BIGGEST RISK with Anna Myers - CREPN Radio
Darrin: [00:00:08] Can you look at what you're doing or perhaps what we've talked about today and identify what you believe to be the BIGGEST RISK? [00:00:15][7.2]
Anna: [00:00:17] Well as a person who studies markets and uses other people's money to invest I think one of the biggest risks is not understanding your market well enough and not going into a market that really supports the rentals you're trying to project and the growth you're trying to project. So the market markets are going to change. The economy will change. Markets will change. We like to go in markets using Data Science where we we can show there are jobs here there are population there. That's going to give you some padding. And we like to have that padding there, because if we make any mistakes as operators of that building or if the economy changes and there is a shift in the market we've got some padding to help. Whereas if you are in a market just for cash flow. And you have no underlying strong fundamentals in the market of jobs and growth, you don't have any padding. So that's a much bigger risk that you're taking because if you make a mistake the markets can't help you out. The market can't help you with that risk. So. So that's what we really like. How we like to mitigate our risk is again by relying on the data science and underlying fundamentals of what makes a strong market. We don't report we can't force appreciation. I mean we do force appreciation but we don't rely on the market to be appreciating. We just go in strong markets. [00:00:17][0.0]
BIGGEST RISK with Larry Goins - CREPN Radio
Darrin: [00:00:08] I'm asking all my guests if they could identify what they see as their BIGGEST RISK. I'm not necessarily looking for an insurance answer but I was hoping you could share with the listeners what you see as the BIGGEST RISK to your investment operation or how you know what you what you see as the BIGGEST RISK? [00:00:26][17.7]
Larry: [00:00:27] Absolutely I'll be more than happy to and I know exactly how to answer this question. A lot of people think real estate is risky. Real estate is not risky. Being uneducated that is what's risky right. Once you get the education it takes the risk out of it. Now you also may need somebody to try to help you. Like you said you can take on that risk yourself or you can transfer that risk right or minimize that risk or transfer it. That's what insurance does. Right. But in real estate, I mean yes you've got to have property insurance. You've got to have liability insurance. You've got to have you know insurance if you're a licensed agent. But, you've also got to have education right. Education takes away the risk if you don't know how to handle something you need to either get educated or or be able to latch onto somebody that does. Like I have a lot of students, a lot of students we have a partner program. It's like a coaching and mentoring program where we help students and partner with them. And a lot of them will run into a situation and they don't know how to handle. They reach out to me. For example, just just a couple of days ago, a student messaged me and he said hey I've got this seller he's got a property. He took the property as payment for something where somebody owed him money but he did it to his son's name right. So. So how much should I offer him Bob. And I said, Well first of all you've got a problem you didn't even think you had. They deeded it to the son. The son is a minor. The son can't sign anything. So the court is going to appoint a guardian ad litem. I think that's what it's called, to to. To oversee that that transaction and make sure the seller, the son's parent, is acting in the best interest. Right. So there's all different kinds of things that you need to be aware of that you may not even know you have a problem yet. Right. So when I advised him about that I told him to talk to his cellar and find out if he knew that that was the case that he's going to have to go through that when he sells the property. [00:02:33][125.4]
Darrin: [00:02:34] So my next question is Larry that sounds like a lesson maybe you learned you learned is that hard. Did you run into that situation? [00:02:42][7.6]
Larry: [00:02:43] Oh, I ran into it years ago when I made a hard money loan in my son's name. And then the property got the property got in default and we had to we had to foreclose to get the property back and then sell it. And we had to do the same thing. We had to do the same thing to to be able to get title clear title to the property to sell it. Because even though I gave my son the money and and made the hard money loan in his name even though we did that we were acting is in his best interest. The court had to appoint an attorney to oversee that transaction to make sure we were still acting in the best interest of my son. [00:02:43][0.0]
Darrin: If I were to ask you what do you see as the BIGGEST RISK that you face for your your clients face.
Bruce: I'll tell you I the to me, the BIGGEST RISK that I face and my clients base is the fact that they could have issues and get wiped out from their assets by not being protected in a fashion that they need to be. And what I've done to mitigate and offset risk is I I'm one of those firm believers that if I'm going to promote something, be involved with it, I need to be a student of it and have it myself. So I and my wife we both have a trust. And I feel that that gives me the peace of mind when I go to sleep in the evening that I know that we have done everything that we possibly can to be insular against charging orders. And likewise we do our debt darndest when we encounter clients, or potential clients, when we're doing consulting to have them get on the same wavelength and understand how we can how we can protect them and their future as well.
Darrin: [00:00:08] I wonder if you could you could speak to what you see as one of the biggest risks you face. And if you could describe how you guys go about managing that risk. [00:00:17][9.3]
Vinney: [00:00:17] I would love to love to Darrin. I think in the apartments business especially because we are dealing with so many residents and different lives of residents and their capability of paying rents and everything. The biggest risk I find is the occupancy going down. I mean that is a huge factor. Because if the occupancy goes down buddy when 3 percent or 5 percent or 10 percent that's going to cut the cash flow quite a large amount and the bottom line. Because other fixed costs are the same. Other operation costs are but the same. You know, it's just that once the rents are lowered. Oh my gosh that hits the pocketbook. So I would say the biggest risk in apartments is the occupancy going down. Second risk I find is the delinquency. I mean we need to hit it hard right. Right. Neck into it you know and then make sure that we are finding why the residents are not paying. You know, why the delinquency is higher. We need to change that right away. We really do. Is it the criteria that we have of getting the residents to come in to a 2.5 percent of the rent is their income or three times it should be three times their income? Are we bringing any, like risk fees, it is called in our language. Risk fees where somebody is denied to come into your community but they end up paying three hundred extra money or five hundred extra money this fee to come into it you know. So those are really positive risks. The other risk I think is insurance related which is like some resident tripping and falling from the staircase. If we don't fix it properly if it's slanted or something is not. Or the walkways the trip hazards you know. Have we painted them yellow or have we grounded them to make them you know make sure. Those kind of risks are there and we try to protect them of course by you know taking care of them right away first of all. And you can only do it if somebody is looking at that asset with outside eyes. See the thing is the property manager is so overwhelmed with everything. [00:02:41][143.3]
Darrin: [00:02:42] Right. [00:02:42][0.0]
Vinney: [00:02:43] You know, and we just need to make sure that we are there to teach them and coach them and counsel them and then make decisions fast. The biggest advantage I think by us managing our own assets, is that we can act fast. We can decide quickly we can change the course quickly rather than waiting for a month meeting when the problem has gravitated the red flags small has become a big red flag now. [00:02:43][0.0]
A Cost Segregation Study is a tool available to real estate investors that accelerates depreciation which lowers the taxable income and improves cash flow in the initial years of ownership.
Yonah Weiss is life long learner. Formerly a teacher, he turned to real estate, first as a broker, then mortgage broker and investor who now uses all of his real estate experience to help investors understand the value of Cost Segregation Studies. Today, he represents the cost segregation firm, Madison Specs, which has performed over 14,000 studies throughout all 50 states.
Here, Yonah provides insight on how cost segregation can improve the cash flow of your property utilizing this IRS approved depreciation accelerator.
Simply put, a cost segregation study is a way of breaking down the property into faster depreciation lives than the normal straight line, twenty seven and a half (residential) or thirty nine years(commercial). So instead of taking a small deduction every single year, the IRS actually allows you to reclassify or segregate out the costs of everything in the property to these faster depreciation lives. Thereby, resulting in greater depreciation deductions and greater tax deductions in the early years of ownership which equal greater cash flow.
This detailed report becomes a source document for filing your taxes, and must be updated as you replace building elements.
Straight line depreciation is recognized when you pay your taxes, depending on the type of property you have invested in. The property is separated between land and building, because land does not depreciate. Then you divide your building amount by the appropriate number of years, 27.5 or 39, and take the result as a deduction from the property income.
Purchase price: $100,000
Est value of land: $20,000
Est value of building: $80,000
Annual depreciation: $80,000/27.5 = $2,909
Each year your basis in the building will lessen by $2,909.
This amount is subtracted from income to determine the income amount you owe taxes on.
In order to accelerate the depreciation of you building, you must have a cost segregation study performed by specialist, engineers & accountants. They will walk the entire property, document all the components, and classify element, light switches, carpet, toilets, faucets, nail, screw, etc. into different categories representing varying life expectancies.
The result is instead of taking 27.5 years to fully expense an item, you can do so in 5, 7 or 15 years.
Purchase price: $100,000
Est value of land: $20,000
Est value of building: $80,000
Yonah’s estimates approximately, 30% of the building value gets reclassified into shorter depreciation schedules versus straight line. Conservatively, experience suggest:
In general up to 20% of the building may qualify for the 5 year classification.
Another 10% is classified as 15 year.
Balance 70% remains in 27.5 year schedule.
Cost Segregation Study first year depreciation:
$80,000 x .20 = $16,000
$16,000/ 5 years = $3,200/ yr for 5 years
$80,000 x .10 = $8,000
$8,000/ 10 years = $800/ yr for 10 years
$80,000 x .70 = $56,000
$56,000/ 27.5years = $2,036/ yr for 27.5 years
1st year depreciation: $6,036
This represents 207% of the straight line option!
As the property value increases, so does the value of the cost segregation and increased depreciation.
The time to do a cost segregation study is as soon as you buy or build a real estate investment. This gives you the maximum potential benefit. This does not mean you are too late if you have owned the property for a number of years, as there may still be an opportunity for savings. If this is the case, you can amend your tax returns and reduce your tax liability.
Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”
BIGGEST RISK: I think more than anything in my experience and that risk is actually arrogance. OK so what I mean by that is when you are thinking that you're going about and you're making a million dollars and making 10 million dollars and it's all you you you you're right. You did it all. You know there is a certain when you start thinking like that you get into a very dangerous situation not just with yourself personally with the people around you. And everyone knows that real estate investing is really a team sport. And there are so many people that are involved. So when you think, just about yourself, and think about how you did it all by yourself and how great I am. And obviously that's important. I'm not talking about you know low self-esteem here. But real humility means that I'm willing to cooperate and willing to learn from everyone around me.
How to manage the risk: I realize that I can't do this on my own I realize that you know whatever talents I have you know are really God given gifts and I have to be grateful for that and recognize recognize that and use them. But at the same time don't think that you know I'm I'm the best thing in the world because that's the biggest risk. As soon as you start thinking that history proves itself over and over and over again, you're bound to fail and you're bound to lose whatever you have built you lose whatever friends you made et cetera. And it's just the easy way to lose friends in general. So that's what I think the biggest risk is.
For more go to :
Darrin: [00:00:07] In insurance, we do focus little on risk management and there's typically there's three strategies that are kind of the go to. One is, avoid the risk; two is, minimize the risk and three is, transfer the risk which is essentially an insurance policy that's your risk transfer method. I'm asking all of my guests now if they could share with us their biggest risk. And then if they could if you could describe how you go about managing your BIGGEST RISK. [00:00:38][30.7]
Ivan: [00:00:39] I'd love to but really quick you reminded me of something my my dad always says and and you'll love this. You know my father who's a great attorney mostly an advocate for the. The have nots in the world as a personal injury attorney but he's he's one of the good guys. Find him on a bus stop on a billboard. He would always say you can't have too much insurance and business because the incremental costs for adding more insurance is so cheap versus the risk that you're transferred. Right. [00:01:14][34.8]
Darrin: [00:01:15] Right. [00:01:15][0.0]
Ivan: [00:01:15] So you know BAM we've got a ton of insurance in every possible care that you could imagine because again it's transference of risk and you know umbrella policies for my family. So on and so forth. Going outside of the insurance spectrum, here risk is a huge part of owning a lot of income property especially at this point the cycle. And so we were constantly looking for ways to minimize risk. One of my biggest risks or perhaps the biggest risk next to just executing the deal which is why we have managed management company and house. We want to we're going to win or lose on our own account. Then I would say the next biggest risk and in some ways even larger is debt maturity risk. That's what that's what really hurt a lot of people in the in the Great Crash is that you had capital markets that were that were locked up right you couldn't roll over the debt. Or that your debt was called by the bank and you had to turn over asset that you were you were paying the debt on you're making payments every month and banker comes along says hey we did a new valuation and we'd like you to write us a check for a million dollars or put the property up for sale. So we don't want to be in that position so we avoid the banks. We primarily use Fannie and Freddie agency loans and we also use HUD. We've got several HUD deals most you will ask me if that means I manage a lot of subsidized housing. It's a common myth almost everybody thinks that that HUD actually finances A B C and D assets all over the country and HUD allows me to do is virtually eliminate downside risk and maturity risk in that I can lock in my interest rate. Thirty five years on a 35 year amortization schedule. And I can still, depending on the program and the points I pay and the interest I take I can still have a prepayment penalty burn off after five or 10 years. But if everything goes to you know what in a handbasket I don't have to do anything with my HUD debt I can continue to cash flow batten down the ship and ride out the storm. And that I think will suit us here at BAM, very well over the next 10 20 years. [00:03:40][144.3]
Darrin: [00:03:41] No I appreciate you sharing it. On the HUD, I just want, is that affordable housing, is what we're talking about or is it not. It's not. [00:03:50][8.5]
Ivan: [00:03:50] I'm I'm using HUD on market rate housing. I think what you're asking is Is it tax credit housing, is it affordable it's so. Affordable gets thrown around a lot. [00:04:01][10.9]
Darrin: [00:04:01] Right. But I mean I mean tax credit I guess what I was looking at. [00:04:04][2.7]
Ivan: [00:04:04] Right. These are not a tax credit these are not bond deals. These are we by market rate housing and we simply instead of going to a bank or Fannie or Freddie we go to HUD. We get a little bit higher leverage. A lot more brain damage in getting the HUD money. [00:04:22][18.4]
Darrin: [00:04:23] Record keeping. [00:04:24][0.3]
Ivan: [00:04:24] It in compliance. Before that I get eighty five percent loan to cost. So acquisition renovation dollars reserves big reserves. Eighty five percent loan to costs thirty five year amortization. [00:04:42][18.1]
[00:04:44] Thirty five years fixed if I want to keep it that long even though I'm doing a seven to ten year hold in most cases, or a seven to ten year recap re refile. If the proverbial shit hits the fan I can just sit there. Cash flow of HUD. [00:04:59][15.3]
Darrin: [00:05:00] Is the HUD. Product is available all through multifamily. I mean is there a unity any asset or. [00:05:09][8.4]
Ivan: [00:05:10] A b c d e f assets you can transfer time. [00:05:15][5.3]
Darrin: [00:05:16] That's let's say I always hear the Fannie and Freddie references. [00:05:20][3.5]
Ivan: [00:05:21] The older, smaller, it gets is harder. Well so I'm very lucky I've got one of the biggest HUD shops in the US. Based here in Indianapolis and I'm really good friends of that shop and we do it twenty five years. They've got a big bank in the on the other side of the org chart. So they bridge me to HUD. They underwrite me to HUD up front just like your mortgage broker on your house would underwrite you to Fannie upfront and then they hold the loan until we until we close the HUD funds. And it's a great program. It works really well and it takes a huge. Amount of risk. Right off the table which is a young dumb developer learned the hard way. It's a very good thing. [00:06:07][46.3]
Darrin: [00:06:08] Downside a minimal downside. No, that's awesome. [00:06:10][1.9]
Ivan: [00:06:10] Warren Buffet said it first, right. Don't lose money. That's the first rule. Second rule remember rule number one. Then let's figure out how to get some yield. [00:06:18][8.7]
Darrin: [00:06:20] I love it. I really appreciate you sharing. That's one of the. I love asking that question and seeing when I'm when I'm getting back and the answer is have been just very fruitful. So I appreciate that. [00:06:20][0.0]
Darrin: [00:00:07] What do you see is the biggest risk that you face or that investors face. [00:00:13][5.3]
Neal: [00:00:14] OK I'm going to take that as a real estate question not necessarily as a you know overall macro question that would be another show. It's an. So firstly it's not interest rates. Read what our new Fed chairman is talking about. Read what all of the different governments governors are talking about. At this point, The Fed has turned very dovish. They think we're close to equilibrium. And recently they've started talking about also slowing down quantitative tightening which is the withdrawal of those four point three trillion dollars that they've dumped into the market after the Great Recession. So I don't think at this point interest rates are a risk or significant risks by rate caps. Keep doing what you're doing. I think I don't think that the next recession is a massive risk because I think it's a recession. Understand that either 2020 or 2021 is a recession year. You're probably not going to provide cash flow to your investors. You're probably going to suffer. You should have some operational money in your in your bank and be very careful. I would urge you that if you start seeing the economy turning. Stop giving money to your investors stop giving them cash flow and add money to your operating budget. That's all really that you have to do because it's not possible from a financial perspective for the next one to be the big one. I still think there's a big crash coming but I don't think we're there yet. I think that what we are what what is about to happen in the next recession is a normal vanilla U.S. recession two to four quarters. You get some pain. You see some decrease in occupancy, your profits dropped for a year and then life goes on beyond that point. Right. I'd much rather be in multi-family at that point than being let's say hotels which get hit a lot harder in those kinds of vanilla recessions. So I don't think that those two interest rate and the next recession are two things to worry about. The biggest thing that I'm seeing to worry about in the marketplace is one that I've never heard anybody talk about as a systemic risk. Right. So what happened in 2006 systemic risk was created by lending to people that shouldn't have loans. Correct. And I led not just to a U.S. real estate crash but a worldwide financial crash. We are now creating new systemic risk through something known as Opportunity Zones. Opportunity Zones are where part of the new Trump law trump bill the new tax reform bill. Where hundreds of billions of dollars of stock market profits are being pumped into real estate. Into distressed no growth or low growth areas around the United States, just in the name of tax benefits. What we're doing there is incredibly dangerous. We are basically here's what we're doing. You and I have been talking about how difficult the market is right now for new construction. Right now we're compounding it by saying not only am I going to do new construction instead of doing it in downtown San Jose or downtown San Francisco I'm going to go to this distressed area where there's all these low end tenants that don't have much money and I'm going to build classic buildings. And by the way instead of building a few million or tens of millions of dollars worth I'm going to build one hundred billion dollars worth every year for the next five years. That is a system crash waiting to happen. You cannot build this kind of inventory into distressed areas. In simply 2020 2021 and 2022 and not expect to have a crash related to that. I haven't heard anybody talk about this but I think to me it's obvious that the vast majority of opportunities on projects will fail. [00:00:14][0.0]
Darrin: [00:00:09] What do you see as the biggest risk that people face. [00:00:12][3.1]
Ross: [00:00:14] Well first of all there are many risks. But if I had to boil it down; look if something has gone wrong let's say it that way because not everything goes 100 percent the way you want it to. This is, there's no guarantees in investing in real estate but it almost always comes back to people. We touched on property management earlier that's certainly a key part of it. So, I would feel like if you want to avoid that risk you've you've got to be involved with a group. A Tribe as I call it, because there's protection in a tribe. Let's, let's say that somebody brings an opportunity to that group and not any malfeasance. But it just turns out the day they're in over their head. They don't know what they're doing and they lose somebodies money. How many times you think you're going to come to that tribe again with something and it's going to work? Never that they're done. Okay. So there's a little bit of protection there. I would also suggest that don't start with anything that's too big. I like the idea that we start with single family homes. Although I'm not doing that anymore because it's not fatal. If you have a single family home that doesn't go well for most investors an ideal mostly with accredited investors so I know I'm dealing a little different pool of people nest maybe. But, that's not going to hurt them that much. And they're still going to learn a lot from that. So I would say don't jump in too deep into the pool and I would say make sure you're playing with the right people. That that those are keys for me. But there's other things. But those are pretty pretty big takeaways for me. [00:00:14][0.0]
Darrin: [00:00:08] Can you. Can you speak to what will you see as the BIGGEST RISK investors face. [00:00:12][4.0]
Matt: [00:00:13] Absolutely I would say a big one is especially for a lot of newer investors and they just get this deal fever. They finally won the negotiations. They had the property under contract and you know not doing under full due diligence i s one. You know things with the cast down drain lines. A lot of sellers they'll say oh it's the cast iron has been replaced. Usually it's only been replaced from the building to the road. They're still cast iron on the slab. So they might skip a camera inspection you know to save a few bucks. You know I think that can cause a risk for them. And then another one I would say would be like in this climate that we're in. You know not stress testing the properties. You know I would stress test the rent. Like a lease 10 percent from what they are now in case you know we do get a pullback. So I would say not doing their full due diligence inspection wise and then underwriting, not stress testing and the rents. [00:00:13][0.0]
Q: Is there an area of risk or uncertainty, not necessarily with an insurance answer, but is there anything that you you feel is a risk that you are constantly aware of that you're that you work, to deal with?
A: I would say, the risk in the syndication world is the SEC.
SEC rules and regulations require that you have a transparent operation. That is the key. Making sure that we do the legal paperwork right. We have the investors; accredited, non-accredited or sophisticated investors to fill out the paper correctly.
The other thing is to have pre-existing relationship, that's huge! A lot of people are advertising without keeping in mind what can it do if, people looked into their operation. So I would say it's better to really be on a cautious side and make sure that when you're doing 506B that you have pre-existing relationships with the investors and making sure that they are not spending every dime they own into your investment because there are a lot of restrictions in that. A lot of people somehow, you know oversee that.
The other thing I would like to say is that you want to have the interest of the investors money foremost. Even if I lose my portion and we have done it by the way in and some properties if the quarter did not go well, we wipe out our management fee or we don't take our portion of the cash flow.
We want to give the investors their portion. So those things are very very important.
The risks can also be that I'm on the loan on non-recourse and recourse debt. But the investors are never on the loan. So in a syndication, the most an investor can lose in an LLC is their investment in that one LLC. I don't believe in series LLC. I don't believe in land contracts. I only like limited liability corporations. So that one property does not. Hurt the other property.