can’t find them online, try visiting your local recorder’s office. 2. Check Property Taxes Next, check the taxes on the property to make sure they have all been paid. What you don’t want to find is any unpaid, overdue taxes. These can lead to a lien being placed on the property, which means that the government can put the property up for sale. Purchasing title insurance is one way to protect yourself. 3. Inspect The Site After you’ve made sure that the property is free of unpaid taxes, you’ll want to schedule a property inspection. As an investor, you never want to … Read more

Investing In Rental Properties For Beginners Real estate investing covers a much broader spectrum of investment vehicles than most people realize. This spectrum ranges from the very passive strategy of buying real estate-related stocks on a public exchange, investing in Real Estate Investment Trusts (REITs) or even investing in deals through a real estate crowdfunding platform, to the more active approach of purchasing individual properties directly — either to resell them for profit, or to rent them out for ongoing income. Contrary to much of the conventional wisdom and many real estate books and courses, investing in rental properties is not a strategy for earning passive income. In fact, it is among the most active and time-consuming forms of real estate investing in which you can engage. In the sections that follow, we will discuss the basics of investing in rental properties, including an overview of how to find a viable rental property and obtain financing for it, what may be involved in operating and maintaining the property, and the basic pros and cons of such investments. INCOME PROPERTY INVESTMENT — INVESTING IN RENTALS Although there are many ways to directly invest in real estate, for simplification purposes, we can break the investment approaches into two primary categories: investing in a property to potentially resell it quickly for a profit, and investing in a property for the long-term and renting it out. One potential benefit of investing in a rental is that it has the possibility to provide two types of return. First, it can provide appreciation over the long run, if the property value increases over time and due to improvements made by the owner, and as the owner increases equity in the property by paying down the mortgage. Second, the owner also has the potential to realize an ongoing return in the form of positive cash-flow on the investment — earned by renting the property out to tenants for monthly payments that exceed the owner’s overall monthly expenses to maintain the property. If an investor can obtain attractive financing to secure a rental property that produces positive cash-flow in an appreciating market — and if the investor is willing to take on the responsibility of managing the property (or working with a property management company) — then rental property investing can be a viable real estate investment strategy. Of course, just as with any investment, it is important to understand that rental property investing carries the risk of loss and there are no guarantees of a return. RENTAL PROPERTY INVESTMENT STRATEGY To determine whether a rental property investment can work for you, you first need to come up with an informed estimate of the return on investment (ROI) that the property is likely to generate. For many types of investments, you can determine the ROI by calculating a simple formula: gains minus cost, divided by the cost. In the case of a stock investment, for example, if you pay $10,000 for stock in a company and sell your shares later for $12,000, then you’ve realized an ROI of 20%. That’s a net profit of $2,000, divided by the original $10,000 purchase price — giving you a 20% return on your investment. In reality, the ROI calculation will be more complicated than this, because you will need to factor in expenses such as capital-gains taxes on your stock sale and any broker fees you incurred while buying and selling your shares. But things get more complicated still when you are attempting to determine the ROI potential in advance of investing in a rental property — because there are so many variables that can affect both the income potential and the expenses of the property. Determining the possible ROI of an income-producing property will require you to make estimates (based on whatever historical data is available) on market rental rates, vacancy rates of similar properties in the area, ongoing expenses for maintaining and operating the property, and other variables that might change at any time. And bear in mind, as stated previously, rental property investments carry risk of loss just as any other type of investment, and returns can never be guaranteed. HOW TO DETERMINE A GOOD RENTAL PROPERTY There are many criteria you’ll need to consider in your search for a good rental property in which to invest. If you’re looking for a residential rental property — such as a single-family residence or a small apartment complex — you may want to focus your search within neighborhoods with homes appreciating in value, low crime rates, strong employment figures and well-rated schools. But assuming you have narrowed your search for rental investments to a given area or even to a few specific properties, you should then run some basic calculations to get a better sense of how well those properties might be able to generate income for you. Your goal, of course, will most likely be to find a rental property that generates positive cash-flow — where the rents and any other income you earn on the property is greater than all expenses, including your mortgage payment, property management fee, property taxes (calculated monthly), repairs, insurance, etc. Imagine you were to purchase a four-unit apartment complex for $300,000, and you took on a $1,900 mortgage payment (which included impounded property taxes, paid by the mortgage company). You then hired a property management company for $150 to handle screening tenants and managing repair and maintenance issues. Further assume that ongoing maintenance work like landscaping for the apartment runs you another $200 and that for expenses you are responsible for on the property, such as some of the utilities and property insurance, cost an additional $500. Your total costs, then, come to $2,750 per month. Finally, assume you can charge $800 per unit and that all four units rent. That gives you a gross income of $3,200 — a net operating income of $450 per month. Another way to determine whether or not a rental property might be viable for you … Read more

4 Reasons Fewer Americans Are Buying Homes 4 Reasons Fewer Americans Are Buying Homes THE U.S. HOMEOWNERSHIP RATE IS CLOSE TO ITS LOWEST LEVEL SINCE THE 1960S. HERE’S WHY. While the U.S. homeownership rate has climbed slightly since reaching a 50-year low in 2016, it remains near a generational low at just 63.7%. Simply put, more people are choosing to rent than buy their homes in recent years than at any point since the 1960s. 1. AMERICANS FIND THE HOMEBUYING PROCESS TO BE OVERWHELMING The survey of more than 2,000 U.S. adults found that 71% of Americans believe that the home buying process is overwhelming. Having gone through the process three times in my lifetime, it’s certainly easy to see why they feel that way. From house-hunting to negotiating with sellers to the mortgage process, buying a house can be a time-consuming and stressful process. The mortgage process alone generally takes a month or more between the time when you have a signed contract and the date you take possession of the home. In contrast, if you want to rent, it’s relatively easy to go and look at a few possible homes, submit an application and security deposit, and move in within a matter of days — not weeks or months. This can be an especially motivating factor, as Americans value convenience and simplicity more than ever, and the home buying process is not particularly convenient or simple. 2. IT’S TOUGH TO COME UP WITH A DOWN PAYMENT Seventy percent of Americans surveyed believe that people these days will need to rent well into their 30s to be able to save enough money to buy a home. To be fair, many people believe (incorrectly) that you need 20% down to buy a home. A 20% down payment is indeed the industry standard and can allow you to avoid mortgage insurance, but it’s certainly possible to buy a home with much less upfront. If you have good credit, you can obtain a conventional mortgage with as little as 3% down, and even borrowers with so-so credit can get an FHA mortgage with a down payment of 3.5%. In fact, the average first-time buyer puts down just 6%. Even so, this still requires a substantial amount of savings. The median sales price for an existing home in the U.S. is just over $258,000, and a 3% down payment translates to $7,740, an amount that many younger buyers simply don’t have sitting around. In addition, closing costs generally add another 2%-5% of the sale price, and lenders typically want to see at least a few months’ worth of mortgage payments in reserve. In a nutshell, even with a 3% down payment, the average homebuyer could need over $15,000 in cash before being able to buy. 3. MILLENNIALS VALUE EXPERIENCES OVER OWNERSHIP Americans are increasingly valuing experience over ownership, and this is particularly evident in the younger millennial generation, the 18-to-35 age group. While previous generations have valued ownership more, millennials seem to be willing to sacrifice homeownership if it means they can afford to spend more money on experiences. While there are more first-time homebuyers entering the market today than in the years immediately following the Great Recession, the portion of sales that come from first-timers is 37%, significantly less than the 46% peak in 1996, according to Genworth. 4. AMERICANS CHANGE JOBS MORE OFTEN THAN IN PREVIOUS GENERATIONS Finally, it seems that Americans value flexibility in their lives more than in previous years. More Americans want the flexibility to change jobs every few years, and the freedom to easily move to a new place if they so desire. Thirty-five percent of Americans say that they would prefer renting a home over ownership to maintain a flexible lifestyle. Since the average person changes jobs about 12 times during his or her career, according to data from the Bureau of Labor Statistics, this certainly makes sense. It’s not very practical to buy and sell homes a dozen times, but it’s easy to rent 12 different homes over the course of a 35-year career. SHOULD YOU BUY OR RENT? To be perfectly clear, although more Americans are choosing to rent than have done so in recent decades, it’s important to point out that more than 60% of homes are still owner-occupied. We’re not exactly becoming a “nation of renters” as many people would have you believe. There are perfectly valid reasons for owning a home, and there are some good reasons to rent, some of which we’ve discussed here. The bottom line is that the best option for you depends on a number of factors, so it’s important to weigh the pros and cons of each option before choosing whether you want to be a renter or a homeowner.

Here Are The Do’s And Don’t You Need To Pull Off A 1031 Real Estate Exchange A 1031 exchange is a practice named after a section of the IRS tax code. It allows taxpayers to potentially defer capital gains taxes from the sale of a property if they meet certain conditions. Those conditions can be complicated, tricky and confusing. To make sure you’re on the right path, pay close attention to these do’s and don’ts as you set-up a 1031 exchange. DO’S 1. Do understand what a 1031 exchange is. They allow you to exchange one piece of real estate for another, and defer capital gains taxes when you sell the first property. 2. Do know that 1031 exchanges aren’t just for investment real estate. They encompass a variety of property. But, some property doesn’t qualify, says the IRS, and that includes: Inventory, stock in trade. Stocks, bonds, other types of notes. Securities, debt. Partnership interests. Trust certificates. For the purposes of this post, we’ll talk only about 1031 real estate exchanges. 3. Do understand the property you’re dealing with. 1031 exchanges happen between “like-kind” properties. This definition is vague. Says the IRS: “Like-kind property is property of the same nature, character or class. Quality or grade does not matter. Most real estate will be like-kind to other real estate. For example, real property that is improved with a residential rental house is like-kind to vacant land. One exception for real estate is that property within the United States is not like-kind to property outside of the United States. Also, improvements that are conveyed without land are not of like kind to land.” Do secure the help of a tax professional who can definitively tell you if a property is like kind. 4. Do understand your investment goals. 1031 exchanges are ideal for investors who can afford to keep their available capital illiquid. These individuals may already be planning to buy more buildings or have no desire to transition their capital to other investment vehicles. 5. Do know you’ll probably need to defer your exchange. You’ll likely need to identify and secure a like-kind property after you sell. Investors typically identify up to three properties in case their first choice doesn’t pan out. Sometimes, investors perform the exchange immediately upon sale, though this is often difficult. That means you’ll perform a deferred exchange. An intermediary party will hold the funds from your sale. If you touch the proceeds of the sale before the exchange is complete, you’ll end up paying taxes on them. 6. Do report the exchange using IRS form 8824 in the year the exchange was made. DON’TS 1. Don’t try to exchange a piece of personal property. 1031 exchanges can only be done between investment properties that you own, which means REITs, funds or an LLC that owns shares in another LLC don’t qualify. Says the IRS: “Both properties must be held for use in a trade or business or for investment. Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment.” 2. Don’t try to exchange properties outside the U.S., as these do not qualify for 1031 exchanges. 3. Don’t take control of any cash before the exchange is done. This may cancel the exchange and make all gain “immediately taxable,” says the IRS. 4. Don’t delay after you sell the first property in the exchange. You must identify the property you’re receiving from the exchange in 45 days. 5. Don’t delay completing the exchange. Even once you identify a property, you need to complete the exchange within 180 days after the sale. 6. Don’t exchange for a cheaper property without running the numbers. If the new property is worth less, the difference in cash may be taxed. 7. Don’t forget to vet your intermediary in a deferred deal. They are not all created equal. The IRS highlights several schemes that occur: “Taxpayers should be wary of individuals promoting improper use of like-kind exchanges. Typically they are not tax professionals. Sales pitches may encourage taxpayers to exchange non-qualifying vacation or second homes. Many promoters of like-kind exchanges refer to them as ‘tax-free’ exchanges not ‘tax-deferred’ exchanges. Taxpayers may also be advised to claim an exchange despite the fact that they have taken possession of cash proceeds from the sale.” 8. Don’t try to act as your own intermediary. Under IRS rules, you, your family or anyone who works for you can’t be the intermediary in these deals. 9. Don’t be fooled into thinking capital gain taxes are forgiven. They’re not. They’re deferred until the time you sell the next property, unless you conduct another 1031 exchange with that property. While these are some helpful suggestions, individual tax situations can vary and can be complex. It is important to consult a tax professional to advise you on your specific situation.

Why Busy Professionals Should Understand the Cashflow Quadrant When’s the last time you carefully analyzed the trajectory of your professional life? As a busy professional, it’s easy to get caught up in all of the complex daily activities and lose sight of your long-term goals. One of the best ways to evaluate and reposition your professional life is by using Robert Kiyosaki’s Cashflow Quadrant. While in my opinion, Robert Kiyosaki’s books have a lot of fluff in them and have gotten less and less meaningful as time has progressed, one of his earlier concepts that has stood the test of time is the Cashflow Quadrant derived from a book of the same name. The Cashflow Quadrant is a simple concept but has enormous importance in the career of any professional. If you’re ready to learn about the Cashflow Quadrant and how it can help you transform your career, and most importantly, life, let’s get started. What is the Cashflow Quadrant? Using the Cashflow Quadrant concept, Kiyosaki created a distinction between various types of careers and how our current tax structure factors into each career choice. He goes on to talk about how people’s mindsets in each of the quadrants influence their career projections and paths (or lack thereof) to financial freedom. No matter what your goals are or what level of career achievement may be, the Cashflow Quadrant helps you to think about the big picture and put your current and long-term goals into perspective. In a nutshell, it makes you evaluate your current quadrant and determine if you are satisfied with it or not. Let’s take a closer look at each of the quadrants and their associated meanings. E Quadrant — Employee “E” stands for “employee.” The E quadrant is where most of the working population resides — an employee earns a paycheck and benefits by exchanging their time, knowledge, and performance of their required job. Their finance or wage is directly tied to the amount of their traded time and their ability to perform efficiently and effectively at their job. If you fall under the E quadrant, the only way to make more money is to put in more hours or switch to a higher-paying company. Within this quadrant, there is no passive income. If you don’t work, you most definitely do not earn any money. Additionally, people in this quadrant pay the most taxes of any other quadrant. As you may have gathered, the majority of highly paid professionals in the U.S. fall into this quadrant and this quadrant alone. How many of you are a government employee or work for a company with a paycheck based on the number of hours you clock in weekly? Put another way, will you feel the heat if you don’t bill a certain number of hours this year? S Quadrant — Self Employed “S” stands for “self-employed.” A self-employed individual is his or her own boss. While an employee works under a management structure, the self-employed person owns their own business and dictates the daily activities without the input of a superior or senior partner. However, while self-employed people may think they are superior to the people under the E quadrant, they both share some similarities — both are exchanging their time for money and pay high taxes. Kiyosaki describes individuals who fall under the S quadrant as individuals “owned by their business.” As a self-employed individual, you have greater control over your time (unlike employees), however, if you do not put in the work you will not get paid. You may have your own business, but you still have to take up new projects, make appearances, draft documents, and bill your time in order to earn money. B Quadrant — Business Owner “B” stands for “business owner.” Unlike the E quadrant and S quadrant, individuals in the B quadrant don’t just own their jobs; they own a system. Business owners are known to outsource their tasks to experts instead of taking it on themselves. If you are a business owner, you likely own a system that creates income inequivalent to the amount of time you put in. You can stay out of your office for months or travel around the world for vacations without your business suffering. Your income isn’t directly linked to your time. Due to the difficulty of breaking into this quadrant, only a select few professionals go on to become business owners. However, professionals that can make it into this quadrant are on the right path to attaining financial freedom. I Quadrant — Investor “I” stands for “investor.” According to Robert Kiyosaki, “this is the peak of all the quadrants, and only a few get to attain it.” While the self-employed guy down the road owns a business and the business owner living across the street owns a system, investors own assets that make money for them while they sleep (and while they’re awake, and while they eat, and while they…you get the picture). Uncle Sam also encourages people towards this quadrant with tax breaks, incentives, and loopholes. The investor is an individual who may have made money from one or more of the other quadrants and has learned how to put that money to work for them passively. Investors often invest or purchase equities in real estate, stocks, royalties, and owning portions of businesses. This is the crème de la crème quadrant and where true passive income lives. If you are a busy professional looking to achieve financial independence and time freedom, then the I quadrant is where you need to get to and therefore where you need to focus your goals. Once you are here, your job becomes more of a hobby than actual work. You can choose to work when you want to, not because you have to. Active Income vs. Passive Income Kiyosaki went further to divide the four quadrants into two parts — the left and right sides of the quadrant. Under this division, Kiyosaki analyzed the quadrants using each … Read more

The Ideal Holding Period For A Real Estate Investment How long should you hold onto your real estate before selling? While the final decision is up to you personally and your investment strategy, many industry veterans recommend longer holding periods. That said, what is considered a long-term hold is a subjective metric. Some whalers believe that the holding period should be equated to the length of lease terms in a particular building. For example, let’s assume a landlord bought a building in 2010 with a 15-year lease in place at the time of his purchase. That landlord may elect to sell the building in 10 years (i.e. in 2020) in order to make sure that the future buyer still has some sense of investment safety (i.e. there would still be five years remaining on that particular lease term). Mulfi-family differs with the length of lease typically being 12 months which is considered more desirable in order to command rent increases based on the market. If you look at the market’s typical 10 year cycle, you might say that in this particular market your holding period would be 3 to 5 years. Subject to location, finance, and circumstances, seeking investments with longer holding periods has historically been the preference for Appelman Properties’. The tax benefits, operational benefits and inflation hedge of long-term holds generally outweigh anything you get from short-term holds. This article looks at the various factors that go into prudent underwriting for the real estate investor, with a focus on the downtown. Hedge Against Inflation A significant portion of the richest men and women in America have made their money through real estate, and they have tended to hold real estate for a long time; sometimes never selling. Wealth is created and built up over time. If you look at long real estate holds compared to the stock market, the long-term real estate hold outstrips stocks in terms of returns, and it also outstrips inflation. It’s all about playing the long game and creating wealth through the “get-rich-slow” scheme. Other than a few years here and there during recessions, the replacement cost for real estate properties has consistently grown over the last few decades. What this means is that real estate generally tends to grow in value, despite some fluctuations over time, and the cost of replacing a building also generally always grows over time. By adopting a buy-and-hold strategy, the original cost of the building will, over time, always end up being less than the cost of replacing (rebuilding) the building. Importantly, inflation will also have a compounding effect on rents. As time goes by, rents will inevitably keep pace with replacement costs of buildings. So, if your cost basis is below replacement cost, returns will, over time, grow to be outsized compared to average returns in the market. This also serves as a hedge against competition. New buyers in the market paying today’s prices for a building have to demand today’s rents to cover their debt and pay a dividend to their shareholders. The long-term player in a market has a competitive advantage over the recent entrant because they can afford to compete on rental rates more aggressively, lowering rents while still servicing debt and paying dividends. This helps to ensure that the long-term real estate investor has lower vacancies than recent market entrants, and, importantly, has more flexibility to sustain occupancy and rental income during economic downturns. Solid Rental Contracts Counteract Recessions Having quality tenants is also a driving factor for successful real estate ownership and management. An owner with a long-term perspective can negotiate better terms with high credit clients for longer leases, because they have greater flexibility in offering competitive lease rates. Having long term leases with high credit tenants serves as a bulwark against recessionary pressures during economic downturns – helping to preserve wealth as well as to build it. Historically, Appelman has aggressively pursued high credit clients and sought longer leases particularly towards the end of the real estate cycle. A building with a lower vacancy will pay for itself and keep a building profitable even if this means sometimes undercutting local lease rates by 10-20% to keep occupancies high. This tactic for defending a building against the effects of a recession results in a building full of credit tenants with long-term leases. This strategy keeps the building solvent during downturns until things start looking better. Once market rates go back up, rates can be increased again when those long-term leases expire. Long Holds Avoid Acquisition & Disposition Fees From an investor’s point of view, long hold times are also better in terms of cost friction caused by transactional fees and associated costs. Every time a new property is purchased or sold, there are fees tacked on for the people involved; brokers on both sides, escrow, legal fees, title related fees, inspections, transfer taxes, lender fees – they add up. It is not uncommon when buying a real estate building to incur closing costs of this much is $1 million. All these fees are avoided by holding a property for longer instead of buying and flipping. As a general comment, investors need to be very wary about the cost of transaction fees. Over the last 10 years, billions of dollars of real estate investments have been sold to investors through a broker dealer network. These brokers typically charge 7% upfront to the investor. Often the syndicators that have sold these investments through the broker dealer networks have charged 2-3% acquisition fees upfront, plus extra fees related to lending and management. By the time the investor has placed their capital and seen a building acquired, their equity might only be worth 88 cents to each dollar they invested. Appelman has elected to go a different route through crowdfunding. The fees being paid to the crowdfunding platform are typically below 2% and Appelman has charged an administrative fee that is typically below one half of 1% (50 basis points). There will always be … Read more

5 Off Market Real Estate Strategies To Try Off-market real estate properties can be the perfect opportunity for commercial real estate investors on the lookout for great deals. Many investors are surprised to learn that a good number of properties change hands every month without ever being listed for sale to the general public. In this article, we’ll explain why off-market real estate can be a good deal for both sellers and buyers and the best strategies you can begin using today to find off-market property for sale What Does Off Market Mean in Real Estate? Also known as “pocket listings,” an off-market property is one that currently isn’t listed for sale – at least as far as the general public is concerned. At first glance, it might seem strange that a seller would want to keep the fact that a property is for sale a secret. But savvy sellers and buyers know that sometimes the best real estate deals to be made are the ones that can’t be found on the internet. That’s because off-market investment opportunities are marketed by word-of-mouth to a network of qualified investors, similar to the way that venture capital investing works. What Are the Advantages for Sellers? There are several good reasons why a seller would want to sell their property off the market: Off-market properties have a certain allure and can imply that the property isn’t available to just anyone. Test the waters before marketing to the general public to get feedback on property appearance, pricing, and anticipate objections. Keep tenants unaware that the property is for sale because a renter may try to use a property being sold as leverage to renegotiate better lease terms with the current owner. Negotiating with a targeted pool of qualified buyers who have a history of performing can lead to a smoother real estate transaction with a high likelihood of closing on time. How Can Buyers Win With Off Market Strategies? Buyers may find that an off-market listing offers a winning opportunity as well: Sellers of off-market listings in cities, where demand for is strong, may not be in a hurry to sell, which gives a buyer time to conduct thorough due diligence before making an offer on the property. Less competition from other investors means the seller has more time to focus on a memorandum of agreement from a qualified purchaser and work with the prospective buyer to put together a win-win deal at a good price. Off-market listings can also be ideal for high-profile buyers wishing to keep the purchase and transaction terms confidential and away from the public eye. Off-market deals sometimes occur without the help of a broker, saving on fees. What Are 5 Off Market Real Estate Strategies to Try? 1. Direct Mail Marketing Direct mail may be considered an “old school” form of marketing, but it is still one that works extremely well. Tips for buyers using direct mail to find off-market listings include: Identify the asset type, like Class A office buildings in the Central Business District or individual properties in a suburban office park. Research the characteristics of the target owner, such as in-state versus out-of-state owners or institutional versus private investors. Select specific submarket to direct mail to, using key criteria such as job and population increase, rent growth and occupancy rates, and tenant mix and nearby amenities. Direct mail letters and postcards have a longer “shelf life” than emails or telephone calls, with property owners holding on to well-designed marketing pieces until the time is right to sell. 2. Real Estate Agents Leasing agents and commercial real estate brokers are another good option for finding off-market properties for sale. After you’ve selected a submarket to target, give the real estate agent a phone call and ask if they or anyone they know has any pocket listings for sale. Framing the question this way lets the agent know you’re open to having them represent you as a buyer and encourages the agent to contact other commercial real estate brokerages on your behalf. Keep in mind that brokers in the hottest markets may get dozens of calls like this each week, so it’s important to present yourself as a serious investor who is ready, willing, and able to perform when the right opportunity comes along. 3. Networking Commercial real estate is a people business, and finding the best off-market deals is as much about what you know as who you know. In addition to commercial brokers, people to reach out to and stay in touch with for future off-market opportunities include: Office building and multi-family developers are a good source for spec and build-to-suit properties, while local property management companies have the inside track on how buildings are performing and which owners are thinking of selling. Real estate attorneys and financial planners may have clients who need to rebalance portfolios or generate additional capital from co-investors. Local investment groups. 4. Wholesalers Real estate wholesalers are professionals who scour the market looking for motivated sellers with distressed properties at a below-market price so that you don’t have to. Once the wholesaler has identified a good deal, they’ll tie the property up using a purchase agreement with a long close period. Then they’ll go looking for an investor just like you to assign the contract to in exchange for a small wholesale assignment fee. Granted, you’ll pay a little bit more for the property when the wholesaler’s fee is factored in. But a good real estate wholesaler can be worth their weight in gold, especially for remote commercial real estate investors. 5. Public Record Short sale and pre-foreclosure properties often appear on the public records of local and state government websites prior to the property being foreclosed on. Oftentimes distressed properties like these are not listed for sale, especially if the current owner has already given up. While situations like these are bad for a seller, they can offer unique and potentially lucrative opportunities for investing in commercial real … Read more

Hud Loan Programs For Apartment Syndicators: Everything You Need To Know Let’s talk about one of the top loan program providers that apartment syndicators use on their deals: Hud. Hud can be a great option for apartment deals. We’re going to cover each of their common loan programs, including their permanent, refinancing, and supplemental loans. Loan 1: 223(f) The first Hud loan, which is the permanent loan, would be the 223(f). This is very similar to agency loans, except for one major difference: processing time. Plus, the loan terms are actually a little bit longer. So for the 223(f), the loan term is going to be lesser of either 35 years or 75% of the remaining economic life. So if the property’s economic life is greater than 35 years, then your loan term is actually going to be 35 years. It’ll be fully amortized over that time period. Whatever the loan term is what the amortization rate will be. If you’re dealing with a smaller apartment community under the $1 million purchase price, then this is not going to be the loan for you. In regards to the LTVs, for the loan-to-values, they will lend up to 83.3% for a market rate property, and they will also lend up to 87% for affordable. So that’s another distinction of the housing and urban development loans, which is they are also used for affordable housing. There will be an occupancy requirement, which is normal for most of these loans. The interest rate will be fixed for this loan, and then you will have the ability to include some repair costs by using this loan program. For the 223(f) loan, you can include up to 15% of the value of the property in repair costs or $6500 per unit. If you’re not necessarily doing a minor renovation, but if you’re spending about $6500 per unit overall, then you can include those in the loan. The pros of this loan are that they have the highest LTV. You can get a loan where you don’t have to put down 20%; you can actually put down less than 20%. It also eliminates the refinance as well as the interest rate risk, because it is a fixed rate loan, and the term can be up to 35 years in length. You won’t have to worry about refinancing or the interest rate going up if something were to happen in the market. These loans are non-recourse as well as assumable, which helps with the exit strategy. There’s also no defined financial capability requirements, no geographic restrictions, and no minimum population. There’s essentially no limitation on them giving you a loan for a deal if the market doesn’t have a lot of people living in it or the income is very low. There are also some cons involved when considering a Hud loan. The processing time is much longer than some. The time for a contract to close is at a minimum of 120 days to six or nine months is actually common. Other loan providers have processing times between 60 and 90 days. Hud loans take a little bit longer to process. They also come with higher fees, mortgage insurance premiums, and annual operating statement audits. Loan 2: 221(d)(4) The next Hud loan is 221(d)(4). These are for properties that you either want to build or substantially renovate. Similar to the 223(f) loan, these loans do have very long terms. The length of the loan will be however long the construction period is, plus an additional 40 years. That is fully amortized. This isn’t the loan for smaller deals, because the minimum loan size is going to be $5 million. So if you have a deal that you want to renovate and has got a $1 million purchase price, you’re going to have to look at some other options. Similarly, this is for market-rate properties as well as affordable properties, with the same LTVs of 83.3% and 87% respectively. These loans are also assumable and non-recourse as well as fixed interest with interest-only payments during the construction period. The CapEx requirements for this loan are quite different than the 223(f). For the 223(f), it was up to 15% or up to $6500 per unit, whereas for the 221(d)(4) loan actually needs to be greater than 15% of the property value or greater than $6500 per unit. The 221(d)(4) pros and cons are pretty similar to the 223(f) pros and cons. There’s the elimination of the refinance and interest rate risk, because of that fixed rate in a term of up to 40 years. They’re also higher leveraged than your traditional sources. Those longer processing time and closing times can be a pain. There’s going to be higher fees, and you also have those annual operating audits and inspections. Loan 3: 223(a)(7) Hud also offers refinance loans as well as supplemental loans for their loan programs. Their refinance loan is called the 223(a)(7). If you’ve secured the 223(f) loan or you’ve secured a 221(d)(4) loan, you’re able to secure this refinance loan, and it has to be one of those two. You can’t go from a private bridge loan to this refinance loan– that’s not how it works. The loan term for the refinance loan is up to 12 years beyond the remaining term, but not to exceed the term. If your initial term was 40 years and you refinanced at 30 years, then this refinance loan will only be 10 years, because it can’t be greater than 40 years. It will be either the lesser of the original principal amount from your first loan, or a debt service coverage ratio of 1.11 or 100% of the eligible transaction costs. These loans are also fully amortized. The occupancy requirements are going to be the same as the existing terms for the previous loan. These are also going to be assumable and non-recourse with that fixed interest rate. Loan 4: 241(a) Hud also has a supplemental loan program … Read more

What Does Accredited Investor Mean For You? Remember back in high school when all social groups were divided into cliques? There were jocks, nerds, cheerleaders, theater kids, band geeks, and every other division of people either by interest, attitude, or even ethnic group you could imagine and it was pretty much unheard of for anyone to move from one clique to another. Geeks and drama nerds didn’t get invited to the jock/cheerleader parties (or vice versa). As adults we think we left all that drama behind, but did we really? At first glance it might seem like real estate syndications are the same way, like an exclusive party that only certain people get invited to attend. Most people haven’t heard about them because you have to qualify to be told about the opportunities. Luckily, the SEC just issued an amended definition of an accredited investor in August of 2020, expanding the pool of people who can qualify to participate in the exclusive “party” of real estate syndication investors. Most real estate syndication deals are only available to accredited investors, but some are available to sophisticated investors. Before you can get investing, you need to know which clique you’re in (sophisticated or accredited) and how to leverage your assets to gain access to the investment opportunities you deserve. In other words, you at least want a chance to be invited to the party! So, you might be wondering – Am I an accredited investor, and do the new rules help me? THE OLD DEFINITION OF AN ACCREDITED INVESTOR According to the SEC, you must qualify as an accredited investor by meeting at least one of the monetary requirements, deeming you financially stable enough to invest in private deals like real estate investment syndications. You can qualify as an accredited investor with an individual income of over $200K per year or a joint income of over $300K per year. If you don’t meet the income requirements, the net worth requirement is + $1M in assets outside of your primary residence. Remember, you don’t have to meet both requirements. If you do, great, but only one is required. If you don’t meet either of these requirements, don’t give up yet! It’s possible the amended definition of an accredited investor might include you, or you might fall into the non-accredited, sophisticated bucket of investors, which is also great news. THE NEW/EXPANDED DEFINITION OF ACCREDITED INVESTOR The August 2020 update expanded the exclusivity to extend beyond just an income or net worth requirement. Highlights of the updated definition include spousal equivalents and qualifications based on licensure, knowledge, and professional investment experience. As of the recent amendment, the joint income requirements not only qualify legally married, traditional couples but also include “spousal equivalents,” allowing non-traditional couples to pool their income and assets to meet the income or net worth requirements from the original definition. This breaks down barriers for LGBTQIA+ couples and allows all spousal equivalents to qualify as accredited investors just as any traditional partners would. Yay for inclusivity! The recent update also provides that professionals with certifications, experience, or knowledge of investment securities and the risks associated, such as those licensed with a Series 7, 65, or 82, or who are knowledgeable employees of a private fund may qualify as an accredited investor. This means that even if you don’t meet the income or net worth requirements, but you’re knowledgeable of or experienced in these types of investments, that you may have a foot in the door. The amended definition of accredited investor provides access to those who previously couldn’t qualify simply because of their lifestyle and for those who are knowledgeable and experienced with these types of investments, regardless of their income or net worth. If you are in either of these buckets, we welcome you with open arms! HOW NON-ACCREDITED INVESTORS CAN STILL PARTICIPATE It’s no secret that real estate syndication investments are exclusive, and even though you don’t quite meet the accredited criteria, you’re a high-net-worth individual determined to build wealth! So, how can you get in? You might be what’s referred to as a sophisticated investor. The SEC provides a broad definition of a sophisticated investor as someone with sufficient capital or net worth and experience to weigh the risks and merits. Industry-wide best practices classify a sophisticated investor as someone with +$100K individual income (+$200K joint) or +$350K in assets outside the primary residence in combination with sufficient experience. The key here is “sufficient experience,” which is why we want to have a conversation with you! We invite you to not only leverage your capital in a way that works as hard as possible toward building wealth, but to also leverage your relationships, namely, the one between you and Appelman Properties. Even if you meet the income or net worth requirements, we can’t share deals with you (or even mention certain deals) without establishing a relationship first. Even if the thought of talking finances on a call is something you’d rather avoid (we aren’t scary, I promise!), it’s never too early to begin a working relationship if it means you gain access to otherwise-exclusive investment opportunities. Plus, since very few deals are available to a limited number of sophisticated investors, you don’t want to miss your chance! HOW THE UPDATED ACCREDITED INVESTOR DEFINITION AFFECTS YOU The amended definition of an accredited investor expands the criteria to include non-traditional couples, experienced investors, and licensed investment professionals who, according to the original guidelines, would have been excluded before August of 2020. If that’s you, this is your invitation to the party! We’re so excited to welcome you and those you know who are newly-qualified (according to this amendment), high-net-worth individuals to the exclusive world of wealth-building real estate syndication investments. Whether you think you’re accredited, sophisticated, or unsure, the important takeaway is that we create a relationship beginning with a call in which we discuss your experience and your investing goals so that we can share deals with you and … Read more