Insurance Coverage Moratoriums happen daily during late summer and early fall across the US. If there is a natural disaster in action, the insurance companies will close the casino and refuse to take any new bets.
2017 has been particularly significant. Think about it. There have been:
Insurance companies take premium from policyholders in exchange for a promise to rebuild if certain disasters happen. The company underwrites your risk to do all they can to stay away from risk they do not want. And they collect what they hope is an appropriate amount of money to pay claims when they do happen.
Companies compete for more premium. Investors look for positive return on their money. Policyholders look for ways to save on insurance and increase the return on their real estate investment. The greater the distance between disasters, the cheaper insurance gets.
After several years of infrequent disasters, the cost to policyholders is low, but the risk rises. For every year there is not a significant disaster, statistically, disaster is more likely to happen.
So what can you do?
Don’t wait to purchase your coverage. Purchase your coverage before disaster is eminent, and be prepared.
For Hurricanes you can safeguard your property and make certain you have insurance.
Flood falls into two categories.
Wind is mostly a problem around the Gulf of Mexico and the Eastern shore from Florida north. Insurance is available, but the deductible is a percentage of the limit. This is unlike a standard property deductible which is a flat dollar amount.
Earthquake insurance is directly related to the soil beneath the property and the proximity to a fault line. Like Wind insurance, the deductible is a percentage.
Insurance is never fun to pay for, but don’t let your real estate investment strategy go without it. Build the cost into your operating budget. Don’t bet against yourself. Buy the coverage before there is a moratorium and you cannot purchase coverage.
Prior Episodes for reference:
Seismic Retrofitting http://bit.ly/2yd9PRZCREPN22dl
Earthquake Preparedness: http://bit.ly/2yGmPmaCREPN17dl
How to Save on Flood Insurance: http://bit.ly/2i3suvnCREPN35dl
If you need help on any of your insurance needs, please reach out and I will do all I can to help.
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Good Bookkeeping is a must for Real Estate Investors for many reasons.
Dave Rice with Key Bookkeepers provides multiple reasons and benefits for real estate investors to set up systems and keep accurate records. Together, they can help you accelerate your real estate investment strategy.
FREE: Five Key Bookkeeping Mistakes Made By Real Estate Entrepreneurs http://bit.ly/2y02fwv5MistakesREIMake
If you want to be viewed as a business by the IRS, you need to act like one. The IRS counts on good bookkeeping to substantiate your business.
Good Bookkeeping gives you the actual numbers you need to determine if you are making money or if there is room for improvement. Are you collecting all the rent? Are you properly categorizing expenses?
When filing your taxes, these numbers are the keys to lowering your taxable income. This alone can boost your actual returns.
When you are looking for money from a lender, your best bet is to make it easy for a lender. They want to see how good your bookkeeping is. If your records only consist of a tax return, you will not make a strong impression. But, if you can easily produce multiple complete years of records and year to date records, you make it hard for the lender to say no.
Don’t forget the value of your commercial real estate. The Net Operating Income is simple to determine: Annual Income minus Annual Expenses. This result divided by the local market cap rate is an indication of what your property is worth.
Poor bookkeeping can result in one of two things when you are trying to sell your property.
Low Ball Offer
If the buyer is experienced and looking for a deal, they will only accept records that you can substantiate. Poor bookkeeping will lower your NOI and ultimately lower a potential buyer’s offer that reflects your actual numbers.
If a buyer is looking for a property that has good bookkeeping, and you don not, they will dismiss your property.
Ask any experienced commercial real estate broker. If you want to maximize the number you can get for your property, it starts with good bookkeeping. Keep your rents at the market rate and take good care of your property.
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Lease Lock is working to change the Rent Payments & Security Deposits hassle that have been a part of renting apartments forever.
Reichen Kuhl, the founder of Lease Lock, had plenty of money in the bank, but not enough income to qualify for a rental. Frustrated, he set out to create a solution for people in his situation.
His idea was to cosign for strangers who could not qualify based on their credit to rent an apartment. Were there other people like him who needed a cosigner to rent an apartment? Were Landlord’s willing to change their real estate investment strategy that required deposits?
He put up a website and tested his idea. On day one received 200 applicants. In three months, none of his clients defaulted and he proved there was a market for Lease Lock.
Lease lock provides a FREE insurance policy to landlords of 100 units and more. The landlord requires that the tenant to put up a deposit, usually equal to one month of rent. Or, the tenant can pay a non refundable fee to Lease Lock. The fee is usually less than half of the required deposit.
When the tenant is approved by Lease Lock, the tenant pays the fee to Lease Lock. The Landlord is provided an endorsement on their Lease Lock policy to protect them from loss caused by the resident. There is NO COST to the Landlord for this.
Challenge with Deposits:
With Lease Lock
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For investment opportunities
A good Commercial Real Estate Mentor can teach you the lessons they have learned and give you the shortcut to building real wealth.
There are many different segments of commercial real estate to choose from. Commercial Real Estate investment strategies work best when they are focused. Your mentor will help you focus and develop your strategy.
You can search online, listen to podcast, watch videos, read books, and get all the answers. If you act, you will likely have some success. But, in order to get over the hump and grow exponentially, you need guidance from someone who has mastered the the skill.
Real Estate is a people business. You need to have people in your network that you can go to when you have questions. Peter Harris is a successful commercial real estate investor who has been mentoring commercial real estate investors since 2003.
Track Record: Is the mentor successful in commercial real estate? Does the mentor own commercial real estate? An active investor will readily recognize potential challenges and help you find the answers. The real estate market is always moving through the cycle. An experienced mentor can help you prepare for the difficult times so you can prosper when others are struggling.
Available: Real estate Investing is full of deadlines and short windows of opportunity. There will be questions that need answers right away. Will your mentor be regularly available to answer your questions. Will they be there after the sale?
Income: Where does the majority of the mentor’s income come from? Is it from selling seminars, books and student fees? Look for a mentor who makes the majority of their income from their own commercial real estate investments.
Teacher: Are they a good teacher? Can they listen to your questions and effectively communicate the answers? If they only tell you what to do and never answer your questions, you will struggle.
Invested: Is the mentor invested in your success? If they only sell you the course, what is their motivation to guarantee your success? Don’t be afraid to share the gain of your deal with the mentor that helped you get it.
Complete: Can the mentor help you all the way through the process to the operation of the property? The real value is created by improving the net operating income, NOI. If the mentor relationship stops once you buy the property, you can miss out on the potential to solidify your future.
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Commercial Real Estate Investing involves many opportunities to make mistakes. Here are 5 mistakes to avoid.
This type of investor believes that the more information they get on the property, the better will be their purchasing decision. Unfortunately, in most instances, that’s not the case. As the saying goes these investors, “Can’t see the forest for the trees.” They are too involved in the details of the purchase that they forget the big picture. Savvy real estate investors don’t get caught up in the minutia. They generally focus on a small subset of issues to get comfortable with, and this determines whether or not they’ll make an offer on a property.
Not only does the detailed oriented approach complicate the buying decision, it also lengthens the time necessary to come to a decision. Many times, another buyer comes along while Mr. Analysis-by-Paralysis continues slogging through the details and “steals” the property away from him. In reality, the seller is tired of all the nitpicky questions the original buyer has bombarded him with. He is relieved someone else is swooping in to save him from the first buyer.
The opposite of the first mistake is the investor who does only a cursory due diligence on the property. This usually takes two forms: the first mistake is not reviewing the historical operating statements and current rent roll carefully. It’s not uncommon that a property’s Profit and Loss Statement is not transparent to the average reader. Lots of important information can be hidden in the property’s operating statements. They need to be teased out by asking the seller good, penetrating questions. For example:
Those are a few questions that may be appropriate to ask.
The second mistake is only doing a cursory physical inspection of the property. If you’re buying apartments, you need to have your building inspector inspect every unit, the roofs, the laundry areas, the attics, the crawlspaces, etc. Find a well- qualified inspector to represent you who will provide a detailed report of the physical condition of the property.
If you are buying a property with a group of investors make sure that those who are in the investor group have the same goals and exit strategy as you do. It’s not uncommon to find out after it’s too late that individuals in the investor group have different motivations for owning the property than you do.
Before you decide to be in an investor group that is purchasing a property, have a meeting with the potential investors. Ask the managing member of the LLC to outline his goals and exit strategy for the property. Also get a feel for whether you would want to be stuck with these investors over the investment life of the property. If you don’t like what you hear from the managing member of the LLC or your gut tells you not to invest with one of the investors in the group because of their abrasive behavior, pass on the opportunity. It’s better that you pass on it than regret it later.
One of the biggest mistakes investors make is not having sufficient cash reserves available for unexpected expenses. This is especially true for multi-tenanted office and retail properties. For example, an investor owns a multi-tenanted office building. He’s owned the building for years and it has cash flowed beautifully. But instead of putting some of the positive cash flow into a reserve account for future needs he puts it all into his back pocket.
Then one day one of his larger tenants moves out and the property no longer cash flows like it once did. Now the owner has to contribute his own cash to keep the mortgage current. He would like to get the vacant space market ready but to do the tenant improvements and pay a leasing commission will cost him more money than he has in his savings. The space remains vacant because he tries to do the leasing himself to avoid paying a leasing commission. And years pass with an under-performing property.
And the sad thing is, it didn’t need to. If the owner had established a reserve account for the eventual cost of tenant improvements and leasing commissions he would have had the funds to get his property re-tenanted.
A 1031 exchange allows investors to defer their capital gains tax when they reinvest their equity into a like kind-exchange. Deferring the payment of your capital gains taxes to a later date is a HUGE advantage to real estate investors. But sometimes investors are so eager to not pay their capital gains taxes that they pay way too much for their exchange property.
If you can find an exchange property at a market price then do a 1031 exchange. But first find out what the capital gains taxes would be if you didn’t do a 1031 exchange. No one likes to pay the IRS if they don’t have to. I get that. But don’t over pay for the exchange property. Sometimes it is better to pay your capital gains tax than to get stuck with a property that will never be a good investment because you paid too much for it.
These are the five mistakes I’ve observed over the years that real estate investors make when buying commercial real estate.
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Learn how a W2 employee’s real estate investment strategy has grown from an accidental landlord to a multifamily syndicator.
Lane Kawaoka is an engineer from Hawawii who followed the normal path. He got a good education, a good job and saved to buy his first house. Shortly after buying his home, he realized that he was so busy working that he was never there.
Checkout Lane’s website and podcast: Simple Passive Cashflow
Lane realized he was paying a lot for a home he was never in. That's when he made the decision to make his home a rental. The result was a lot of extra beer money.
Lane continued to work hard as an engineer, and aggressively saving for another down payment. He was on his way. As time went on, he was no longer able to find properties that could cashflow.
As his real estate holdings continued to grow, so did his knowledge and experience. He realized that appreciation was out of his control in single family rentals. He needed to find cash flow and appreciation he could control.
Recognizing the lack of control in single family is what Lane and most investors realize when they compare single family to mulitfamily real estate.
Multifamily provides multiple benefits when compared to single family real estate. You must get educated In order to recognize the difference. This requires many hours spent analyzing deals to determine when a deal is a real opportunity. is
To learn more go to: simplepassivecashflow.com
A turnkey real estate investment strategy can be an excellent way to profit from real estate for an investor wanting diversification.
FREE 7 Things to Consider when Purchasing a Cash Flowing Investment Property
John Larson with American Real Estate Investments, works with investors who want a hands-off investment in markets like Dallas, Houston, St. Louis, and Kansas City.
Turnkey real estate firms match investors with properties that have been renovated and come with a screened tenant in place. When you invest in turnkey real estate, you have minimal involvement with the property, tenant and management of the property. You collect a monthly check.
Investors working with a turnkey company benefit from the experience and expertise of a company with boots on the ground. Their physical presence provides an intimate local market knowledge, access to off market properties and relations with reputable contractors. Many turnkey companies have their own crews to help further contain cost.
To start, the investor identifies what they are looking for with the turnkey firm. Then the company finds a property that meets the investor requirements. As soon as the property is acquired, the company manages the renovation, and placement of a tenant.
Risk versus reward
For a higher rate of return, you will need to look in less desirable neighborhoods and be unable to attract tenants with job stability. John’s experience shows it is better to aim higher given all the opportunities to acquire higher end properties, tenants and rent to higher.
For more security, lower cash flow, but greater potential appreciation, consider properties located in owner neighborhoods with high average incomes and desirable schools.
When you purchase a higher end property and renovate to a level that a potential homeowner would expect, you create more exit opportunities.
If the market appreciates beyond expectations, you can more easily sell to a potential homeowner that wants to own in the neighborhood.
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Real estate investing strategies require that investors pay attention to Big Trends in Real Estate. They are changing where we live, work and play.
Real estate expert John Wilhoit takes us through three distinct recent lifestyle changes that are shaping the real estate marketplace.
Mobility changed during the recession. Children who would normally leave home after graduating from college, continued to live at home. The lack of employment opportunities forced them to stay in place.
The longer the economy stalled, the go and seek mindset changed for the average American’s mobility. Instead of moving for nonexistent jobs away from home, and starting a new life, they stayed in place.
Now the economy has improved and the jobs have come back to where people live. Help is wanted and you do not have to move to find employment.
How we Shop
The internet has changed retail forever. The younger generations, due to their lack of funds, do not shop for things. They are more interested in an experience. Major retailers are struggling to figure this out. Most are realizing the need to consolidate space to match the decreased demand.
The unforeseen challenge local communities will have to face is how to make up the loss in property tax receipts. If the retail space goes away, or is significantly reduced, this will affect local tax base.
Traditional suburbs were a place where people lived and commuted from Monday through Friday to the city for work.
Some suburbs outside major metro areas have transformed into Hyper-Suburbs. They now provide the ability to work, shop and go to school without leaving.
It can be argued that the big box retailer is responsible for initiating this change. As your need to travel downtown decreases, and employment opportunities grow, you no longer need to leave for what you want.
This transformation provides residents the opportunity to take advantage of all that their community has to offer.
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Real estate investing requires that you consider your entity selection in order to both benefit from the tax code and protect your assets from unnecessary liability.
CPA Patrick Camuso takes us through the considerations and benefits of an LLC versus a S Corporation.
Operating as a sole proprietor leaves you exposed for liability that an entity can shield your from.
In order to determine which entity option is best for you, it is recommended that you start with a clear understanding of your real estate investing strategy.
The first question you need to answer is will you be passive or active. If your goal is to buy and hold, and you turn over all of the day to day investment and property management decisions are handled by others, your are passive. An LLC is a good option for a passive investor
If you will be operating a more hands or, “active”, business that flips, or includes a lot of transactions, you are likely a good candidate for an S Corp. Especially when your income increases beyond $60,000 per year from your real estate investing. There are additional tax codes that you can benefit from when you are filed as an S Corp.
An S Corp does expose you to self employment tax. Working with your CPA to determine what a reasonable compensation is, you can limit the amount of your income that is applicable to self employment tax. Additional compensation can be received as distributions that are not subject to self employment tax.
The S Corp comes with additional accounting costs. You will need to weigh the cost of accounting against the tax benefits if your operation to determine when is the right time to file as an S Corp.
Additionally, if you create multiple entities, remember to maintain the corporate veil and keep separate accounting and accounts for all income and expenses.
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The 1031 Exchange is a section in the IRS tax code that allows investors to defer paying capital gains taxes. If your are a real estate investor, this is a great opportunity to keep your gains when investing in a like investment property.
Bill Exeter with Exeter 1031 Exchange has been working with investors as a qualified intermediary for over thirty-four years. He provides specific steps and useful information for investors considering an exchange.
FREE A Guide to 1031 Exchanges click here
The intermediary applies the money to the new property.
You have 45 days to identify a replacement property and another 135 days to complete the purchase of the replacement property. The sale and purchase of the two properties must be completed in 180 days to avoid a taxable event.
You should contact a qualified intermediary during the sales negotiation when the sale seems likely to be completed.
The key to a successful 1031 exchange is planning. It takes coordination with all of the interested parties; lender, broker, title agent, qualified intermediary, attorney, accountant, etc.
If you can Identify and tie up the replacement property prior to selling your property, the process tends to go much smoother.
Can you purchase the replacement property before you sell your property? The 1031 Exchange can work in reverse. You will contract with the qualified intermediary to act as the buyer of the new property. When you sell your first property within the 180 days of the new purchase, the proceeds will go through the qualified intermediary and be applied to the replacement property.
The price varies among qualified intermediaries. The full cost of the service ranges from $700 - $5,000 depending on the degree of difficulty and the service provider.
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