Warren Buffett, the CEO of Berkshire Hathaway, made his considerable fortune investing in the stock market. Last year Fortune magazine ranked him as the third wealthiest person on the planet with a net worth approaching $80 billion. But unknown to most people are Mr. Buffett’s two small real estate investments that he made long ago that have amply rewarded him for his willingness to invest outside his area of expertise.
And far more important than their profitability were the five common sense principles he learned from his real estate investments. And before I get into what those were let me give you a brief explanation of his real estate investments.
REAL ESTATE INVESTMENT #1
In 1986, he purchased a 400-acre farm located outside of Omaha, Nebraska. He purchased the farm from the Federal Deposit Insurance Corporation (FDIC) who had inherited it from a bank that failed. Mr. Buffett admits that he knows nothing about farming but he has a son who loves to farm so he turned the day-to-day operations over to him.
Although Mr. Buffett admits his lack of farming acumen he could easily recognize that purchasing the farm was a good investment decision. As he said, “I needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had substantial upside.” Three decades later, the farm has tripled its earnings and is now worth five times what he paid for it.
REAL ESTATE INVESTMENT #2
In 1993, he purchased a retail property located adjacent to New York University that the Resolution Trust Corporation (RTC) was selling. A real estate bubble had popped and the RTC had been created to dispose of assets of failed savings institutions. His investment analysis was very rudimentary. The property had been poorly managed by the previous owner and then by the RTC. The vacancy at the property was well above the market’s vacancy rate for no apparent reason. The largest tenant’s rent was $5.00 per square foot compared to all the other tenants’ rent averaging $70.00 per square foot. He realized that when the current lease term expired for this tenant that the new rent on this space would improve the property’s cash flow dramatically.
And like the time he purchased the farm, he realized that he needed to turn the management of the property over to an experienced property manager, which he did. Over a relatively short period of time, the new property manager was able to lease the vacant space and to raise to market the rent on building’s largest tenant. As a result, the property’s net cash flow tripled and annual distributions currently exceed 35 percent of his original investment.
So those are Mr. Buffett’s two attempts at real estate investing. Both were highly successful. But as good as his results were the principles he learned were priceless.
LESSONS WARREN BUFFETT LEARNED FROM INVESTING IN REAL ESTATE
So what did Mr. Buffett learn from his two real estate investments? He learned five things that we as real estate investors should try to emulate.
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Violent crime is a sad reality in America. If you watch the news, you know it happens daily at work, nightclubs, homes and church.
Regardless of the cause, guns, mental health, drugs, domestic or other, it can happen anytime, anywhere. Denial of this will not prevent if from happening, but rather make you a potential victim.
Real Estate investors nature is to look for an opportunity to make money. They may consider rough properties in crime ridden neighborhoods and may not realize the potential danger to violent crime they or their representatives might encounter.
James Holman with 540 Tactical works with property owners and professionals to provide training on what they can do to keep themself and their tenants safe.
Violent crime prevention is key to making your property an unattractive option to crime. The following are some basic proven steps that will encourage criminals to look elsewhere when plotting a crime:
Awareness is the best tool available to avoid violent crime, and you can take with you everywhere. In a survey of over 1000 criminals, the number one thing they look for is an unaware person. If a criminal thinks you are aware of what is going on, they will move on to another potential victim.
Be intentionally aware of your surroundings. Put down your phone, take out your earphones and be aware of your surroundings. 540 Tactical gets it name from 540 degrees of awareness: in front, to the sides, behind and above you is what James recommends. This simple habit can keep you from being a victim of a crime.
Don’t wait until something happens to you, have a conversation and train your staff to keep everyone safe.
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Social Media is where prospects go to find you and learn more about you and your offer. In fact they are more likely to form an opinion about you based on your Social Media presence or lack of than your first face to face interaction.
Mark Leidlen and Rob Wellman work with real estate investors and professionals to establish a social media presence. This marketing strategy helps create credibility and builds trust through regular informative posts to keep your network informed.
It took radio 38 yrs, television 13 years, internet 4 years to reach 50 million users. Social media behemoth Facebook took only 9 months to get 100 million users. People go online to shop and share with their friends what they are doing. And with each click, they leave a digital breadcrumb clue for advertisers and others to recognize their likes and interest. These breadcrumbs allow people like you to put a very focused message in front of your ideal client for pennies.
Whether you are a Broker, Leder, Property Manager or Investor, your prospective clients are interacting on social media and looking online for who to call when they need help. So where are you?
There is a plethora of options to choose from when choosing a social media platform to engage. The most important for commercial real estate professionals are:
And don’t forget to create and maintain a blog and an active email campaign.
The good news is that you can repurpose your material across the different platforms. However, you still have to create new material to remain relevant. Unless you are a gifted writer and have lots of free time to accomplish this, your options are don’t create a presence, or hire help.
Social Cuda has professional writers that work with its clients to tailor a content strategy to reach your intended audience. They can create post with written text, pictures, video, or drone footage content that can help grow your presence and capture email along the way to build your email list. The cost to create and maintain your professional presence is minimal when you consider the alternatives.
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Text: Cuda5 to 88588 to receive Mark’s business card.
Financial Freedom is a common goal of real estate investors. Most start with a single family property, thinking that over time, they will grow their portfolio to provide enough income to give them freedom from working for others.
Michael Blank is an engineer turned real estate investor. His experience from single flips and analysis on what it would take to reach his goal led him to the advantages of multifamily investing.
Most new investors feel they are unable to pursue multifamily as a real estate investment strategy due to their lack of experience and lack of money.
You need money to acquire a large real estate investment. The good news is there are lots of people with money to invest who are looking for opportunities to invest. High networth individuals are not finding a consistent return on their money and they are paying too much taxes.
Real estate can help these investors looking for opportunities. For this reason, it is important that you are not shy about what you are doing. Let others know that you are doing multifamily investing. Depending on how well you know them, ask if they might be interested in learning more about your opportunity.
If you don’t have the network, but have a deal, there are those who are experienced at raising capital, ie mentors and other experienced investors and can help you. This is an excellent opportunity to be an active participant in a large deal and get experience that you will need to find your next deal.
Financial freedom is available is available to you through Multifamily investing. Michael’s experience shows that from the time an investor makes the decision to become an investor, the “law of the first deal” takes hold. The first deal leads to multiple other deals, literally making the investor financially free as little as 3 - 5 years.
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Real Estate Investing is a continuum. The market goes up and down. In order to stay profitable, your real estate investment strategy must adjust to reflect the market.
Mark Ferguson is an experienced real estate investor. He has gone from flipping to buying single rentals to flipping to most recently acquiring commercial real estate properties. His success is directly related to his ability to make changes as the market changes.
He started as a realtor focused on working with short sales and foreclosures that provided multiple flipping opportunities.
Mark’s original real estate investing plan was to buy 100 single family rentals. As the market improved, retail sale prices outpaced market rents. When he realized that rentals could no longer cash flow, he changed back to single family flips.
At the time of our interview, he had 22 flips underway. In order to manage this many projects, Mark has systems and a trusted team that helps him find, acquire and renovate each project. Mark’s Investfourmore.com blog, podcast and Facebook group provide the details each of his deals.
Recently, he acquired four commercial properties. The first is one that he found on the Multiple Listing Service. It had IRS tax liens and took eleven months to close. The property is a single tenant, 3,000 square feet building he purchased for $110,000. The seller will remain as a tenant for 6 months paying $1,500 / month rent.
The second is a small warehouse a friend wanted to sell. Mark needed a place to store the materials for his multiple flips and his growing car collection.
The third is a 7,500 sq foot office building that was previously a medical office. It was listed on the MLS for $500,000 with several price reductions. He purchased it for $292,000. This is currently vacant.
The 4th is a 1600 sq foot single story cinder block building he found on Facebook marketplace for $101,000. This is currently vacant with expected rents $1300 - $1500 per month.
Keeping with his “as they come” strategy, he has a $2.1M, 70,000 square foot retail strip mall with a grocery store anchor under contract due to close in January 2018. The numbers reflect a 9 cap with 8000 sq ft of vacant space!
The two markets, residential and commercial are very different. One thing that Mark has recognized that is different between residential and commercial is the amount of effort spent to make a property appealing to a buyer or potential tenant.
Most residential properties need to be spruced up to attract potential buyers or tenants. However, most commercial properties are left just as the last tenant left it; water stains on the ceiling from past roof leaks, stained carpet, etc. He has taken his residential experience to the commercial and done minor things that can take away the negatives and leave the space clean and inviting.
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A Mobile Home Park may not be your first thought for an investment in real estate. However, you would be wrong to dismiss it.
Andrew Lanoie, with Four Peaks Capital Partners, real estate investment strategy focuses on the Mobile Home asset class. They identify parks that meet the underwriting requirements, make offers, acquire and manage parks across the USA.
The mobile home park marketplace is fractured, and unorganized. There is a limited supply of mobile home parks and new ones are not being built. The sellers are many times legacy owners, or have owned and managed the park for decades. Management is rarely professional, and consequently, there are opportunities to increase efficiencies and improve the net operating income.
The asset class of Mobile Home parks are essentially affordable housing. Yet, it provides the opportunity for ownership and the expression of pride of ownership.
The fractured marketplace allows buyers to engage directly with owners and sellers. Banks are not always excited about lending on a park. The owners who have owned the parks for years often have no debt, which makes seller financing an option to sellers not wanting to give up the monthly income.
The lack of professional management provides multiple opportunities for improvement. The tired owners likely have some vacancies and are likely charging lot rent that is far below market rent.
Transitions always provide a shock to the existing residents, but raising the rent is easy. Filling the vacancies is easy when you partner with a company that specializes in mobile home financing. This will all you the opportunity to market and attract potential residents that would otherwise be renting a two bedroom apartment to own a home of their own.
Mobile home park residents rarely have resources significant enough to pay for moving their mobile home from your park to somewhere else. This creates long term residents.
When residents fall into financial hardships, this often provides opportunities for park owners to acquire the home left by the resident for very little. This can be sold as is, renovated and held as a rental. Most park owners prefer to sell the home and just rent the space.
Four Peaks Capital Partners is an investment firm focused on acquiring mobile home parks.
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Knowledge and Numbers are key to Commercial Real Estate Investing. Yishai Breslauer was a school teacher with a thirst to learn more about real estate investing.
He started by learning the local building codes and laws and applied these to his residence to create additional needed space for his family. Soon the neighbors were following his lead, and a neighborhood was transformed.
Yishai continued to learn about real estate. He found there were opportunities if you knew what was allowable and applied this knowledge to an existing property. This was an opportunity to increase the value of the property.
The more Yishai learned, the more he got excited at the possibilities. His pursuit of knowledge led him to learn more about laws, statutes, finance and real estate development. When he applied the numbers to his knowledge he could tell if he had a real opportunity.
Quickly, he learned there was a hierarchy to real estate from Residential to Commercial.
There are multiple asset classes to chose from in commercial real estate. Residential / Multifamily is simple because a home is familiar to everyone. Everyone needs a place to live, and the components of a multifamily property are very similar to single family. The questions you need to know the answers to are:
His interest in real estate took him to a position with a major real estate developer as the head of investment banking for real estate.
He learned that the highest level of real estate investing, commercial, the level of information that is combed through and analyzed on larger deals by professionals, is incredible.
Office and Retail is more complex. While everyone needs a place to work, the fundamentals for each class are different than residential. The questions you need to know the answers to include:
The big boys play the game differently than the mom & pop investors.
To be a pro, knowledge and numbers are key.
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Tax Planning can save you thousands when you have a working relationship with your CPA.
Craig Cody spent 17 years with NYPD chasing bad guys on the streets of New York City. Today, he chases tax savings for real estate investors and small business owners.
Craig recommends that real estate investors stay in regular contact with your accountant. If you act before consulting your accountant, it can cost you dearly.
Tax planning with your accountant can help you reduce the taxes you owe and propel your real estate investment strategy.
For instance, if you sell a building and expect to buy a new building with the proceeds, you may be shocked when your accountant informs you that you owe taxes on the sale of the building.
Regular communication with your your accountant and tax planning could have provided the proper structure to keep you from having “constructive receipt” and owing the tax.
Proper tax planning provides constructive ways to keep more for you. For instance, depreciation is tax free cash that real estate investors recognize when they file their income taxes. Unlike an operating expense that reduces cash flow and Net Operating Income, depreciation is an accounting tool that reduces the taxable income.
If you are a W2 employee, depreciation is something negative you associate with, ie: the declining value of your new car after you leave the dealership.
Unlike a car, real estate is an appreciating asset. When you invest in real estate, depreciation is an asset. You get the benefit of both appreciation and depreciation.
Depreciation is an allowable expense that recognizes the declining life expectancy of a business asset. In real estate, it can be applied in one of two ways; Straight line, or Accelerated. Tax planning will determine which option is available to you.
Straight line depreciation is used most often by passive real estate investors. If the property is a residential asset, ie single family or multifamily, the depreciation schedule is 27.5 years. If the property is a commercial asset, the depreciation schedule is 39 years.
If you are a real estate professional, you are can take advantage of a cost segregation study, and accelerate the depreciation of you property. Cost Segregation breaks the building into components and assigns life expectancy of 5, 10 or 15 years to the components depreciation schedule.
The depreciation is deducted from the the taxable income to reduce the taxes owed.
So, if you are making positive cash flow, the depreciation can lower the recognized income and reduce the tax owed.
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Use your Self Directed IRA to invest in real estate and turbo charge your tax deferred returns.
Podcast Format Survey: https://goo.gl/forms/hUF2OAxTu2WHsMQg2
The following are the most common questions asked from investors looking to use their 401k to invest in real estate. The questions were presented to Travis Watts from Direct Source Wealth for answers.
Q: What are the benefits of opening a self-directed IRA?
A: Freedom & Choice to invest in the things you want to invest in, ie: large scale real estate.
Q: Why invest in real estate using a self-directed IRA?
A: Opportunity for larger return in a real estate investment that regularly produce higher rates of return.
Q: Can I use a Self Directed IRA to purchase a property I buy for investment?
A: Yes, subject to many rules; ie you cannot personally manage the property.
Q: Can I use a Self Directed IRA to invest in a Syndication?
A: Yes, the most common use of Self Directed IRA funds is investment in syndicated real estate deals. A syndication is a group of investors pooling their funds for investment. The investment is typically larger than one the investor could accomplish on their own. These real estate investments are professionally managed and require that you do nothing.
Q: Is there any tax or penalty to move my current Retirement Funds to a Self Directed IRA?
A: A Self Directed IRA retains the same tax implications as your traditional IRA. You are only changing the custodian from your current provider to another that will allow you to direct the investment.
If you elect to convert your traditional IRA to a Roth IRA, you will be responsible for the tax.
Q: Can I take the distributions?
A: Any distributions from the Self Directed IRA are subject to tax and penalties for early withdraw. A Roth IRA is not subject to tax when funds are withdrawn.
Q: How long does it take to set up a Self Directed IRA?
A: It can take as few as 3 or 4 days if you are currently in cash or it can take a couple of months to liquidate your current positions. Consult with your current custodian and tax professional for your specific timeline.
Q: What documents are required to open a Self Directed IRA?
A: Standard documents; driver license, photo id and social security card, etc.
Q: What documents are required to fund a deal?
A: Standard documents include:
Every deal is different. Check with your syndicator or investment for specifics.
Q: What happens to the investment returns & distributions?
A: Distributions are returned to the Self Directed IRA as cash.
Q: Can distributions be invested in the next deal?
A: Accumulated cash distributions can be invested in another investment.
Summary: Look into a self directed IRA and learn what the possibilities are and remember, learning is earning.
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Cost Segregation can turbo charge your commercial real estate investments financial results by accelerating the depreciation schedule.
Paul Caputo with Segregation Holding LLC provides an explanation of how it works and what the benefit is to commercial real estate investors.
Depreciation is an accounting tool that recognizes each year, a percentage of your building’s life expectancy is used up. This loss can be recognized for tax purposes as an expense against the income generated.
When you purchase a building, regardless of the age of the building, the depreciation clock starts. The standard building depreciation schedule is 27.5 years for residential and 39 years for commercial.
If you purchase a residential property, ie an apartment building, and the building is valued at $2,750,000 at acquisition, the straight line depreciation would be $100,000 each year. This amount will be deducted from your income to determine the taxable income.
A cost segregation study breaks the building into its component parts. Depending on the estimated life expectancy of each building part determines the ability to accelerate the depreciation.
When a property owner hires a cost segregation firm to do a study, the firm takes an engineering assessment of building. This process itemizes each component used to construct the building.
Instead of using straight line depreciation the building components are assigned a new depreciation schedule of 5, 7 or 27.5 years. This significantly compresses the time to depreciate the building.
For instance, if 15 percent of the building, $412,500 of the $2,750,000, is now assigned to 5 yr depreciation schedule. The difference in allowable depreciation between straight line and the accelerated schedule for these items assigned to the 5 yr schedule is:
Straight line over 27.5 years: $30,000
Accelerated over 5 years: $82,500
Additionally, when you have a cost segregation study, you can also capture the unused life of a component if you have to replace it prior to its scheduled life expectancy. So, if you have to replace a roof 5 years after you buy the building, you can recapture the 22.5 years left on the cost segregation schedule in the year you replace the roof. The new roof is capitalized at the replacement cost with the new life expectancy updated on the schedule.
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