Private Money can be the solution to your real estate investing when the bank shuts you down.
That’s exactly what happened to my guest Jay Conner after years of successful borrowing and repayment from his bank line of credit he used to fund his real estate deals.
At first he did not know what to do. How was he going to continue without the $1 million line of credit from his bank?
In just ninety days, he found $2,150,000 of private funds at his disposal, and he thanked his bank for shutting him down.
What is Private Money?
For the uninitiated, private money is synonymous with “hard money”. Hard money is typically provided through a broker for periods from six months to one year. The average interest rate is greater than 15% and requires additional loan origination fees from two to ten percent of the loan.
Private money lending connects the borrower and the lender direct. The rates tend to be more than you will get from a bank, but less than Hard Money. The length of the loan can go from two to five years, and be interest only. This allows the borrower to season the property before obtaining long term traditional financing.
Who has private money to lend?
There are two sources of private money. The first is your warm market which includes friends and family. The second is those private money lenders who are already in the business of lending their private money.
What are the benefits of using Private Money?
There are many including:
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Every real estate deal starts with a pro-forma analysis. The buyer learns quickly if the seller and his broker’s numbers support the asking price.
If you do not confirm all the numbers, you will be the fool.
Beau Beery is a Commercial Real Estate Broker with Coldwell Banker in Gainesville, FL who specializes in Multifamily. I had the opportunity to review with Beau the numbers and learn what should be present when doing an analysis.
Grab the example used on the call click here.
Beau’s experience has shown there are some primary expenses that tend to be different for the seller and the buyer.
Pro-forma Analysis Expenses
Property Taxes: Property taxes are based off of a tax value, which rarely reflects current market conditions. If the seller has owned the property for a long time, it is likely that the taxes reflected in the pro-forma will be substantially low. It is important to evaluate what the taxes will be when you buy the property.
Reserves: Smaller properties that are managed by the seller will likely either show a low number, or nothing at all. This is where you account for things like new roofs, ac units, paint and parking lots. It’s a real expense, and an easy number to omit, or minimize which will affect the actual performance of the property.
Insurance: The seller’s insurance program is likely not what you will find. The seller could have multiple properties and have access discounts not available to you. Or if the seller does not have a loan, he may elect to self insure.
It is a must to learn, know and evaluate the numbers presented by the seller to make certain your deal will be profitable for you.
For your FREE Deal Workbook to analyze your next property, click here.
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Hey property investor, have you thought about what happens when disaster strikes your property, how do you keep from a loss of rent?
If your tenants are unable to occupy your building, your rent will stop unless you protect your rent. Where will you get the money you need to pay your mortgage, pay your employees, and ongoing expenses? What about your profit?
You would be shocked to know how many landlords do not buy Loss of Rent protection, especially on C & D class assets.
If income matters, you want to insure your rents from loss in the event of a “covered loss” to your building.
Insurance is complicated, so please understand this:
1 - The Property Coverage Form, has multiple lines of coverage. If there is not a number on your declaration page next to the coverage description, with rare exception, you do not have coverage!
2 - A property insurance policy with “special form” protects your Building from all perils EXCEPT those that are excluded, such as; “Earth Movement” & “Flood”.
What do you need to protect yourself from Loss of Rent?
A - The coverage you need to insure your rents can be called a couple of things:
What is covered?
B - The property policy provides protection from loss caused by a covered peril including:
How much do you need?
C - There are multiple coverage limitation options available. You need to consider the time needed as well as the amount. If your market is experiencing significant rent increase, or a local building boom, and the damage is extensive, you may need substantially more than you expected to get back up and running.
Actual Loss Sustained is the most preferred option if your insurance company provides it. The simple reason this is preferred is because there is no dollar limit.
However, the standard length of time for Actual Loss Sustained is twelve months. This is great in a partial loss and normal building market. If you need more time, you could be screwed. Unless you are able to extend the time limit.
There are insurance companies that provide coverage time limitations of 18, 24 and even 36 months of coverage. You will need to check with your company or agent to determine the maximum amount of time available.
Other versions of coverage require that you preset a specific dollar limit. These options include additional terms you need to understand:
For your FREE worksheet to determine the amount of rent you need, CLICK HERE
For more information, or answers, please contact:
Investing in Real Estate works because of leverage. Other People’s Money is the leverage of real estate.
Whether you use a bank, investors, relatives or seller financing, you are using other people’s money. It is the leverage that allows people with little or no cash of their own to buy a property and benefit from real estate.
This is unique to real estate.
In the stock market, you buy shares of a company. Your upside and downside are limited to the gain or loss of the shares you own.
In real estate, you are able to benefit from the value of the whole property. In residential real estate, your success is determined by the surrounding properties. In commercial properties, you can force appreciation through reducing expenses and increasing rent.
The power of leverage is undeniable when compared.
Let’s say you have $10,000 to invest.
If you invest $10,000 in the stock market, and the stock goes up 17%, which is really good. Your $10,000 is now worth $11,700 and your gain is $1,170.00. That’s great!
Compare this to $10,000 invested in Real Estate.
Suppose you purchase a property for $100,000 and are able to get in for just $10,000. It happens a lot. You have $10,000 of equity and $90,000 of leverage using other people's money. According to the Case-Schiller Index, home prices rose from 1987 to 2009 an average for 3.4% per year. In this case, your $1000,000 property would now be worth $103,400.00. Your gain is $3,400.
Which would you prefer:
17 % on $10,000 = $1,170.00
3.4% on $100,000 = $3,400.00?
That's the power of leverage!
This is one of many reasons to consider investing in real estate. Currently there are tax benefits available to real estate investors. There is the real possibility that the Trump Administration may reduce some tax advantages of real estate in an effort to simplify the tax code.
Regardless of what happens with the tax code, the power of leverage remains.
Click here to get your FREE Real Estate Deal Workbook.
A Real Estate Investor must chose an investor classification from three allowable classes. Each class provides certain benefits and requirements that should be considered when determining the best tax strategy.
One of the often cited benefits for investing in real estate is the tax treatment. Investors are able to expense, interest payments, operating expenses, capital improvements and depreciation.
Depreciation is an accounting expense that is realized when filing and paying income taxes. Expenses lower the taxable income, benefiting the real estate investor taxpayer with a lower tax obligation.
Passive: This is the least beneficial. Allows the investor to take real estate losses and depreciation to the extent of the income generated from real estate.
Active: An investor who materially participates in the investments and owns at least 10% of the investment, can count upto an additional $25,000 of losses against ordinary income. Additional losses for real estate investors phase out when the adjusted gross income breaches $150,000 for a married couple filing jointly.
Professional: This is the most advantageous for tax purposes. To qualify, the real estate investor must spend the majority of their time in real estate, and a minimum of 750 hours per year. The professional classification allows the investor to expense all of their real estate expenses for the year.
The ability to count expenses against income should not be the sole reason for choosing a classification. In all three cases, unrecognized losses can be carried forward and used against future gains realized when the property is sold.
Additional considerations include whether or not to create an LLC or S Corp. The difference will determine if income is subject to self employment tax or a distribution.
In all cases, real estate investors should seek counsel of a tax professional to determine the best option to meet their goals.
For more, go to:
Patrick Camuso, CPA
Camuso CPA PLLC
Real Estate is segmented into asset classes; single family, multifamily, office, retail, warehouse, etc. One overlooked asset class with big returns is Mobile Home Parks.
Kevin Bupp is an experienced real estate investor who survived the crash, and has since devoted all of his efforts into buying and operating mobile home parks with great cash flow.
Consider the following reasons and you will see why mobile home parks make sense:
Mobile home parks are more plentiful in the rural parts of the United States. In these tertiary and rural market, people are accustomed to regularly drive thirty minutes for their work commute and shopping.
Pride of ownership can be provided to people who otherwise are unable to purchase their home.
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What is a Delaware Statutory Trust?
Download a summary Delaware Statutory Trust FREE
Real estate investors focus so much time and effort on getting into the deal. Once they have a deal, it's all about creating cash flow, net operating income, and profit at a future sale.
For the investor who has held a property for twenty years and depreciated it to near zero, a conversation with your accountant can be shocking when you realize the potential tax consequence of selling.
If this is you, the depreciation recapture and capital gains tax can leave you feeling trapped and asking yourself, “How can I keep my profits?”
Most real estate investors have heard of the 1031 Exchange. In its simplest terms, the 1031 Exchange allows you to defer paying taxes from the sale of an investment property if you abide by the 1031 Exchange requirements including:
Tenant in Common or Delaware Statutory Trust.
In order to invest with other investors, you must choose one of two structure options to preserve the 1031 exchange.
The Tenant in Common notable limitations include:
The Delaware Statutory Trust characteristics / requirements for Investors:
Typical Delaware Statutory Trust Risk Profile
DST eligible properties will controlled by the sponsor/ operator, stabilized and provide consistent income. Financing will be in place. The property will be a Class A asset that is newer, larger, and located in a major metro area.
The investors considering a DST looks more at risk avoidance and principal preservation, than appreciation.
If your goal is to preserve your principal, gain consistent income, and get into a larger, newer, stabilized asset, a Delaware Statutory Trust might be the answer.
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Call Drew: (512)827-3654
*Realized 1031 is not an Investment Adviser or CPA and does not provide investment or tax advice. Any information presented in the podcast or other materials is for illustrative purposes only. Securities offered through the Realized Marketplace are exclusively through WealthForge Securities, LLC, a registered broker/dealer and member of FINRA/SIPC (“WealthForge”). Certain members of Realized are registered representatives of WealthForge.
Investing in real estate for passive income in retirement may seem risky to investors who would rather trust their retirement funds to fund managers and mutual funds.
Bill Manassero, host of the popular Old Dawgs REI Network Podcast, found that there are at least seven reasons for seniors to invest in real estate.
Bill started investing in real estate after he turned sixty. As veteran stock market investor, the decision to invest in real estate was easy, based on the opportunity to create passive income and preserve capital.
Once he got started, he realized he could accomplish a lot more with additional units. So, he set a goal to acquire 1000 units within six years to allow him the passive income he wanted and leave a legacy for his children, grandchildren and Haitian charity.
Before making your first real estate investment, Bill recommends taking four steps:
The most important question to ask before investing:
Experience is the most valuable teacher. Look to an experienced investor who can mentor you. Any investor with multiple properties and years experience investing can provide stories and lessons they learned the hard way, so you won’t have too.
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They say hindsight is 20/20, and I have new knowledge to share that would have been good to know when doing a plumbing inspection.
Recently we purchased a 12 unit apartment building in FL. Our due diligence checked all the boxes, except for one; a thorough plumbing inspection.
When I spoke with our plumbing inspector, he provided two options;
For those who have not had a plumber scope your lines, it is comparable to a colonoscopy for your building. The plumber puts a camera through the pipes to see what’s inside.
Given my experience, as a property owner, investor and as an insurance broker, I felt confident that the waste line stack inspection was appropriate. On a couple of properties we own, we have had to replace the waste line from the structure to the street, as well as water mains due to tree roots growing into the waste lines, and growing roots pressing against the main until it broke the line.
If I knew then what I know now, I would have selected the complete plumbing inspection including the all the lateral waste lines. But then, I would not have had the opportunity to meet Ann McClellan with Roman Plumbing of Central Florida, who I highly recommend if you are in Central Florida and have an old building with older plumbing.
Old buildings have old plumbing. If you are considering buying or currently own a building that is older than thirty years, you have some potential repairs in your near future.
The easiest way to test the plumbing and see if there is a problem. Turn on all the fixtures to see how the drains handle the water. You will learn a lot. If all the water disappears down the drain, you are in great shape. If not, well, you will have to figure out what the problem is and how to fix it.
The water main supplying water to the property from the city is an underground pipe until it gets inside the building. From the building to the street, it is difficult to recognize a problem until you get your bill. If all fixtures are turned off, and you observe the water meter moving, you have a leak. Also, if the bill is abnormally high, you likely have a leak and need to replace or repair the line.
Inside the building, broken supply lines will give themselves away when they leak. Look for wetness, staining, and sounds of running water for clues for where the leak is.
The biggest danger is if no one is around when a pipe breaks. Water that runs for a long time can cause damage throughout the property.
The main stack from the roof to the street is made from some of the most durable material, cast iron. Failure in these is usually detected when the drain backs up. Standing water can cause older pipes to rust, which opens the pipe to outside elements, roots, etc.
Lateral waste lines, when under cabinets, can be easily identified. Once they go behind the wall, problems are not as easy to recognize. In a block building where corroded pipes leak, it will fester and cause unwanted odors.
Hot water heater
The average life expectancy is 7 - 10 years. If yours is older, you are on borrowed time. If you see any rust, or leaking on the ground, you will need to replace.
Faucets, dishwashers, garbage disposals, all wear out and need to be inspected regularly. Faucets need to regularly have the washers or cartridges replaced. Be sure to look for drips under the sink in the cabinets in addition to in the sink or tub.
Toilets that run continuously are probably in need of a new flapper. If you find water on the floor, or the floor around the toilet is soft, check the supply line fitting.
A wobbly toilet is a sign the bolts holding the toilet to the flange need to be tightened or replaced. When replacing any bathroom flooring, always replace the wax ring and the bolts.
For more contact:
Roman Plumbing of Central Florida
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Clean Carpet is a must for landlords looking to attract new tenants. The cost to replace carpet is significantly more than the cost to clean it if cleaning is possible.
The prospective tenant’s first look at an available unit is a lasting one. Stains, smells, and worn spots will keep a tenant from renting your unit.
For your FREE Guide for Property Owners & Manager click here
If your market has low vacancy rates, you may be able to get away with less attractive carpet. However in a market with higher vacancies where tenants have more opportunity to chose from available units, you will need attractive flooring to compete.
The average life expectancy of carpet varies from five to ten years depending on quality of carpet, traffic, care, etc It is estimated with regular cleaning that the life can be extended up to twice the average.
The manufacturers recommend that you clean the carpet once per year. Realistically, this may be more timed to tenant turnover. Some landlords and property managers offer free annual cleaning to their tenants. This can be a smart way of gaining access to the property to inspect for any needed repairs, as well while extending the life of your carpet.
Cost of Accepting Pets
Many tenants have pets, and landlords are willing to accommodate. Oils in the pet’s coat combined with the size and type of a pet, can accelerate the need to clean and cost to replace the carpet sooner. Something to consider when agreeing to allow tenants with pets.
How to Choose a Carpet Cleaner
The IICRC provides the carpet cleaners with training and ongoing education for professionals wanting to stay on top of the latest tools and techniques for cleaning carpet. This designation is a good starting point to look for when considering a carpet cleaner to hire.
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