Scott Smith takes us through what real estate investors need to do in order to survive and thrive the Corona Virus.
Finding value in multifamily where others cannot is key to your success in a competitive market.
JP Albano is a computer hard drive equipment sales turned multifamily real estate investor / multifamily syndicator. In a little under two years, he has invested in 230 plus units spread over 5 properties.
Finding value in today’s competitive multifamily market is difficult. JP’s most recent deal is a 60 unit property. It took almost 4 months of courting the seller, who was the original owner, and had operated the property for 60 years with no systems. Originally set up as a weekly rental for men, the current rents were less than half of the average market monthly rent.
A poorly operated property with 24% vacancy, in a market with no vacancies, and market rents that are twice what is being charged, that sounds like an opportunity.
The condition of the property lent itself to the listing land broker as a redevelopment opportunity. Local code violations made other potential buyers look past this property. If you had no imagination, you too would drive right past. It was only through looking at the business and pulling the numbers together that JP and his team were able to realize the potential.
Time lingered on, and the seller had become desperate.
The seller was willing and ready to sell. Recent sales comps for area apartments were $64,000 per door. JP was able to negotiate a price based on the seller’s numbers about $17,000 per door. For a down payment of $400,000, and seller financing of the balance with 0% interest for 18 months. Additional opportunity, is the billboard on the property for which the seller has not enforced the lease for multiple years.
In order to know a market, you have to do the footwork. JP was underwriting multiple deals per week, making offers on a fraction of those, and losing each time. The multiple reps helped fine tune his understanding of the market, and expand the search to additional markets.
The process can be frustrating. For each offer, you are emotionally invested. Losing multiple times, takes a toll. The antidote to loss, is making sure you have options. Focus on the number, and remember this is business.
If you only have one option and lose, it hurts. When you have four options and get one, it’s a win. Today, his team is underwriting in 12 markets, submitting letters of intent, raising money and closing deals.
Meeting brokers face to face is where it all begins. If they present you a deal, you absolutely have to respond. Even if the deal does not work for you, you have to respond to the broker and give input as to why it does not work. This will give the broker additional direction for what you are looking for.
When you close your first deal it proves to the area commercial real estate brokers and lenders that you are a closer. This is the proof that makes others take notice. Once you are recognized, the deals start to present themself. The shortcut is to go into a smaller market, or partner up with a proven closer.
Multifamily is a team sport. When selecting your teammates, it’s important to find out if you are on the same page. To do so, JP recommends you underwrite a couple deals and see if you both recognize the same opportunity. If not, there is no harm. When you find a good fit, the opportunity to run will propel your growth.
Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”
BIGGEST RISK: So one of the BIGGEST RISKS that we were unaware of that we've since become aware of is one of my properties in Texas, a small property, 28 units. I guess I'll start with the summary and then I'll go into the story. If you're going to get started as an investor in smaller properties just because it's easier, right? Easy to raise money, less overwhelming than taking down a hundred units on whatever, really investigate your third party property management options thoroughly. Have a number of backups lined up. You know, getting into this business, I thought I had an expectation that there was going to be more pacivity into this business. Passive income, passive income is a lie. Unless you are a passive investor, if you're going to be a GP and even if you hire third party property management, there's work to do.
In my experience there aren't, I haven't run into many third party PMs that will have the same level of care and attention to detail that I do. You know, you would. So we found ourselves in a situation where we had an underperforming, when all came down to it, property manager for our property and it was hurting our numbers.
Fortunately we were in a position where one of the partners is local to the property. So making sure that one of the partners is physically close to it, take over property manager roles. And, we were able in the course of I think four weeks to transfer to get, become 100% leased up and have a waiting list. Something that we were struggling for for weeks and months, um, with a third party PM. So, uh, part of the problem was we were having a hard time finding someone to take his role, uh, as a replacement.
And then one day he called us and said, Hey, I'm letting you guys go on changing our business model. So it forced us to figure something out. As a stop gap, we said, well, let's just take over self-management for now. And it worked out, still working out really well. Um, because we've been kicking butt. But we didn't, we didn't expect to find ourselves in a situation where, oh my gosh, who are we going to find to manage it?
The smaller property sizes you'll find there's a lot of single family property managers, which is cool, but they're not really well suited for multifamily. Four units sure, but not 12 or 20 or 30 or 40. And then it's also too small for the bigger players. You know, they want 50 units or 60 units and above. So there's this gray area of like 12 to 40 ish where there may not be in your area or your market. A lot of third party PMs. And that's critical to the success of your investment. Now that's an execution risk right there.
Finding value in multifamily where others cannot is key to your success in a competitive market.
JP Albano is a computer hard drive equipment sales turned multifamily real estate investor / multifamily syndicator. In a little under two years, he has invested in 230 plus units spread over 5 properties.
Finding value in today’s competitive multifamily market is difficult. JP’s most recent deal is a 60 unit property. It took almost 4 months of courting the seller, who was the original owner, and had operated the property for 60 years with no systems. Originally set up as a weekly rental for men, the current rents were less than half of the average market monthly rent.
A poorly operated property with 24% vacancy, in a market with no vacancies, and market rents that are twice what is being charged, that sounds like an opportunity.
The condition of the property lent itself to the listing land broker as a redevelopment opportunity. Local code violations made other potential buyers look past this property. If you had no imagination, you too would drive right past. It was only through looking at the business and pulling the numbers together that JP and his team were able to realize the potential.
Time lingered on, and the seller had become desperate.
The seller was willing and ready to sell. Recent sales comps for area apartments were $64,000 per door. JP was able to negotiate a price based on the seller’s numbers about $17,000 per door. For a down payment of $400,000, and seller financing of the balance with 0% interest for 18 months. Additional opportunity, is the billboard on the property for which the seller has not enforced the lease for multiple years.
In order to know a market, you have to do the footwork. JP was underwriting multiple deals per week, making offers on a fraction of those, and losing each time. The multiple reps helped fine tune his understanding of the market, and expand the search to additional markets.
The process can be frustrating. For each offer, you are emotionally invested. Losing multiple times, takes a toll. The antidote to loss, is making sure you have options. Focus on the number, and remember this is business.
If you only have one option and lose, it hurts. When you have four options and get one, it’s a win. Today, his team is underwriting in 12 markets, submitting letters of intent, raising money and closing deals.
Meeting brokers face to face is where it all begins. If they present you a deal, you absolutely have to respond. Even if the deal does not work for you, you have to respond to the broker and give input as to why it does not work. This will give the broker additional direction for what you are looking for.
When you close your first deal it proves to the area commercial real estate brokers and lenders that you are a closer. This is the proof that makes others take notice. Once you are recognized, the deals start to present themself. The shortcut is to go into a smaller market, or partner up with a proven closer.
Multifamily is a team sport. When selecting your teammates, it’s important to find out if you are on the same page. To do so, JP recommends you underwrite a couple deals and see if you both recognize the same opportunity. If not, there is no harm. When you find a good fit, the opportunity to run will propel your growth.
Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”
BIGGEST RISK: So one of the BIGGEST RISKS that we were unaware of that we've since become aware of is one of my properties in Texas, a small property, 28 units. I guess I'll start with the summary and then I'll go into the story. If you're going to get started as an investor in smaller properties just because it's easier, right? Easy to raise money, less overwhelming than taking down a hundred units on whatever, really investigate your third party property management options thoroughly. Have a number of backups lined up. You know, getting into this business, I thought I had an expectation that there was going to be more pacivity into this business. Passive income, passive income is a lie. Unless you are a passive investor, if you're going to be a GP and even if you hire third party property management, there's work to do.
In my experience there aren't, I haven't run into many third party PMs that will have the same level of care and attention to detail that I do. You know, you would. So we found ourselves in a situation where we had an underperforming, when all came down to it, property manager for our property and it was hurting our numbers.
Fortunately we were in a position where one of the partners is local to the property. So making sure that one of the partners is physically close to it, take over property manager roles. And, we were able in the course of I think four weeks to transfer to get, become 100% leased up and have a waiting list. Something that we were struggling for for weeks and months, um, with a third party PM. So, uh, part of the problem was we were having a hard time finding someone to take his role, uh, as a replacement.
And then one day he called us and said, Hey, I'm letting you guys go on changing our business model. So it forced us to figure something out. As a stop gap, we said, well, let's just take over self-management for now. And it worked out, still working out really well. Um, because we've been kicking butt. But we didn't, we didn't expect to find ourselves in a situation where, oh my gosh, who are we going to find to manage it?
The smaller property sizes you'll find there's a lot of single family property managers, which is cool, but they're not really well suited for multifamily. Four units sure, but not 12 or 20 or 30 or 40. And then it's also too small for the bigger players. You know, they want 50 units or 60 units and above. So there's this gray area of like 12 to 40 ish where there may not be in your area or your market. A lot of third party PMs. And that's critical to the success of your investment. Now that's an execution risk right there.
Finding value in multifamily where others cannot is key to your success in a competitive market.
JP Albano is a computer hard drive equipment sales turned multifamily real estate investor / multifamily syndicator. In a little under two years, he has invested in 230 plus units spread over 5 properties.
Finding value in today’s competitive multifamily market is difficult. JP’s most recent deal is a 60 unit property. It took almost 4 months of courting the seller, who was the original owner, and had operated the property for 60 years with no systems. Originally set up as a weekly rental for men, the current rents were less than half of the average market monthly rent.
A poorly operated property with 24% vacancy, in a market with no vacancies, and market rents that are twice what is being charged, that sounds like an opportunity.
The condition of the property lent itself to the listing land broker as a redevelopment opportunity. Local code violations made other potential buyers look past this property. If you had no imagination, you too would drive right past. It was only through looking at the business and pulling the numbers together that JP and his team were able to realize the potential.
Time lingered on, and the seller had become desperate.
The seller was willing and ready to sell. Recent sales comps for area apartments were $64,000 per door. JP was able to negotiate a price based on the seller’s numbers about $17,000 per door. For a down payment of $400,000, and seller financing of the balance with 0% interest for 18 months. Additional opportunity, is the billboard on the property for which the seller has not enforced the lease for multiple years.
In order to know a market, you have to do the footwork. JP was underwriting multiple deals per week, making offers on a fraction of those, and losing each time. The multiple reps helped fine tune his understanding of the market, and expand the search to additional markets.
The process can be frustrating. For each offer, you are emotionally invested. Losing multiple times, takes a toll. The antidote to loss, is making sure you have options. Focus on the number, and remember this is business.
If you only have one option and lose, it hurts. When you have four options and get one, it’s a win. Today, his team is underwriting in 12 markets, submitting letters of intent, raising money and closing deals.
Meeting brokers face to face is where it all begins. If they present you a deal, you absolutely have to respond. Even if the deal does not work for you, you have to respond to the broker and give input as to why it does not work. This will give the broker additional direction for what you are looking for.
When you close your first deal it proves to the area commercial real estate brokers and lenders that you are a closer. This is the proof that makes others take notice. Once you are recognized, the deals start to present themself. The shortcut is to go into a smaller market, or partner up with a proven closer.
Multifamily is a team sport. When selecting your teammates, it’s important to find out if you are on the same page. To do so, JP recommends you underwrite a couple deals and see if you both recognize the same opportunity. If not, there is no harm. When you find a good fit, the opportunity to run will propel your growth.
Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”
BIGGEST RISK: So one of the BIGGEST RISKS that we were unaware of that we've since become aware of is one of my properties in Texas, a small property, 28 units. I guess I'll start with the summary and then I'll go into the story. If you're going to get started as an investor in smaller properties just because it's easier, right? Easy to raise money, less overwhelming than taking down a hundred units on whatever, really investigate your third party property management options thoroughly. Have a number of backups lined up. You know, getting into this business, I thought I had an expectation that there was going to be more pacivity into this business. Passive income, passive income is a lie. Unless you are a passive investor, if you're going to be a GP and even if you hire third party property management, there's work to do.
In my experience there aren't, I haven't run into many third party PMs that will have the same level of care and attention to detail that I do. You know, you would. So we found ourselves in a situation where we had an underperforming, when all came down to it, property manager for our property and it was hurting our numbers.
Fortunately we were in a position where one of the partners is local to the property. So making sure that one of the partners is physically close to it, take over property manager roles. And, we were able in the course of I think four weeks to transfer to get, become 100% leased up and have a waiting list. Something that we were struggling for for weeks and months, um, with a third party PM. So, uh, part of the problem was we were having a hard time finding someone to take his role, uh, as a replacement.
And then one day he called us and said, Hey, I'm letting you guys go on changing our business model. So it forced us to figure something out. As a stop gap, we said, well, let's just take over self-management for now. And it worked out, still working out really well. Um, because we've been kicking butt. But we didn't, we didn't expect to find ourselves in a situation where, oh my gosh, who are we going to find to manage it?
The smaller property sizes you'll find there's a lot of single family property managers, which is cool, but they're not really well suited for multifamily. Four units sure, but not 12 or 20 or 30 or 40. And then it's also too small for the bigger players. You know, they want 50 units or 60 units and above. So there's this gray area of like 12 to 40 ish where there may not be in your area or your market. A lot of third party PMs. And that's critical to the success of your investment. Now that's an execution risk right there.
For more go to:
Website: www.jpalbano.com
Darrin: (00:08)
JP Albano, what is the BIGGEST RISK?
JP : (00:12)
So one of the BIGGEST RISKS that we were unaware of that we've since become aware of is one of my properties in Texas, a small property, 28 units. I guess I'll start with the summary and then I'll go into the story. Um, is if you're going to get started as an investor in smaller properties just because it's easier, right? Easy to raise money, less overwhelming than taking down a hundred units on whatever, really investigate your third party property management options thoroughly. Have a number of backups lined up. You know, getting into this business, I thought I had an expectation that there was going to be more pacivity into this business. Passive income, passive income is a lie. Unless you are a passive investor, if you're going to be a GP and even if you hire third party property management, there's work to do.
In my experience there aren't, I haven't run into many third party PMs that will have the same level of care and attention to detail that I do. You know, you would. So we found ourselves in a situation where we had a underperforming, when all came down to it, property manager for our property and was hurting our numbers. And fortunately we were in a position where one of the partners is local to the property.
So making sure that one of the partners is physically close to it, um, take over property manager roles. And, uh, we were able in the course of I think four weeks to transfer to get, become 100% leased up and have a waiting list. Something that we were struggling for for weeks and months, um, with a third party PM. So, uh, part of the problem was we were having a hard time finding someone to take his role, uh, as a replacement.
And then one day he called us and said, Hey, I'm letting you guys go on changing our business model. So it forced us to figure something out. As a stop gap, we said, well, let's just take over self-management for now. And it worked out, still working out really well. Um, because we've been kicking butt. But we didn't, we didn't expect to find ourselves in a situation where, Oh my gosh, who are we going to find to manage it? Because the smaller property sizes you'll find there's a lot of single family property managers, which is a cool, but they're not really well suited for multifamily. Four units sure, but not 12 or 20 or 30 or 40. And then it's also too small for the bigger players. You know, they want 50 units or 60 units and above. So there's this gray area of like 12 to 40 ish where there may not be in your area or your market. A lot of third party PMs. And that's critical to the success of, of your investment. Now that's an execution risk right there.
CARES Act has multiple options for relief.
Complete text of the act: https://www.congress.gov/bill/116th-congress/house-bill/748/text#toc-HCC079DAB5D724A3B9AE86D4E64A83BBE
Jonathan McGuire takes us through the different elements and describes the different attributes and which might work for you.
Coronavirus Relief Options: https://www.sba.gov/funding-programs/loans/coronavirus-relief-options
Paycheck Protection Program: https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program-ppp#section-header-1
If you have employees, W2 wages, this is likely your best option.
Economic Injury Disaster Loan EDIL: https://covid19relief.sba.gov/#/
If you do not have employees, this is likely your best option.
There are additional fixes in the bill to correct prior measures.
For additional information, go to:
Website: aldrichadvisors.com
Custom software solutions can make real estate professionals more productive for less cost.
Dan Moore is the founder and CEO at Vaporware Vaporware Custom Software headquartered in Raleigh, NC. After graduation form Georgia Tech Dan first worked for large software companies where he was not close to the problems the software was designed to solve. Wanting to be closer to the users with problems his software designs could help, he started his own consulting firm.
Custom software weighs viability, feasibility and utility. There is a great deal of satisfaction when the software solution to the problem contains all three.
An example of custom software for real estate that Vaporwrare has worked on is
Servusconnect. This is a software solution for multifamily maintenance scheduling, which helps reduce the time necessary to turn a unit. The service order is initiated by the resident, and instantly, maintenance calendar is scheduled.
Upon completion of the repair request, the resident receives a satisfaction survey, which feeds the online reputation platforms. A good custom software solution allows the user to communicate easily, collect measurable data, and generate useful reports that enable the user to be more prepared for future events. When data is used properly, you can run a more profitable operation.
Custom software ranges from fully custom to just one function that plugs into another software platform through API. Dan believes that the selected custom software operation is a better use of time and money. In this way you are able to customize the part you need to work better and get a robust solution. If you try to build the entire solution from the ground up, you end up with lesser degrees of great all the way around.
There are multiple excellent software solutions already available for things like payment collection. If you use MRI or Yardi for your property management software your custom software can plug into and work with these using API. Therefore you do not have to build a complete system from the ground up and your staff will not have to be retrained to utilize your custom software.
For any data you collect and track in a spreadsheet, a custom software solution can be created to make data collection easier and more user friendly. Some reasons to consider a custom solution include;
The decision to have custom software created is involved. For organizations that are large enough to adopt the software for your own use. The cost tends to be more justifiable for companies with more than 50 employees and $10-$20 million in annual revenue.
If you can identify a single problem, and then find others with the same problem, you can start to determine if there is a market for your solution. When there are enough people with the problem who are willing to pay, it can make sense to spend for a custom solution that you could then sell to others.
Depending on your needs, custom software can cost as much as you want to spend. Vaporware approach takes into consideration the clients current solution cost and tries to determine what are the minimum output that will be helpful. Small custom software solutions can start as low as $5 - $10 thousand dollars.
User benefits are maximized when the programmer and user are able to communicate to develop specific benefits for the user. More input allows the developer to continue to improve the product so that the end product is easy to use and collects the wanted data. The output allows the company to put the info to future use and improve the output..
Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”
BIGGEST RISK: I think the BIGGEST RISK for all of us in our personal, professional lives is speed. Time is a very limited resource for us all. Time is how opportunities kind of come and go. If we talked a little bit earlier about being able to know if a property is going to go on the market before it does, being able to operate faster than the competition.
So I would definitely have to say speed. The speed at which we can operate, the speed at which we can save our time and do passive investments and be able to realize value faster and see more opportunities and the right opportunities faster. So anything that we can do to be faster at what we do and relying on computers is a good way to do that.
For more go to:
Website: www.vaporware.net
Email: Dan@vaporware.net
Darrin: Dan Moore, what is the BIGGEST RISK?
Dan: I think the BIGGEST RISK for all of us in our personal, professional lives is speed. Time is a very limited resource for us all. Time is how opportunities kind of come and go. If we talked a little bit earlier about being able to know if a property is going to go on the market before it does, being able to operate faster than the competition.
So I would definitely have to say speed. The speed at which we can operate, the speed at which we can save our time and do passive investments and be able to realize value faster and see more opportunities and the right opportunities faster. So anything that we can do to be faster at what we do and relying on computers is a good way to do that.
Retail trends in real estate continue to change with the and for the consumer.
Tom Londres is the CEO of Metro Commercial Real Estate Brokerage based in Philadelphia, PA. The core business focuses on suburban retail strip centers, big box, community centers, supermarket anchored centers, and downtown urban. They provide third party solutions for retailers, owners of retail and investors in the greater metro area, including Pennsylvania, New Jersey and Delaware.
Location was, is and will be key to the value of commercial retail real estate. Depending on the criteria of a particular business, the value of a location will vary from business to business. If you are trying to sell tequila on the morning side of the street, you are going to struggle. You have to make it easy for your consumer to access your business. For a retailer, location is a surgical strike!
In the 1980’s the growth of the retail strip centers grew with suburban sprawl. This is when the big box retailers' growth exploded, think Wal-Mart & Home Depot and the deconstruction of the department store began. Instead of being located in a department store, the departments became a store of their own. Apparel, appliances, tv’s all became a single mega center, often located across the street from the mall.
From there came the open air shopping centers with one or two categories under one roof.
Online and bricks & mortar used to fight for the customer, you stay in your cage, I’ll stay in mine. No more.
Now, we have the omni channel. No longer can a successful brick & mortar retail business thrive without an online presence, nor can an online retailer thrive without a brick & mortar presence. They need both. Retail has to have an online presence and a bricks and mortar presence. This race to grow is creating disruption and opportunities for those who can execute.
Buy online, purchase in store (BOPIS) is the evolution of online with bricks and mortar. Stores are now trying to balance the physical space needs with just the right amount of merchandise on hand to increase sales when you pickup your online order in the store.
This eliminates the delivery cost, and the numbers show that the consumer will make an additional purchase when they pick up their order in the store.
The consumer demands quality at a good price, now and the ability to get out of the transaction whenever they want. For the retailer that gets this wrong, they will forever lose the consumer. These consumer demands are changing the physical configuration of the store.
Stores have to create an experience in their store. The consumer goes to the store to have the experience, then makes their order. The product can be shipped direct to the consumer or available for the client to pick up in the store.
Today, data drives decisions. For years data has been collected but only recently has it been analyzed and applied in a recognizable form. Now the consumer and retailer can lean into the data collection for greater convenience for both parties.
Apparel reconfigured is happening much like the hotel business and Airbnb. Consumers recognize that they want the nicest brand, but realistically will only use it once. Instead of a closet full of once worn garments, why not rent. Millennials value material possessions less than prior generations. They want the experience, not the possession.
Retailers have to be good stewards to meet the consumers expectations. Consumers expect a responsible retailer. The consumer is rejecting retailers that ignore conserving energy. Roofs, parking lots, solar power, recycled water, lighting, etc. If you do not conform and retrofit your store, the millennial buyer will pass you buy for the responsible retail option.
Disruption continues to reveal opportunities in real estate for those who can see the opportunity. The reconfiguration of retail is greater in the urban core than suburbia. Mixed use projects and established urban retail show great potential.
Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”
BIGGEST RISK: I'll give you what I think is the biggest risk or one of the big risks if you owned retail real estate. I'm not going to get into the mind of a retailer where they think they should be other than I think they should be always in the online world and the bricks and mortar world. That, that is universally agreed if you're a retailer and want to move forward with some exceptions, but if you want to, generally speaking, if you want to be a vibrant, relevant retailer moving forward, you have to have an online and a bricks and mortar presence that's effortless, that has a great customer experience.
And we can see that with both of those retailers that are disciplined in each one of those corners trying to get, um, into the other space. But I would say if you own retail real estate and you have an exposure, um, high exposure to department stores and apparel retailers, I would say if your portfolio contains a large portion, the percentage of your occupancy, is coming from department stores or apparel retailers. I would say you need to rethink when those options come up.
If you have the opportunities to downsize to mitigate your risks, you have to inject entertainment, you have to inject food, you have to inject convenience, services. Fitness, theater. And again, moving towards diversifying your center, not away from retail, to diversify and add apartments. Although some assets would lean towards that just in scale and size you need mitigate and say, I'll take one wing of retail and make them apartments or luxury condos or townhouses.
Maybe I'll add a hotel or something, but generally speaking, if you look at your portfolio, if you're owner of a retail real estate and you're leaning more towards a department store and or apparel, I'd say probably rethink it. Because I think apparel is shrinking, uh, in its category and its demand and its consumption. And I think department stores, most of them, if not all of them, will be radically different or completely eliminated within a decade.
For more go to:
I'd like to ask you, Tom Londres, What is the BIGGEST RISK?
Tom:
Well, you know, I'd have to take a position to establish a vantage point on answering that. Am I a retailer looking into the future saying where's my biggest risk? Am I an investor or an owner of a piece of retail real estate looking to position it, um, to minimize my risk or assess where am I most exposed going forward? So I'll take the latter. I'll tell you, I'll, I'll give you what I think is the biggest risk or one of the big risks if you owned retail real estate.
I'm not going to get into the mind of a retailer where they think they should be other than I think they should be always in the online world and the bricks and mortar world. That, that is universally agreed if you're a retailer and want to move forward with some exceptions, but if you want to, generally speaking, if you want to be a vibrant, relevant retailer moving forward, you have to have an online and a bricks and mortar presence that's effortless, that has a great customer experience.
And we can see that with both of those retailers that are disciplined in each one of those corners trying to get, um, into the other space.
But I would say if you own retail real estate and you have an exposure, um, high exposure to department stores and apparel retailers, I would say if your portfolio contains a large portion, the percentage of your occupancy, um, is coming from department stores or apparel retailers. I would say you need to rethink when those options come up.
If you have the opportunities to downsize to mitigate your risks, you have to inject, entertainment, you have to inject food, you have to inject convenience, services. Fitness, theater. And again, moving towards diversifying your center, not away from retail, to diversify and add apartments. Although some assets would lean towards that just in scale and size you need mitigate and say, I'll take one wing of retail and make them apartments or luxury condos or townhouses.
Maybe I'll add a hotel or something, but generally speaking, if you look at your portfolio, if you're owner of a retail real estate and you're leaning more towards a department store and or apparel, I'd say probably rethink it. Because I think apparel is shrinking, uh, in its category and its demand and its consumption. And I think department stores, most of them, if not all of them, will be radically different or completely eliminated within a decade.
1031 Exchange for real estate investors is often talked about, but not always understood when it makes sense.
Toija Beutler, the principal of Beutler Exchange Group LLC , has been acting as a qualified intermediary to facilitate 1031 exchanges since 1992. Following is a summary of our conversation.
Section 1031 of the Internal Revenue Service tax code is where the law originates. The code was written in 1919, however prior to 1992, there was no regulation. A 1031 Exchange provides the seller of three types of real estate, residential rentals, commercial property and investment land. Each of these are eligible for exchange.
If a taxpayer elects to exchange one property for a like kind property, they can transfer the tax and depreciation to the new property. This transfer allows the seller to defer paying the tax normally due upon sale.
A lIke kind exchange allows the seller to sell one type of real estate and buy another. The program is an incentive for real estate investors to keep their money in real estate.
There are two benefits for the real estate investor who elects to exchange. The ability to defer both the capital gains and the depreciation recapture from the property you are selling. When you exchange from one property to another, the capital gains and depreciation recapture that would normally be due at sale, are transferred to the new property.
To complete a 1031 exchange, the rules for replacement apply to the property, equity and debt from the sale property. This means that the seller must purchase a property of equal or greater of the net value, invest all of the equity from the sale, and replace the debt that was on the sale property.
The debt on your property can be replaced with cash if you would prefer to not take new debt on your replacement property.
If the replacement property is of lesser value, does not use all of the equity nor replace all of the debt, there will be tax due from the seller.
The timeline for 1031 exchanges are carved in stone. There is no option for extension. When you sell a property, you have 180 days from the sale to complete the purchase of your replacement property. From the date of sale, you have 45 days to identify 3 potential properties to use for your replacement. Once you identify, you must complete the purchase of one of the three properties for a successful exchange.
Toija recommends that as soon as you have half a thought about selling, you should engage a 1031 accommodator. This allows you the best option to complete a successful exchange.
What are you selling and what do you want to buy? These are some of the first questions you need to answer. How the property is titled is how the replacement property will need to be titled. If you own a property with others and the sellers are not in agreement on the replacement property, you will not be successful.
Who can you buy from? Anyone except for a related party, parents, grandparents, children, brothers and sisters are all excluded as options for you to purchase from.
Strategies for replacement property need to be considered prior to selling the first property. For the best outcome, it is advisable to have a conversation with an exchange accommodator and your tax professional to create a successful strategy.
A 1031 exchange does not work for a second home. If twenty-four months prior to the date of sale, and 24 months after the purchase of replacement property, personal use is not allowed.
Nor is a Flip eligible for an exchange. A flip is inventory.
For a mixed use property, you can exchange the portion of the property that was used for investment.
In a forward exchange, the qualified intermediary acts as the seller for you, then applies the proceeds in the new property. If you find a replacement property prior to completing the sale of your first property, you can utilize a Reverse Exchange. This requires that the qualified intermediary hold title of the replacement property until the first property is sold. The same 180 day timeline holds true. You must complete the sale of the first property within 180 days from the purchase of the replacement property.
Constructive receipt is what triggers the tax. When you hire a Qualified Intermediary, they take receipt of proceeds and coordinate with the title company for the placement of the proceeds. This eliminates the taxable event for you the seller.
Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”
BIGGEST RISK: Failure to engage a 1031 Exchange Company prior to closing.
For more go to:
Website: www.beutlerexchangegroup.com
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