Darrin: Bruce Petersen, I ask you what is your BIGGEST RISK?
Bruce: My BIGGEST RISK you know that's yeah it's the liability we had we've had people die on the property. It's just as you grow a business you can't be the one doing all the jobs you have to entrust people and you hope that they're doing an effective job. You've interviewed them. You coached them you mentor them and their job and you can't be there with them all the time. You just hope that they're doing the right thing and they're not getting you hung out to dry from a fair housing standpoint from a discrimination standpoint. Or that we have done something negligently that causes somebody to pass away. The one death we've had, there was nothing we did wrong absolutely nothing at all. That's probably the biggest risk. You know you're dealing with hundreds and hundreds and hundreds of people on a property. You buy a two hundered unit property, average occupancies probably two to three people. Right. So if it's three people have a two hundred unit property, that's 600 people right there that we are very involved in their lives on a daily basis. So we have a lot of responsibility we take it very, very seriously. But as this is for me you said Bruce Peterson right. I'm a syndicator but I own my own management company so I have a lot more risk than a lot of people have. I would guesstimate 80 to 90 percent of the people that do what I do they want no part of management. They hire a third party management company like us to come in and do it for them so they won't have that risk. For those people, I would say, this is kind of a macro. Be careful what you're doing. Right. Don't get aggressive don't get anxious Don't get impatient. I can't find a deal. Oh this one works. No it really doesn't work. But I gotta get a deal. Don't do that. Don't buy the crap that's in An offering memorandum from a from a listing broker. Don't believe them when they tell you that your taxes are going to go up 3 percent year over year because that's what everybody here is right. You increase your expenses every year by an average of 3 percent. Taxes are different. And if you believe that you could fall flat on your face so don't be overly optimistic. Don't think the economy can't shift because it's going to shift again. We all know it's going to shift. We don't know when we think it's coming kind of soon but we don't know for sure. So just be safe in what you're doing. Don't overextend yourself.
Each Real Estate Investor Tax Classification has specific benefits and limitations. Nick Aiola with Aiola CPA takes us through some situations and breaks down the consequences for each.
The IRS provides three general classes of real estate investor tax payer classifications; Passive, Active and Professional.
Passive: This applies to the investor who invest in other investors deals, ie a syndication. In this case, they provide the capital and receive income.
Active: This applies to investors who invest on the side ie; flip homes, landlord. This is not their primary occupation.
Professional: This applies to investors who spend more than 700 hours active in real estate; analyzing deals, talking with brokers, raising capital, working with contractors, tenants, etc.
The purchase price is your basis. The IRS recognizes that the structure has a useful life expectancy. For each year you hold the property a portion of the structure is depreciated. The amount of depreciation is subtracted from your basis, effectively reducing the value of building.
When a Mortgage is used to purchase the property, the interest paid is allowed to be written of as well.
Depreciation is one of the most effective tools available to real estate investors to reduce their taxable income. This is recognized as an expense that is subtracted from income when filing taxes. The amount of depreciation expense is based on the type of property, residential or commercial and if you or your sponsor has done a Cost Segregation Study.
For straight line depreciation, residential is based on 27.5 years and commercial is based on 39 years. When cost segregation is employed, a large portion of the building is broken into different class codes of personal property which have 5, to 15 year life expectancy. The life expectancy dictates the depreciation schedule applied.
Passive: For an investor with less than $100,000 annual ordinary income, they are able to take up to $25,000 above the income generated by the passive income generating property. This phases out as investor ordinary income grows to and in excess of $150,000. For losses that are not allowed in the tax year, they are carried forward for future tax years.
Active: Same as Passive.
Professional: This investor can claim all losses in the year they are recognized up to the amount of income received.
The sale of property creates a taxable event. Depending on the length of time property was held will determine if the gains are ordinary or capital; less than or greater than one year.
When you have a gain, sell for more than your basis, you will owe taxes on the gain and depreciation you recaptured due to your gain.
The Depreciation recapture will be taxed at 25%, while the Capital Gains will be taxed at 15 - 20% depending on your taxable income.
For all investors; Passive, Active & Professional; Depreciation that was previously generated and has been carried forward, may be used to reduce the taxable income upon sale.
Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”
BIGGEST RISK: I would say the biggest risk as a real estate investor would face would be failure to prepare. Not analyzing a deal or not understanding the scope of the work involved or understanding what kind of what level of commitment; time or cash it's going to require from you is detrimental. We've seen that cripple people in the past.
For more go to: https://www.aiolacpa.com/
Sure. Well I guess I would go to foldable real estate investor. I would say the biggest risk as a real estate investor myself that I would face would be failure to prepare. You know going into a deal not analyzing it or not understanding the scope of the work involved or understanding what kind of what level of commitment time commitment or cash commitment it's going to require from you is detrimental. So the biggest risk. Yeah I would say as an investor the biggest risk would be just if you didn't prepare and I guess that goes without saying for. For other areas of investing or businesses too. But yeah we've seen that cripple people in the past and I would be the first one that comes to mind.
Your First Multifamily Value Add Purchase can be overwhelming.
Brandon Blount and his partner pulled the trigger and lived to tell the tale of their first multifamily deal and are now looking for their next opportunity. Reading books, listening to podcast, and talking with investors helped them create the plan, but they soon learned, there is no substitute for experience. The lessons they learned by doing an actual investment don’t compare.
Branton is former active duty and current reserve member of the US Armed Forces. His military experience uniquely qualified him to recognize the opportunities a military town can offer. So, he and his partner jumped into their first deal, a 16 unit value add property.
First Multifamily Value Add was a true value add opportunity in all aspects. The property had deferred maintenance, rents that were well below the market and it was 30% vacant. All of these issues made acquiring the property difficult, but perseverance paid off.
Due diligence was enlightening. To start with, the seller had no records, and the management company had only one lease. The deferred maintenance was easy to identify, and plan for.
Having walked each unit, there was a firm understanding of what needed to be done.
There were 5 vacant units that needed to be updated and rented ASAP.
The color scheme was set, levels of finish set, contractors hired, and there was no time to waste given their hard money loan with a nine month window to avoid any additional points.
As soon as the new management was in place and the light was shined on residents. In a very short amount of time, tenants who were up to no good decided to move out rather than face the heightened awareness of management. Instantly, the vacancy rate went from 30 to 75%.
The additional vacancy was a blessing and a curse. The blessing, now additional units could be upgraded without the need to work around tenants. The curse was the loss of rent and the additional funds needed to renovate the additional 7 units.
The additional challenge turned out to be a blessing because it allowed a greater number of units to be renovated right away, which command higher rent. Once the process was set, the contractors were able to renovate quickly without stopping. When the newly renovated units were leased, the proof of concept gave a local bank the confidence in the project and provide a refinance. At the refinance, Branton and his partner were able to pay off the hard money loan, and repay the owners for money invested for the capital improvements.
Now there are 13 of the 16 units fully renovated with updated floor coverings, paint, kitchens, baths and appliances.
Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”
BIGGEST RISK:
"Known unknowns". You know it exists but you know that you don't know the status of it. So you just have to plan accordingly. And I think on top of that as owners and as investors you have to be able to adapt. I know a lot of people that create a plan and they get so tied to that plan that they lose their flexibility and they and they lose their ability to adapt quickly.
I think flexibility is the key to adapt to risk. You're going to adapt and you're going to overcome it.
the plan will change whether you want it to or not.
For more go to:
Email: branton@aom-e.com
Absolutely, I think. There's a couple there's a couple of factors to that. I mean in any building there's the physical risk right. There's what you can't see. So there's the plumbing there's the electrical there's the things going on behind the wall. So there's a certain amount of risk that you can assess and mitigate. What we used to call it, "Known unknowns". You know it exists but you know that you don't know the status of it. So you just have to plan accordingly. And I think on top of that as owners and as investors you have to be able to adapt. I know a lot of people that in a lot of forms whether it's military or law enforcement or wherever they are they create a plan and they get so tied to that plan that they lose
their flexibility and they and they lose their ability to adapt quickly. And I think adaptability is the key and there's a term that we do use. In my other line of work which is risk at risk you know you're going to mitigate you're going to assess but you're also going to adapt to risk. You're going to adapt and you're going to overcome it. And so if you know if you know you're accepting a certain percentage of it and then you accept it and you move forward I think that that allows you to then react when you go from five units to 13 vacant. You know that is a that's a that's a risk that you knew could always happen. You hoped it wouldn't. And it did. So how are you now going to handle it. And your ability to adapt quickly come up with
a new plan or just the plan and move forward on point and on target will allow you to succeed. So I think that that's bigger than a physical risk of a pipe or whatever that is it all falls into the category of of pivoting and moving forward. And then I think you have to be able to assess the situation and then and then not to mix too many metaphors to pull the trigger on starting. OK. where do we go from here? Because we still have to get because the project doesn't stop. We still got to get to the goal, the finish line. And so I think as investors your ability to remain flexible. You know don't get don't get off target. Don't don't go off on tangents and change the plan throughout stick to the plan but also understand that on it at any given time
the plan will change whether you want it to or not.
Think BIGGER Real Estate Show is Facebook Live event where Justin Stoddart shares ideas and methods for real estate professionals to help them build, grow and scale their brand and business.
Justin is real estate and marketing entrepreneur. He started in real estate as a custom home builder. Since then he realized his passion was building people rather than buildings. Today he works with real estate agents as a representative at Old Republic Title in Lake Oswego, OR.
So many real estate professionals are caught up in the daily grind that must be performed to get the work done, that they have no time to think about, let alone execute, creating a brand and growing beyond the transaction mode.
There are multiple opportunities to spend money on different tech platforms to advertise and get leads. But at the end of the day, is a client you work with from Zillow your client or Zillow’s client?
Zillow is working to become the Amazon for residential real estate. They draw the attention of the prospective buyers, agents pay to be seen on Zillow, and it works. But will the client remember you, the agent when they are ready to buy again? Unless the agent has distinguished themself as something special, the customer will likely go back to Zillow, not the agent.
In order for an agent to avoid being displaced by tech platforms like Zillow, they need to create value and position themselves as a brand. If the consumer sees no value in the service provided by an agent, why would the customer look past a tech platform?
Justin recognized that real estate agents need help to grow their business and their brand. To help his clients, real estate agents, he created theThink BIGGER Real Estate Show. It is both a resource and an example for his agent clients on how they can bring value, and stay relevant in the eyes of their clients and prospects.
The future of real estate is certain to change. Real estate investors and home owners will continue to buy properties. Presumably, as technology advances and AI is more fully adopted, the division between Fiduciary & Functionary tasks will become more defined.
Fiduciary tasks: Decisions made by the real estate agent on behalf of the client that put the clients interest ahead of the agent.
Functionary task: The many task which are necessary to complete a real estate transaction such as filling out a form. Over time, these lower level task will be transferred to tech platforms.
Ideally, by transferring the lower level Functionary Tasks to a tech platform the real estate agent will be able to work more on the Fiduciary Tasks, to better serve their clients.
Time previously spent doing the functionary task, will give the agent time to spend educating oneself on where the market is going, engaging the client.
This higher level will not be for all of your clients, but you will be able to provide this for a small group of your clients & prospects. When you ask better questions you get better answers. The more you listen and learn your clients wants and needs, the better you are able to serve them. Ultimately, this better experience will provide a happier client who is likely to refer more clients to the professional agent.
Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”
BIGGEST RISK:
I think actually interviewed a gal yesterday and she said. I asked her the question which is kind of my signature question get on my shows which is, "what do you do to intentionally think bigger? And I 'think it's a great response actually for your question. She said I work too. I work really hard to avoid complacency. And I think the biggest risk that all of us face in a world that's rapidly innovating and rapidly moving forward is to get complacent with our own personal growth in our own personal network. And I'm going to put up a plug for you. You didn't ask for this but to have somebody who's whose business is insurance. But goes about adding value to their clients really modeling media. Modeling marketing at its highest form. I think it's it's brilliant on your part because you're becoming a much more, even if nobody listens to this. I know that's not ture, we had this conversation before. You've got a great audience. That just affect the person that you're becoming by having these conversations. Just makes you when you show up with a customer you're so much more valuable to them than had you just been going about as a typical insurance agent. And so I would encourage anybody who's listening that the biggest risk that you have is to not surround yourself with partners like Darrin and knowledge that's helping you grow and your business grow. Because we can't really complain and say, "Oh I've had such and such for so many years and you know they're you know they've done fine". Which I'm all about loyalty, don't get me wrong. Like I'm not. But what I am saying is all of us need to be aggressively seeking out how to grow ourselves and grow the value to our customers. And sometimes that entails actually taking a look at our partnerships instead of these people becoming somebody that can lead me? Are these people the growing network that can be a value to me and my customers as the competition stiffens. So not growing and being complacent I think is the biggest risk.
For more go to:
BIGGEST RISK:
I think actually interviewed a gal yesterday and she said. I asked her the question which is kind of my signature question get on my shows which is, "what do you do to intentionally think bigger? And I 'think it's a great response actually for your question. She said I work too. I work really hard to avoid complacency. And I think the biggest risk that all of us face in a world that's rapidly innovating and rapidly moving forward is to get complacent with our own personal growth in our own personal network. And I'm going to put up a plug for you. You didn't ask for this but to have somebody who's whose business is insurance. But goes about adding value to their clients really modeling media. Modeling marketing at its highest form. I think it's it's brilliant on your part because you're becoming a much more, even if nobody listens to this. I know that's not ture, we had this conversation before. You've got a great audience. That just affect the person that you're becoming by having these conversations. Just makes you when you show up with a customer you're so much more valuable to them than had you just been going about as a typical insurance agent. And so I would encourage anybody who's listening that the biggest risk that you have is to not surround yourself with partners like Darrin and knowledge that's helping you grow and your business grow. Because we can't really complain and say, "Oh I've had such and such for so many years and you know they're you know they've done fine". Which I'm all about loyalty, don't get me wrong. Like I'm not. But what I am saying is all of us need to be aggressively seeking out how to grow ourselves and grow the value to our customers. And sometimes that entails actually taking a look at our partnerships instead of these people becoming somebody that can lead me? Are these people the growing network that can be a value to me and my customers as the competition stiffens. So not growing and being complacent I think is the biggest risk.
Qualified Opportunity Zones were created in the 2017 tax plan passed by congress.
Following is from my second conversation with Real Estate Accountant, Jonathan McGuire, from Aldrich Advisors. In this we dive into the clarifications provided Treasury Department draft proposal of proposed regulations. Eventually, final regulations will follow. In the second round, a path from inception to exit strategy has been made clear.
On CREPN Radio episode #158 Round I, Jonathan explained what Qualified Opportunity Zones were and their purpose. For investors with a capital gain, from any investment, they could invest with a temporary deferral on the owed tax if they stayed in for 5 or 7 years. If they stayed in 10 plus years, the subsequent gain on the investment in the Qualified Opportunity Zone is TAX FREE.
Click the link to download your Qualified Opportunity Zone Explanation
Temporary Gain Deferral is the initial benefit to investors with capital gains who reinvest their gain into a Qualified Opportunity Fund that invest in a Qualified Opportunity Zone. The QOZ deferral program last until December 31, 2026 at which time, the deferred tax becomes due.
If the investor holds the investment for:
If the investor holds the investment for more than 10 years, ALL SUBSEQUENT GAINS ARE TAX FREE!
Use inside the Qualified Opportunity Zones - Originally, the understanding was specific to the real estate; new construction, or substantially improved. The round II clarified that tenants in a QOZ can also take advantage of the tax laws.
Round II clarified the end date for the free bonus on the subsequent gain. The 100% tax free subsequent gain ends in 2047. Previously, there was no recognized end date attached to this. This will likely create another anniversary date for additional market activity.
Fund Rules require that 90% of assets held by opportunity zone fund must be invested in qualified opportunity zone stock, partnership or property. And, at least 70% of the property inside of the business, etc must be qualified, ie: acquired after 12/17, substantial improvement, original use inside the QOZ, etc.
Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”
BIGGEST RISK: I would say the BIGGEST RISK is not taking a serious look at Opportunity Zones. If you don't do it and put a little bit of sweat equity into this to see if you can you can make a deal fit inside of a zone. If you have a project underway or a potential project that you're looking at I mean, you would be doing yourself a disservice if you have a property or a business that it's going to be located in the zone and not take advantage of this. Now maybe you don't have capital gains so you can't do anything. But you know maybe you need some investors, and you need capital. Why take a debt interest? Let's get somebody with equity that wants to have a vested interest in seeing the business succeed and create an investment that works for them and for you. And then it's a win win on both sides.
For more go to:
Darrin: [00:00:08] Jonathan McGuire what is the BIGGEST RISK you see that investors face? [00:00:13][5.5]
Jonathan: [00:00:17] I would say the BIGGEST RISK is not taking a serious look at Opportunity Zones. If if you don't do it and put put a little bit of sweat equity into this to see if you can you can make a deal fit inside of a zone. If you have a project underway or a potential project that you're looking at I mean you would be doing yourself a disservice if you have property or a business that it's going to be located in the zone and not take advantage of this. Now maybe you don't have capital gains so you can't do anything. But you know maybe you need some investors, and you need capital. Why take a debt interest? Let's get somebody with equity that wants to have a vested interest in seeing the business succeed and create an investment that works for them and for you. And then it's a win win on both sides. [00:00:17][0.0]
[5.5]
Darrin: [00:00:08] What is your BIGGEST RISK? [00:00:09][1.6]
Tim: [00:00:10] Sure. Great question and I pay a lot of attention to this because I've seen people make a lot of money and lose a lot of money in real estate. I want to make sure that I'm not making the same mistakes. The BIGGEST RISK, in me and my model and my business is probably tightening up of lending, tightening up of the banking. And so when I know how do you mitigate that right. Because my model is based on refinancing in 12 or 18 months. So one thing I could do is if I see the market shifting I can refinance sooner and I just don't get to take out like the refi cash out refight proceeds. Right. I can. I can refinance back out at my basis into long term debt at any time. The reason I wait until 12 months is typically because we could pull some money off the table distribute it. It pads the investors returns a little bit and makes them happy makes me more liquid to go qualify for more loans and things like that. But if I didn't if I didn't feel confident where the market would be twelve months from now I could definitely refinance sooner and at least get all my investors their money back out. And then just have long term debt in place and write out any sort of storm. The other thing that I do is I underwrite my projects as if it's going to be the loan to value is going to drop by 5 to 10 percent over the course the next 12 18 months. And then I also underwrite my jokes as if the interest rates are going to bump. Like right now my interest rates. I'm going to refinance right now my interest rates four point six percent and I'm underwriting my deals at 5.5 percent right now for anything that I'm acquiring today. So do I think to jump that much. I don't think so. But I want to be prepared for in case they do. So I'm underwriting it in a pretty conservative fashion making sure I'm making the offers at the price point that we need. And I mean it's such a low cost basis I'm buying at such wholesale prices that things would really have to shift hard for me to not be able to at least cash out my investors at the end of the day. So again I'm 30 to 40 percent below market values today and you know for traditional syndicators when they're looking out trying to forecast five years from now that's really hard. We could have three different presidents over the course next five years. Right. [00:02:25][134.3]
Darrin: [00:02:25] Right. [00:02:25][0.0]
Tim: [00:02:26] Versus forecasting out 12 months. It's a little bit more predictable of where the market's going to be in 12 months from now. You know interest rates aren't going to be at 18 percent or anything like that. Could they bump up maybe a half a point or a point? Yeah that might happen. Could lending tighten up a little bit? Yeah that could happen. But you know I'm at the point today where I have a big enough balance sheet and enough performing assets and enough cash flow coming in where even if the market shifts I'll still be a bankable. You know I'll still be able to put long term debt in place just maybe a little bit lower of a loan to value. And so. So that's that's really my greatest risk in my business. And you know if worst case scenario I got I got to ride out the storm and we can't refinance back out, my investors know that they're still gonna earn their 10 percent preferred rate of return on their money and they're OK with that. And if they have to ride it out you know 24 or thirty six or 48 months they're OK doing that. We have the asset. We're at a low enough basis we could sell it if we needed to or we could hang onto it. The cash flows enough the debt service coverage is high enough where we're able to cover all those expenses. [00:02:26][0.0]
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