Qualified Opportunity Zones, a late add to the 2017 Tax Code, are designed to stimulate neighborhoods in need of investment.
Kathy Fettke, author, investor, syndicator and host of RealWealth Show Podcast shares her views on the new tax law. For investors with capital gains who are looking for a way to lessen their tax liability, this just might be the answer to your prayer.
Markets cycles are affected by supply, demand, interest rates, etc. When needed, the tax code is a proven tool the government can use to stimulate growth and change the behavior of investors. Opportunity Zones are the newest iteration for investors looking to lessen their taxes and get a better than average return on their investment.
Do you have an unrealized capital gain? Unlike 1031 Exchange, the Qualified Opportunity Zone is not exclusive to real estate investors. All investors, who have taxable gains from the sale of stocks, bonds, business, real estate, etc are eligible. You have up to 180 days from the sale that caused the gain to invest in an opportunity zone fund.
The opportunity zones are in neighborhoods needing a jumpstart. New investment will likely not be a cash flow opportunity. Instead, over time, the expectation would be for significant appreciation. It takes time to improve a neighborhood. The goal is to find a neighborhood with momentum that will attract other investors. If you find this, and you can be patient, the reward will be worth it.
Disclaimer: The information presented is is for discussion purposes only.
The QOZ details are developing. It is up to YOU to engage a tax professional for advice on how to proceed and benefit.
There are over 8,000 qualified Opportunity Zones in the US. States had 90 days from the date of the act to apply to the US Treasury for zone status. To find one near you do an internet search, “opportunity zone map”, or click: ttps://www.cdfifund.gov/Pages/Opportunity-Zones.aspx
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Multifamily Syndication Structure and Fees provide a significant opportunity to make money. Who better to ask about the numbers than the sponsor of twenty-six syndications, Vinney Chopra.
To buy a large multifamily property, it takes the coordination of several like minded investors. The General Partner, finds the deal, builds the team, and gets the commitment from the limited partner investors to close the deal.
The owner of the property is the LLC entity created specifically for this property at closing. Members of this entity are the General Partner, sponsor, and the Limited Partners, investors. The range of ownership depends on the specific deal, but a split range of 20-40% for the General Partner and 80-60% for the Limited Partners is common. The specific opportunities are spelled out in the private placement memorandum. The opportunities to make money are numerous for the Limited Partners including:
So what’s the reward for the General Partner? Below are the various ways to get paid as the sponsor of a syndication.
The acquisition fee ranges from 2 to 4% of the purchase price. It is the sponsor’s reward for putting the deal together and raising the funds needed to close. A good rule of thumb for the capital raise is 30-35% of the purchase price. The money raised will cover;
In order to borrow the funds needed to close the deal, the lender one investor guarantee the loan. This individual must have a personal net worth greater than the loan amount. The fee for this obligation ranges from a flat fee to a percentage of the General Partnership.
Throughout the course of holding the property, the asset manager is responsible for overseeing the property manager and any repositioning of the asset if a value add plan is to be executed. A sponsor will also prepare and provide regular reports to investors on the property’s performance. The Asset Management fee is typically 1-2% of annual collected income.
If you have enough units, consider creating a property management firm. This is an excellent opportunity to serve your investors and collect a fee. Fees range from 4-10% of the total income collected depending on the size of the property. When you are the property manager, you can negotiate better deals with your suppliers for the benefit of your investors.
While operating the property, if the market supports, there may be the opportunity to refinance and return some equity to the investors. The proceeds of the refinance are paid to the investors to return their investment capital. When you can return the investors original capital and continue to pay them a quarterly distribution makes investors happy. The sponsor can charge a refinance fee, 1%, for doing the work necessary to complete the refinance.
When it’s time to sell the property, sponsor will charge 1 - 2% of the sale price. The fee is for the work required to prepare the property for sale. This includes: conduct property tours, gather the broker price opinions from four different brokers, and meet with CRE Brokers.
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Prior CREPN Radio Multifamily Syndication episodes with Vinney Chopra
Real Estate Investing has benefits that are not always recognized by investors.
Tyson Cross is a former Teacher turned Commercial Real Estate Broker and investor based in Portland, OR. His journey from educator to investor is a common progression for investors; awareness to action.
Do you understand the fundamentals of the stock market? You know you need to invest, but where? How? If you have a W2 job with an employer sponsored 401K, that may be all you do. In this options, the only control you have is the amount you put into your account and which investment fund you select. Your employer contribution and the market performance are out of your control.
Outside of your 401K, you can choose any traded stock on the exchange. What do you know about any of the companies on the stock exchange?
Now, think about real estate. It’s everywhere; big cities to rural towns. In every city, people need a home, and over time, what happens? Rent and the cost of housing go up. If you understand this, you understand the upward trend line for real estate market fundamentals. Your understanding of this makes the benefits of investing in real estate tangible.
Your 401K is essentially a savings account. Every payday, you buy shares, which over time adds up to a substantial sum. What’s not so well understood is that when you are ready to take your money out of your 401K, you have to sell shares. When you sell them, they’re gone! The remaining shares have to increase in value for you to stay even. This is out of your control.
Real Estate is not as liquid as stock. However if you keep your property for several years, you can borrow against the equity. The proceeds from the loan can be used to invest in additional properties, or taken as cash. Neither use is a taxable event.
Don’t forget the cash. Investment real estate valuation can include positive cash flow from day one.
The increase in value difference between a percent of a small number, your 401k or a big number, a leveraged asset, like real estate.
Example: If you have $100,000 saved in your 401K and the market goes up 8%, you made $8,000. Not bad.
If you purchased a property worth $500,000 using your $100,000 as a down payment, and the value goes up 5%, you made $25,000, which is more like 25% return against your $100,000 investment.
The difference between the $8,000 and the $25,000 is $17,000! This is the power of leverage.
The percentage increase or decrease in value is directly proportional to the amount you have saved. With leverage, you benefit from a large number increasing by gives you the benefit of a big asset increasing in value
Real estate provides the opportunity to control an expensive asset with help from leverage, a loan. You collect rent from the residents and pay off the loan over time. Now let’s look at the benefits unique to Real Estate.
There are no guarantees in life. But, for those who take action, real estate investing is a proven path for wealth accumulation If you know why you are investing, get educated, get your mindset right, focus, and take action, and you will overcome the risk and be successful.
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Insurance is required to close any Multifamily Real Estate deal with lender financing. Recently, Rod Khleif invited me on his podcast, Lifetime Cashflow Through Real Estate to discuss insurance for Multifamily.
Rod Khleif is a veteran real estate investor syndicator, real estate mentor, and podcaster based in Sarasota, FL. We discussed steps multifamily investors can take to be successful in procuring insurance for your property.
Insurance for Multifamily is very specific. To make certain you are working with a broker / agent that can help you, here are some questions to ask:
If you are purchasing a property that is more than twenty-five years old, you have to ask some questions not required for newer properties. There are 4 Building Systems that every Insuance Underwriter wants to know about on older buildings. If you want the most affordable insurance, find the answers to the age and details of work done to these systems:
Sometimes, you can determine from the seller’s financials dates and significant amounts spent on system updates. During the due diligence period, review the financials and ask quesitons.
For Liability you want to walk the property looking for trip and fall hazards. Are the hand railings firmly attached, stairs in good shape, any uneven walking surfaces, or cracks in the concrete? All of these are potential claims that the insurance company is looking to avoid. If the insurance company’s inspection finds that your property has these, you will receive a cancellation notice, or inspection report requesting that these need to be repaired for the carrier to continue providing coverage.
For your best pricing, start talking with your Insurance Broker early. The older, more value add opportunity you are buying, the more information will be required, including Seller Loss History, to tell a story the Underwriter wants to hear.
Insurance is complicated. There are lots exclusions and endorsements that if you or your insurance broker do not ask for can leave you with big coverage challenges in a claim. The following are a few specific items to ask for:
Cash flow must be the goal if you intend to replace your salary, so that you can quit your W2 job.
I’ve experienced first hand and conferred with other investors multiple ways you can screw it up. The following are some ways to keep the cash coming.
My friends Jake & Gino from Wheelbarrow Profits stress, “Buy Right”! This is the critical first step. If you don’t buy right, it can take years to recover, and keep you from reaching your goal. To make certain you are buying right, you have to know ALL of your numbers. Use something like my Deal Workbook to account for your expenses.
I remember the first couple of single family rentals I purchased. Needless to say, I left some expenses out, because I only accounted for the mortgage, taxes & insurance. What could go wrong when the a repair was needed, the tenant was late, or the unit was vacant. That’s right, if you don’t budget for these expenses you will pay. So, know your numbers and BUY RIGHT.
Operations includes the day to day operating of the property. Taking applications, rent collection, maintenance, etc. When you have a property manager in place, it’s your job as an asset manager to ask questions and follow up to make sure things are as they should be.
This includes providing regular reports; income & expenses, applications, turns, maintenance, etc. An empty unit is a lost income opportunity and a cost to you. If a property manager is not proactive and waits until after the unit is vacant to coordinate with the needed contractors, your vacancy loss will inflated.
A professional property manager will minimize the down time by communicating and actively marketing the unit as soon as it is known there will be a vacancy. It’s been said, “inspect what you expect”, otherwise you will be disappointed, and end up with less than you could of.
Capital expenses are related to replacing systems; roof, HVAC, plumbing, electrical, parking lot, kitchen & bath remodel, etc. They last for years, and should be budgeted for. If you do not budget for them, they can mess up your projected returns.
For the most success, make certain to include your capital improvements in your startup funding budget. This allows you to improve the property right away and increase the rents for the improved property. Paying for capital improvements out of cash flow will take significantly longer to reposition the property and will drain any potential investor returns. Been there!
An experienced investor will not only budget for these, but also account for them as capital expenses, outside of the operating budget for maintenance. When you include capital expenses as maintenance they will lower your NOI and your property’s value. Don’t do it!
You don’t expect a disaster, but it is always a possibility. Your ability to collect rent could suddenly stop if your property is damaged. The risk can mostly be transferred to an insurance company, through the purchase of a policy that provides Business Income coverage. Be careful, not all policies include Business Income nor cover all perils, causes of damage.
Fire, Hail, and Frozen pipes, are some of the common perils typically covered by a property policy. Windstorm including tornadoes & hurricanes can be an extra charge depending on where your property is located.
If your property is located in a Flood Zone, your lender will require Flood coverage be in place prior to closing. However, this does not mean that if your property is not located in a flood zone that it cannot suffer a Flood loss.
Earthquake and Landslide are rarely required by a lender, but regularly purchased by investors whose primary source of income comes from their real estate. if your property is located in an active fault seismic zone.
To learn more about protecting your cash flowing property from disaster, email J. Darrin Gross
The Letter of Intent and the Purchase Sale Agreement are significant steps towards closing your multifamily purchase.
When you find a multifamily property, you run the numbers. If the numbers show promise, it’s time to engage the seller to see if you can put the deal together. The initial non binding offer used by buyers is a Letter of Intent. If you and the Seller find agreement in principle, you will formalize the offer with a Purchase Sale Agreement.
The Letter of Intent is a non binding presentation to the seller that spells out the framework of your offer, your intent to purchase the Seller’s apartment building. This should be addressed to the selling broker, not the Seller. To see a sample Cover Letter & LOI used by Vinney, click here.
The Cover letter should summarize your intentions. It should also include any relevant experience you or your team has closing on Multifamily Properties, to give the buyer confidence you will close if they accept your offer.
The Letter of Intent is not binding, so it does not require legal review, but should contain::
Because you will be offering less than selling price offered, it is to be expected that the Seller will either reject or counter your initial Letter of Intent. After some back and forth, if you are able to reach agreement in principle with the Seller, you need to put the property under contract. This is accomplished using a Purchase Sale Agreement.
The Purchase Sale Agreement is a legal, binding agreement. The PSA includes all of the items in the LOI and spells out all the legal performance requirements for both you and the Seller. Each property is unique and requires that you have your attorney prepare and review to protect you.
Vinney advises that you communicate early and often with the Seller during the Due Diligence period to avoid any surprises. He suggest that your compose a Repair Letter as soon as you know the condition and any additional capital expenses that you were not aware of prior to your offer.
Similar communication regarding the financing should be made to keep the Seller in the loop. When you do this, the Seller is more likely to credit you additional funds to fix the problem, or accommodate the time needed to obtain financing to keep the sale on track to close.
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Prior CREPN Radio Multifamily Syndication episodes with Vinney Chopra
Environmental Risk assessment needs to be part of your real estate investing due diligence.
Mike O’Connor is the Pincipal at Assessment Associates, Inc, an environmental consulting firm that specializes in working with real estate transactions.
The reasons to test range from: “it’s a good idea” to “lender requirement’. If you don’t need to borrow money, and you elect to forgo the assessment, you could end up with the liability and cost associated with any cleanup. However, if you are borrowing more than $1M, the lender will require a Phase I Environmental Assessment for a clean bill of health, guaranteed.
The primary risk comes from leaky underground storage tanks, but you would be wrong to think that you don’t need to be concerned unless you are buying a gas station.
Why your ask? Do your know what's going on on at the neighbors property? Is there a leaky underground heating oil tank? Each of these can create plenty of problems for you.
To learn how to DIY the initial Environmental Assessment
and know what to look for, get your
A Phase I Environmental Assessment consists of a visual inspection at the property and a review of all available public records. The consultant will visit the site, interview the seller, neighbors, etc to assess the historical use and potential for an environmental problem. If evidence suggest a potential problem may exist, the Phase I recommendation will call for a Phase II Environmental Assessment.
A Phase II Environmental Assessment involves sampling the soil beneath the surface. It can start with a Geophysical survey to identify inconsistencies below the surface. The results will identify where further looking should occur.
Then actual soli samples are puled to test the soil for toxins. This is accomplished by using a well drilling like rig that pulls cylinders of soil to the surface for visual inspection. The samples that look suspicious will be sent to a lab for testing. If results are positive, the site will need to be cleaned before going forward with the transaction.
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Conquer your fears so you can leave your W2 job and have success investing in Real Estate.
The investors journey is full of hurdles, road blocks, growth opportunities, and setbacks.
Dan Handford with Handford Capital is a serial entrepreneur. He has faced the fear, made a plan and acted with relentless intention and achieved. When he sets a goal, he runs forward full throttle with relentless intention towards accomplishing his goal. All the while he keeps his eyes open for the next opportunity.
Because, when you reach a goal, you’re not done. Instead, you have to take the next step In order to continue your growth. Sometimes you have to take a few steps backwards before you can go forward.
Fear can be paralyzing. If your goal is to escape what you know, the W2 job that provides for your family to become a full time Real Estate Investor, what’s holding you back?
For most of us, it’s the fear of change.
To reach your destination, you have to be willing to leave your driveway and accept that you will make mistakes. So get comfortable with that.
You don't have to act with blind faith. But sometimes, you have to let go and trust what you have learned, and do the work.
Here are Dan’s action steps to get through the fear of moving forward.
Remember, if you don’t try, you are guaranteed you will not fail but you will also never have the success you wanted.
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Podcast: Tough Decisions for Entrepreneurs
Passive Income generated from assets is the key to building real wealth.
AJ Osborne is an insurance agent turned real estate investor who traded the lack of security provided by a job to create generational wealth through real estate.
Naturally competitive, he was a successful benefits insurance broker. He ate what he killed. If he wanted to make more, he sold more. Ultimately, he realized that he was limited by time, and he knew that at any time, his clients could leave. This left him feeling less than secure.
In the 2008 economic downturn, he recognized the difference between being rich vs being wealthy. Those who he thought were rich, lost the most. The survivors, owned assets that produced income regardless of the economy. Their income did not depend on their time. He recognized their freedom as true wealth. And, most investors passive income was generated through real estate.
AJ studied the real estate market and recognized the value add opportunity in self storage. The market was fragmented, full of amateur operators that left plenty of room for improvement.
He recognized that the industry has not customer service oriented. There were additional products and services that customers were willing to pay for, but were not offered.
He focused on finding poorly run self storage businesses, in underserved markets. opportunities, initiating systems, and producing predictable outcomes.
Today, he and his father run a portfolio of self storage properties throughout the west. They have a system.
After each refinance, he was able to pull his initial investment capital out of the deal which gave him the needed capital for the next deal.
Until you test a system, you don’t know if it really works. For AJ, the passive income from self storage was tested when he was stricken with Guillain Barre Syndrome. For months he laid paralyzed in a hospital bed, in pain and unable to move beyond blinking his eyes. There was no way he could go to work to sell insurance.
Fortunately, his self storage business generated income regardless if he was sick. Not only did his income continue while he was ill, but real estate value grew.
If not for his self storage business, he and his family could have lost everything. The passive income and wealth created from his real estate proved to be more secure than a job that could disappear.
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Multifamily Underwriting has three key aspects for consideration to determine if you have a true investment opportunity. They are Market, Financials and Physical Property.
When looking for a Market it is important to look for an emerging market. An emerging market is one that has jobs, jobs, jobs. Population of the city is not as critical as the number of jobs and its distance to a major market, however you will want to set some minimum population criteria.
You are looking for growth. Talk with the locals to determine the true prospects for new jobs. Call the local brokers, property managers and the chamber of commerce and to to the building permit office to find out the path of progress and where the population is moving.
While underwriting the market, get to know the real estate professionals that you will need on your team. These are the boots on the ground that will be able to provide you with potential properties. Vinney has found that you will be more successful if you specify exactly what you are looking for, class of property, neighborhood, number of units, etc.
Once the brokers know your criteria, they will bring you deals.
There are two aspects to your initial multifamily underwriting. You want to start with the financials. How is the property performing financially? At the same time, you can do an initial property inspection using online searches or with the help of your broker.
Vinney recommends that you never fall in love with the property. Only fall in love with the numbers.
What to look for in the numbers. Start with the rent roll, and expenses. You are looking to identify areas where you can save money, or those that will be different than the sellers. Vinney recommends you use his Deal Analyzer. You can list the sellers numbers, and the numbers you find that will reflect our operating cost side by side. This will more clearly identify if the property is a real investment opportunity.
One key metric is Cash on Cash ratio. This provides a simple measure of the net return on the cash required to close the deal. Vinney looks for 10.5% as a minimum for the multifamily properties he acquires.
If the initial numbers look good and you pursue the property, you will need to do a more thorough analysis to confirm the sellers numbers including bank statements, utility statements, leases, trailing twelves, etc.
The physical property has two aspects you are looking for during your physical inspection; value add opportunities and capital improvements that are needed.
The best investment opportunity will be one that you can add value to. This could be updating the kitchen and baths, painting the exterior, adding storage space, dog parks, etc. These improvements that residents are willing to pay more. This translates to a higher Net Operating Income and higher property value.
The condition of the physical property cannot be underestimated. During the physical inspection, you are looking for the physical condition of the property; roof, plumbing, electrical, heating & cooling systems, paint, parking lots, landscaping, etc. Make notes when you find needed repairs.
Vinney has had greater success by communicating immediately with the seller’s broker about any needed repairs rather than waiting. By communicating right away, the seller is not caught off guard at closing.
When you determine the repair cost, Vinney has been successful by requesting a seller credit at closing rather than a sale price reduction. The benefit of a credit is that you have the funds needed to make the capital improvements needed instead of paying for out of cash flow.
To develop your multifamily underwriting skills, get in the habit of analyzing deals. This practice will sharpen your ability to recognize when a true investment opportunity comes your way.
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