House Hacking

Net Operating Income (NOI): Definition And Formula There are a handful of “tools” any real estate investor needs in their “tool belt”: solid knowledge of their preferred real estate market, the ability to estimate remodel costs, and a firm grasp on basic financial concepts. One of the most important calculations for real estate investors is knowing how to correctly calculate Net Operating Income (NOI). This powerful calculation enables real estate investors to make financial decisions at-a-glance. What Is Net Operating Income (NOI)? Net Operating Income, or NOI for short, is a formula those in real estate use to quickly calculate profitability of a particular investment. NOI determines the revenue and profitability of invested real estate property after subtracting necessary operating expenses. The formula works by succinctly considering all income a property makes minus all of the general expenses. For example, a property may earn money from tenant rents and a coin laundry machine. Operating expenses aren’t just maintenance fees, but also things like insurance and professional help. The power of NOI is that it takes into consideration all of the necessary income and expenditures per property into one calculation. The Net Operating Income Formula The formula for NOI is as follows: Net Operating Income = (Gross Operating Income + Other Income) – Operating Expenses Below, we’ll walk through all the numbers to include in your formula and how to calculate NOI. How To Calculate Net Operating Income It can get confusing distinguishing between “gross profit” and “net profit,” especially as we break down the formulas below. Here are two things to remember: “Gross” is what you make. “Net” is what you take home. Gross Operating Income To accurately calculate NOI, first you need to calculate your Gross Operating Income (GOI). Gross Operating Income = Potential Rental Income – Vacancy Rates It’s easy to fall into the trap of assuming that your gross income is simply what the property is worth. This is false. Gross operating income also mathematically accounts for possibilities and fluctuations in a property’s income. It sounds tricky but it actually isn’t. Here’s how to get to your true gross operating income. Potential Rental Income Potential rental income (PRI) is how much you’d make if the property was 100% leased, 100% of the time. This is the number that’s easy to stumble on because investors often think in terms of “best case scenario.” Vacancy And Credit Losses It would be great if a property was 100% leased, but this isn’t likely each year. This is why GOI factors in vacancy and credit losses against potential rental income. When evaluating a potential investment, use comparable property vacancy rates or ask the current owner for historical accounting in order to get a better idea of the vacancy percentage you should use to come up with your calculations. Other Income Remember, NOI takes into account all income, which is GOI plus any additional income a property makes. A property can make money outside of tenant rents in a variety of ways. For instance, maybe the property boasts vending machines, an additional parking lot, the aforementioned coin laundry. A property may make additional income, but not always. Operating Expenses OK, now that we have an accounting of gross income, we need to add up operating expenses: what it actually costs to own the property. Operating expenses to include in your calculations are: Property taxes Insurance Maintenance/Repair Costs Miscellaneous Fees: property management fees, accounting and attorney fees, marketing costs. What Isn’t Included In Net Operating Income? NOI does not include numbers that can be written off against future earnings and taxes. It also does not include large one-time costs such as major repairs. Seem confusing? Certain numbers are excluded from NOI calculations because they do not support the purpose of net operating income (NOI). The purpose of NOI is to give investors a look into the true cash flow of a rental property: how profitable it is (or isn’t), how much it costs to maintain the property, and the overall health of the investment. Because we’re looking at true cash flow with NOI, here is what to exclude from your NOI calculation. Debt Service You may notice one big expense is missing from the list above: mortgage payments. This is because debts are not included in a NOI calculation since the amount of debt can vary from investor to investor. One investor may be able to put 50% down, while another can only put 20%. This number would substantially influence NOI if included, but because we want to see the overall health of the property (and not the financials of a specific investor) we exclude this from our calculations. Excluding debt allows us to compare properties on the same merit: income vs. outflow. Debt Service Coverage Ratio (DSCR) is the measure of a property’s cash flow against what it needs to cover any loans. DSCR does take into account NOI, and you can get a quick accounting of DSCR by using the following formula. NOI/Total P+I each year = DSCR Income Taxes NOI is a pre-tax calculation, which means all taxes are excluded from the formula. Tax expenses also vary widely by investor, and since NOI is specific to the property, not the person, do not include it. Depreciation Depreciation isn’t an actual expense because you never “pay” for depreciation out of pocket like with a cash or check. Depreciation, rather, is an accounting concept. Depreciation only becomes “real money” when writing it off on your taxes or during the sale of a potential property. Since NOI only looks at real, annual expenses that come out of cash earned each year, depreciation is also not included in the calculation. Tenant Improvements (TI) Because tenant improvements are specific to the tenant, and not the property as a whole, this cost also gets excluded from any NOI accounting. Capital Expenditures Operating an investment property can be expensive, and yes, there will be years where more capital is required for maintenance. However, because this expense … Read more

When Hiring A Commercial Real Estate Attorney What should I Look For? It has come to our attention that many people are not entirely aware of what commercial real estate attorneys are and what their job truly is. That’s one of the common reasons why people don’t know what to look for when they need to hire one of these attorneys. Commercial real estate attorneys are lawyers who can not only help you represent your case in court and get the best possible outcome in a real estate case, but also mitigate your risks when investing in real estate. What’s more, you don’t need to be a victim of some shady practice or downright fraud when investing in real estate, as these attorneys can be helpful in many ways by mitigating your risks, when it comes to commercial real estate, from reviewing/negotiating the language on leases, to even helping to review and negotiate the terms of a commercial real estate loan. If you’re interested in getting the best possible outcome when investing in commercial real estate, it would be best to continue reading this text. Experience is always crucial. When it comes to commercial real estate attorneys and people in the field of law in general, the main thing you need to look for is experience. It’s in the nature of the profession itself that experience trumps everything else. It doesn’t matter how well-schooled or how skillful a lawyer is, if they don’t have the experience, they won’t do you much good. It’s thus essential for you to look for a combination of all of these — as long as their experience is plentiful — both professional experience as well as experience in handling cases. The second part is especially crucial if you have a claim, as it’s vital for your attorney to have experience in handling cases like yours. Their Plan Matters. We are sure that you will agree that it matters how these attorneys approach a specific case or something else that you need. You want to know how they operate as that can have a significant effect on the outcome and especially the costs. Naturally, you don’t need to ask them about every single detail – it’s more than enough to have their plan in the form of a brief outline of the steps they plan to take. Enquiring about this is also helpful as it shows you how attentive they are to details and how hard they will fight for your case. What is their cost? When you need to hire professionals, money matters. It is always the case and applies to any service, but it’s more important in the field of law, as attorneys can be costly. What’s more, they have wildly different fees as some ask for a lot while others are very cheap, yet both are equally good. That’s why it’s vital for you to compare the prices of various commercial real estate attorneys and organizations before you opt for a specific one and before signing a contract. One crucial thing to remember here is to ask the attorney about upfront costs and an expected time frame to review the matters. Try to find one that specializes specifically in what you are looking for. After all, you don’t want to pay someone to research and learn as they go, even if their hourly rate is lower. Look at what suits your needs best before deciding to hire them. Our last piece of advice is to give clear instructions to your attorney that they are there to review the legal matters only, not try and negotiate better economic terms. I see this all too often, where an attorney tries to renegotiate better terms and it ends up just costing the client more fees (in hours spent) with very little return, or in some cases, even blowing up the deal!

Rental Applications: A Guide For Landlords & Tenants Passive income investors who hope to find the best possible tenants need to understand that rental applications represent an important piece of the screening process. Expensive vacancies, coupled with the time-intensive rental application process, can trick anyone into picking out a new tenant before the time is right. However, those who take the time to go over rental lease applications will be able to identify the best possible tenant, thus protecting their bottom line. With that in mind, there isn’t a single landlord or tenant who wouldn’t benefit from a greater understanding of rental applications and their impact on future leases. What Is A Rental Application? A rental application is exactly what it sounds like: a document used to screen and vet prospective tenants on behalf of landlords. In their simplest form, rental applications represent the first action taken between renters and landlords. At their pinnacle, however, rental applications are an efficient vehicle for gathering information to determine whether or not tenants are suitable renters for respective landlords. If for nothing else, a properly drafted rental agreement should divulge how trustworthy, responsible, and financially stable a renter will be for the foreseeable future. In vetting potential tenants, rental applications will take the following into consideration: Personal Information Household Information Residential History Employment History Current Income Background Information The convergence of this information creates a profile by which landlords may base any decision to lease their property on. Why Do You Need A Rental Application? Rental applications grant landlords the ability to gauge how much of a liability potential renters may represent. While they are certainly susceptible to flaws or inherent oversights, the context provided by a well-written rental application can go a long way in helping landlords mitigate risk. Simply put, a rental application can help landlords find the tenants which are most likely to pay their rent each month on time and those who will most likely rate their property with the respect it deserves. Suffice it to say, a rental agreement is a safety measure used by landlords; one that is intended to prevent unqualified renters from leasing the subject property. What Is The Average Rental Application Fee? To be perfectly clear, rental application fees are not intended to serve landlords as a source of revenue. Instead, rental application fees serve two primary purposes: they simultaneously identify serious applicants and cover the costs associated with screening them. It is worth noting, however, that while all rental application fees serve the same purpose, prices may vary from location to location. As a general rule of thumb, higher rents tend to lead to higher rental application fees. Rental application fee variances can range anywhere from single digits to upwards of $100, or more. Again, fees will vary from state to state, and location to location. Nonetheless, the average application fee currently rests somewhere in the neighborhood of $51, according to Apartment List. How Are Rental Application Fees Collected? Fees are one of the first steps in the rental application approval process, which begs the question: How are rental application fees collected? While there isn’t a universal answer, the process for collecting fees is relatively simple and dependent on how individual renters apply. That said, hopeful tenants who apply online may be required to pay their application fees upfront with a credit or debit card. Those who apply in person, on the other hand, may have more options: credit cards, debit cards, checks and money orders are all usually accepted for initiating the lease application process. What Is The Rental Application Process? By understanding the rental application approval process, passive income investors cannot only ensure that they find a good tenant, they can also explain the process to prospective tenants in such a way that cuts down on any delays or confusion. Breaking down the rental application process will looks something like this: Collect rental applications Charge application fees Request proofs of income Process credit checks Evaluate background checks Call applicant references Schedule the lease-signing meeting Collect Rental Applications The process begins with the collection of rental applications. Make sure that applicants have provided all of the requested information, such as their social security and driver license numbers, employment information and a list of references. Charge Application Fees Assessing a rental application fee is optional, but helps to put in place an incentive system such that only serious applicants submit an application. Many landlords will require a combination of refundable and non-refundable fees, to help cover the costs of running background and credit checks. Request Proof Of Income It is also a good idea to require applicants to submit proof of income along with the application, such as a W-2 or copies of a few most recent pay stubs. Landlords can call the employer to verify that the applicant is indeed employed, but legally they may not be able to provide more information. Verifying that the potential tenant has a steady source of income is a critical aspect step in tenant screening, as it helps to ensure that the tenant will pay rent wholly and on time. Process Credit Checks Running a credit check also provides more evidence to see whether a tenant will be financially dependable or not. If the applicant has little to no credit, it is up to you whether or not you will allow for a co-signer. Evaluate Background Checks Next, you will want to receive authorization to run a background check against applicants. Property owners will provide a section on the rental application form for individuals to explain any felonies that may come up on their record. Call Applicant References Most rental applications ask for a list of previous rental properties and past landlords, and it is in the investor’s best interest to pick up the phone and call these references. The proof of income, credit check, background check and references will all help provide a holistic view of the applicant’s personality, dependability and responsibility. From here, … Read more

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