Tag Archives: Commercial Real Estate

Different Types of Real Estate Investments You Can Make

Real estate is one of the oldest and most popular asset classes.  Most new investors in real estate know that, but what they don’t know is how many different types of real estate investments exist.  It goes without saying that each type of real estate investment has its own potential benefits and pitfalls, including unique quirks in cash flow cycles, lending traditions, and standards of what is considered appropriate or normal, so you’ll want to study them well before you start adding them to your portfolio.

As you uncover these different types of real estate investments and learn more about them, it isn’t unusual to see someone build a fortune by learning to specialize in a particular niche.

If you decide this is an area in which you might want to devote significant time, effort, and resources to in your own quest for financial independence and passive income, I’d like to walk you through some of the different kinds of real estate investing so you can get a general lay of the land.

Before We Talk About Real Estate Investments

Before we dive into the different types of real estate investments that may be available to you, I need to take a moment to explain that you should almost never buy investment real estate directly in your own name. There is a myriad of reasons, some having to do with personal asset protection.  If something goes wrong and you find yourself facing something unthinkable like a lawsuit settlement that exceeds your insurance coverage, you and your advisors need the ability to put the entity that holds the real estate into bankruptcy, so you have a chance to walk away to fight another day.

 A major tool in structuring your affairs correctly involves the choice of legal entity.  Virtually all experienced real estate investors use a special legal structure known as a Limited Liability Company, or LLC for short, or a Limited Partnership, or LP for short.  You should seriously speak with your attorney and accountant about doing the same.

 It can save you unspeakable financial hardship down the road.  Hope for the best, plan for the worst.

These special legal structures can be set up for only a few hundred dollars, or if you use a reputable attorney in a decent sized city, a few thousand dollars. The paperwork filing requirements aren’t overwhelming, and you could use a different LLC for each real estate investment you owned. This technique is called “asset separation” because, again, it helps protect you and your holdings.  If one of your properties gets into trouble, you may be able to put it into bankruptcy without hurting the others (as long as you didn’t sign an agreement to the contrary, such as a promissory note that cross-collateralized your liabilities).

With that out of the way, let’s get into the heart of this article and focus on the different types of real estate.

From Apartment Buildings to Storage Units, You Can Find the Type of Real Estate Project That Appeals to Your Personality and Resources

If you’re intent on developing, acquiring, or owning, or flipping real estate, you can better come to an understanding of the peculiarities of what you’re facing by dividing real estate into several categories.

  • Residential real estate investments are properties such as houses, apartment buildings, townhouses, and vacation houses where a person or family pays you to live in the property. The length of their stay is based upon the rental agreement, or the agreement they sign with you, known as the lease agreement.  Most residential leases are on a twelve-month basis in the United States.
  • Commercial real estate investments consist mostly of things like office buildings and skyscrapers.  If you were to take some of your savings and construct a small building with individual offices, you could lease them out to companies and small business owners, who would pay you rent to use the property.  It isn’t unusual for commercial real estate to involve multi-year leases.  This can lead to greater stability in cash flow, and even protect the owner when rental rates decline, but if the market heats up and rental rates increase substantially over a short period of time, it may not be possible to participate as the office building is locked into the old agreements.
  • Industrial real estate investments can consist of everything from industrial warehouses leased to firms as distribution centers over long-term agreements to storage units, car washes and other special purposes real estate that generates sales from customers who temporarily use the facility. Industrial real estate investments often have significant fee and service revenue streams, such as adding coin-operated vacuum cleaners at a car wash, to increase the return on investment for the owner.
  • Retail real estate investments consist of shopping malls, strip malls, and other retail storefronts. In some cases, the landlord also receives a percentage of sales generated by the tenant store in addition to a base rent to incentivize them to keep the property in top-notch condition.
  • Mixed-use real estate investments are those that combine any of the above categories into a single project. I know of an investor in California who took several million dollars in savings and found a mid-size town in the Midwest. He approached a bank for financing and built a mixed-use three-story office building surrounded by retail shops. The bank, which lent him the money, took out a lease on the ground floor, generating significant rental income for the owner. The the other floors were leased to a health insurance company and other businesses. The surrounding shops were quickly leased by a Panera Bread, a membership gym, a quick service restaurant, an upscale retail shop, a virtual golf range, and a hair salon. Mixed-use real estate investments are popular for those with significant assets because they have a degree of built-in diversification, which is important for controlling risk.
  • Beyond this, there are other ways to invest in real estate if you don’t want actually to deal with the properties yourself.  Real estate investment trusts, or REITs, are particularly popular in the investment community.  When you invest through a REIT, you are buying shares of a corporation that owns real estate properties and distributes practically all of its income as dividends.  Of course, you have to deal with some tax complexity – your dividends aren’t eligible for the low tax rates you can get on common stocks – but, all in all, they can be a good addition to the right investor’s portfolio if purchased at the right valuation and with a sufficient margin of safety.  You can even find a REIT to match your particular desired industry; e.g., if you want to own hotels, you can invest in hotel REITs.
  • You can also get into more esoteric areas, such a tax lien certificates.  Technically, lending money for real estate is also considered real estate investing, but I think it is more appropriate to consider this as a fixed income investment, just like a bond, because you generating your investment return by lending money in exchange for interest income.  You have no underlying stake in the appreciation or profitability of a property beyond that interest income and the return of your principal.
  • Likewise, buying a piece of real estate or a building and then leasing it back to a tenant, such as a restaurant, is more akin to fixed income investing rather than a true real estate investment. You are essentially financing a property, although this somewhat straddles the fence of the two because you will eventually get the property back and presumably the appreciation belongs to you.

Post found on www.thebalance.com

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There’s No Better Time to Be a Real Estate Investor

Real estate investors may have never had it so good. A classic alternative investment in a volatile stock market, real estate also just got a boost from the Tax Cuts and Jobs Act, with landlords among the biggest winners.

The law’s new provisions especially favor rental properties. “Real estate investors have historically been given preferential treatment by the tax code,” says Nick Sher, founder of New York-based Sher & Associates. “All things being equal, 2018 tax reform only enhanced that preferential treatment.”

And there’s no shortage of tenants. “Real estate is a strong long-term investment because people will always need housing,” says Ryan Coon, CEO of Rentalutions, a Chicago-based company that provides online tools for landlords. “While the housing boom and bust of a decade ago hurt a lot of overleveraged buyers, we’re facing a housing shortage right now, and that scarcity could mean higher rents.”

Other tax changes that have created disincentives for home ownership could push more consumers into the rental market. New limits on deductions for mortgage interest and state and local property taxes mean there’s less of a tax advantage to owning a home, Coon says. The higher standard deduction may also have a chilling effect on a taxpayers’ ability to benefit from itemizing and deducting mortgage interest.

If you’re considering wading into the rental property investing waters, here’s what the changes mean from a tax perspective.

Pass-through entities get a tax break. One of the most significant provisions of the tax bill affecting real estate investors is the 199A pass-through deduction. This allows residential landlords who operate as pass-through entities to deduct 20 percent of net rental income right off the top. “The new deduction will allow many individuals at the highest tax brackets to effectively reduce their tax rate from 37 percent to 29.6 percent,” says Chris Pegg, senior director of wealth planning for Wells Fargo Private Bank in San Diego.

But there are some exceptions for who can claim this deduction. “New qualified business income rules do not permit the full deduction for high-income specified service businesses, which includes lawyers, accountants, doctors, consultants and financial advisors,” says George Clough, senior vice president for People’s United Wealth Management in Bridgeport, Connecticut.

Claiming the full deduction also depends on income. For pass-through entities to qualify, total annual income must be less than $157,500 for single filers and $315,000 for those who are married and file jointly.

Rental property investors should also keep in mind that the 20 percent deduction of rental income is capped by whichever is greater: 50 percent of wages or 25 percent of wages plus 2.5 percent of the unadjusted basis of qualified property held by the business, says Rob Crigler, managing partner at Mariner Wealth Advisors in Madison, New Jersey. Qualified property is any rental property you own that’s subject to depreciation, and the unadjusted basis is the property’s original cost, without depreciation.

For an idea of how much the pass-through deduction could be worth to a rental property investor, he says to assume you own a 10-unit apartment building through a limited liability company, with no employee wages. The building was constructed in 2012, with land costing $100,000 and the building costing $800,000. In 2018, your LLC has a taxable profit of $300,000. In that case, Crigler says, the potential 20 percent pass-through deduction is $60,000 or 20 percent of $300,000; however, it’s limited to 2.5 percent of the $800,000 building or $20,000.

Anthony Glomski, principal and founder of AG Asset Advisory in Los Angeles, says investors just entering the rental property arena should fully understand the tax implications of the deduction. “Each person’s situation is going to be different,” he says. “For example, fully depreciated property may not qualify for the deduction, but a simple fix may be exchanging into another property with a higher basis.” Your financial advisor or accountant can help with determining whether you qualify for the deduction.

New Section 179 rules yield additional tax savings. The tax bill preserves and expands some existing tax benefits for rental property owners, including the Section 179 deduction. It allows business owners to deduct the cost of qualifying equipment or software purchased or financed in that tax year.

Beginning in 2018, the deduction is extended to rental property business owners, allowing them to deduct the cost of personal property, such as appliances or furniture used in rental units. The deduction has also been expanded to include investments in certain improvements, such as a new roof, an upgraded heating and air system or new fire protections and security systems.

“By having a firm grasp of Section 179, investors can realize some meaningful reductions to taxable income,” says Scott Bennett, a financial advisor with Wells Fargo Real Estate Asset Management in New York. “It’s important to be familiar with what assets and improvements qualify for the depreciation allowance to take full advantage of the change.”

In addition to widening the scope of deductible expenses, the tax bill also raises the Section 179 deduction limit from $500,000 to $1 million, with a phaseout limit of $2.5 million. This represents the amount you can spend on rental property assets or improvements before the deduction begins to be reduced on a dollar-for-dollar basis.

Additionally, the new 100 percent bonus depreciation allowance lets landlords deduct the entire personal property for rental units, instead of the previous limitation of $2,500 or less, says Nina O’Neal, partner at Archer Investment Management in Raleigh, North Carolina. “That certainly makes upgrading or replacing kitchen appliances to attract new tenants more appealing.”

Don’t overlook the downsides. Tax breaks are a great reason to consider owning rental property, but that doesn’t make it right for every investor. “It all sounds great in theory – steady rental income, tax benefits and ideally a gain on the property when you sell,” says Matt Archer, founder of Archer Investment Management. But finding tenants, resolving tenant issues and handling property maintenance and repairs are time-consuming. You can hire a property management company to do the legwork, but “that will decrease your net monthly income.”

Keep in mind also that these tax breaks won’t last forever. The pass-through deduction ends Jan. 1, 2026, and the 100 percent bonus depreciation deduction only lasts through 2022. Before adding rental property to your portfolio, consider whether the investment can still meet your goals and objectives after these tax benefits expire.

Post found on http://www.money.usnews.com

8 Times When It's Smarter to Rent a Home Than to Buy

8 Times When It’s Smarter to Rent a Home Than to Buy

8 Times When It's Smarter to Rent a Home Than to Buy

Photo Credit: Andy Dean Photography/Shutterstock.com

Buying can make financial sense for some people, and home ownership has been the American dream for many families. This dream vanished for many during the housing market crash of 2008. Since then, home prices have increased, and mortgages have become more available with interest rates that haven’t been seen in decades. However, life has changed for many families, and home ownership may not be a good plan for people who fall into one of the following 8 categories.

  1. You Might Not Be Able To Stay In a Home for Five Years

 

Experts say it takes about five years for your investment to earn money, or more importantly, to not decline. The most important factor influencing your decision to buy or rent is how long you believe you will be in the home. Changes in your career path and your personal life should be considered. Make a realistic assessment of your lifestyle preferences. Can the home you buy now fulfill the expectations you have for your life?

  1. If You Can’t Put 20% Down

A small down payment means higher costs. The interest rate will be higher, and you will be charged a mortgage insurance premium to protect the lender should you default. If you have to sell the home soon after you move in, then you will likely have to pay to sell.

  1. If You Have Found a Rental Bargain

If you are renting a lovely home at a low rent payment, then you might consider using this time as an opportunity to save money towards a down payment. You will need to weigh all factors including savings in maintenance and the loss of a tax deduction.

  1. When the Housing Market Is Priced Too High

Carefully consider the price of homes compared to what you can get for the money. A home may be priced too high for your budget, but it may be what the market is selling at.

Equally important is the need to assess your ability to buy a home in this type of market. Know your budget limitations and don’t let someone talk you into purchasing a home that you know you can’t afford. Purchase price is one thing, but taxes and upkeep are a totally different and often expensive part of buying a home.

  1. If Buying Extends Your Commute

If you need to drive a car to your job, then you need to consider commuting time and costs. Sitting in traffic on a freeway gets old quickly. Gas and car insurance costs increase along with the commute. Free time is valuable time.

  1. If Your Credit Isn’t Very Good

Your credit score will determine the interest rate you will pay and even your down payment requirement. Think about the impact of a low credit score over the life of the mortgage. You could be paying a lot more money for many years.

  1. If You Are Not a Person Who Likes To Do Maintenance Chores

There will always be things to do around the home – both inside and outside. The costs of maintenance could be up to 10% of the price of your home each year. You might also have to pay an HOA fee. Some tasks are very foreboding like cleaning gutters and inspecting the roof for leaks.

  1. If You Are New To the Area

It can take up to a year to get to know a new area well enough to know where to buy a home. Let your brain guide you and not your heart. Be sure of the area you select. Even if you don’t have children, the quality of the schools will be essential for sustaining the resale value.

How To Market Your Home

How To Market Your Home

How To Market Your Home

Photo Credit: 317617577/Shutterstock.com

With the growing demand for houses and apartments, the real estate market has become very competitive. With competition comes the need to strategically market your home in order to make it appealing to potential buyers. Real estate business involves significant communication and negotiation skills to ensure you get the best deal when you market your home for sale. Here are a few tips on how to market your home and make it stand out from the rest.

The first step in preparing to sell your home is to research houses within the area. This will let you know how much they are placing for their bids and give you an idea about the market in your area.

The next step is to hire a real estate agent. Not only can real estate agents offer valuable advice and help you properly sell your home, but they know the in’s and out’s of the real estate market and which marketing strategies work and which don’t. Once you have found a real estate agent, you need to a detailed evaluation or analysis of your house. This will tell you exactly how much your home is worth at the current market price.

The next step on properly marketing your home is to renovate your house to ensure that it maintains its value and style. A well-maintained house is likely to fetch a higher price in the market compared to others that have not been renovated. Hire a professional to take photographs of the outside and inside of your house and surrounding areas. This gives buyers an idea of your house and should catch their eye.

Your real estate agent will know how to properly stage your home to make it appeal to potential buyers. He or she will then host an open house and showcase your house in the best way possible. Your real estate agent also knows the property sites and different outlets to use to display your home.

Lastly, your real estate agent will handle the negotiation aspect of selling your home. He or she will make sure all of the proper documents are signed and handled accordingly. With the help of a real estate agent, you will be able to strategically market your home and attract buyers in an efficient way.

5 Tips for First-Time Homebuyers

5 Tips for First-Time Homebuyers

5 Tips for First-Time Homebuyers

Photo Credit: Monkey Business Images/Shutterstock.com

When you are a first-time homebuyer you can expect a whirlwind of emotions—it is very exciting, yet also nerve-wracking if you are not completely sure on what you are expected to do. However, if you plan ahead and do your own financial homework, these questions can be solved.

Use these five tips to help make the process of buying your first home a breeze.

  1. Check your credit

When qualifying for a loan, the homebuyer’s credit score is one of, if not the most important factors to take into consideration. It is imperative that you start the process of checking your credit at least six months before you begin the process of looking for a home.  To get an idea of where your personal credit stands, visit a credit scoring website, such as AnnualCreditReport.com to get your free credit report. Once you have done so, score the reports for any mistakes, unpaid accounts or collection accounts. Fixing damaged credit takes time, and money, so it is crucial that you take care of this business before shopping for your home.

  1. Evaluate assets and liabilities

As a first-time homebuyer, you should be knowledgeable about your budget—how much is owed and how much is coming in? It is a smart idea to track your spending for a few months and see where your money is going and coming in from. Furthermore, first-time homebuyers should be well-informed on how lenders will view their income, which requires being familiar with the basics of mortgage lending.

  1. Organize documents

When in the process of applying for mortgages, homebuyers must document their income and taxes. Usually, mortgage lenders will request a variety of documents—two recent pay stubs, the previous two years’ W 2s, tax returns and the past two months of bank statements. As soon as you decide that you are looking to buy a home, prepare these documents. The process of buying a home can be extensive, however knowing what documents you will need from the beginning will save you time.

  1. Qualify yourself

It is very important for first-time homebuyers to know what they can afford both up front and monthly before the mortgage lender tells them how much they qualify for. The front-end ratio inquires that no more than 28% of your gross monthly income should towards housing costs. The back-end ratio—the portion of income that covers all monthly debt obligations—should be 36% or less, but in some cases borrowers have been approved with back-end rations of 45% or higher.

  1. Figure out your down payment

Although figuring out your down payment can be a task that takes a lot of effort, there are programs that can help buyers with their qualifying incomes and situations. It is also a good idea to speak with a mortgage lender when you are beginning the process of buying a home.

6 Tips For Buying From Out Of State

6 Tips For Buying From Out Of State

 6 Tips For Buying From Out Of State

Photo Credit: Marcos Mesa Sam Wordley/Shutterstock.com

Buying a home in another state need not be a challenging task. You will find plenty of help when you locate a realtor in the new area. Some planning and advance preparation will go a long way to make your move easy on everyone. Actually, the relocation can be easy when you take the appropriate steps to ensure success. We have put together the following 6 tips for buying from out of state.

1. Find a real estate agent that knows the area you are moving to. The search should start with a local realtor who will undoubtedly have connections in the new area, or they will know other agents who do. Find an agent who understands the market you will be buying in as well as the neighborhood you want to move to. Another good source is social media and websites that offer the performance history of their work. Many agency websites will describe the market they specialize in so you can avoid the agents that work out of your price range.

2. After you have selected a realtor and you have decided to visit the area, ask your realtor questions about the neighborhood such as the quality of the schools. Find out where the restaurants and the grocery stores are located. Look for medical facilities including hospitals and urgent care centers. Check the nearby streets for traffic patterns that may be worrisome.

3. Take a tour of the neighborhood with your realtor as the guide. Look at all of the attractions and amenities that are in the area of a home you just looked at. You want to be sure that the neighborhood doesn’t suddenly transition into a undesirable neighborhood that is close by. Many towns have various pockets of housing ranging from run down properties to elaborate homes. You might want to avoid both, and especially if you have children.

4. Check the crime statistics for your new neighborhood and for the town. A lot of dangerous criminal activity could be a problem. The local police department can provide you with this information. You might want to check for registered sex offenders living in the neighborhood.

5. Check the insurance coverage that a mortgage company would mandate. Check the prices, and if you are moving to an area that requires hurricane or flood insurance, then check the cost of the coverage. Always check the property taxes so you can determine if the property is affordable based on insurance and taxes. Also Inquire about home owners association payments.

6. Don’t forget the home inspection. Your realtor can recommend a qualified home inspector to conduct a thorough inspection of the home you intend to buy. The realtor can coordinate the inspection for you, and they can ensure that you receive a detailed report.

7 Ways To Give Yourself A Leg Up When Looking For A New Home

7 Ways To Give Yourself A Leg Up When Looking For A New Home

7 Ways To Give Yourself A Leg Up When Looking For A New Home

Photo Credit: Konstantin L/Shutterstock.com

Buying a home is making the most expensive purchase of your life. You want the home that checks all of the boxes on your wish list, but finding this home is not easy in today’s housing market. We have assembled some tools and strategies to help you successfully navigate the house buying waters which can be rough.

1. Improve Your Credit Score and Eliminate Errors In Your Credit Report

A mortgage approval is largely dependent on your credit score. While other criteria is important, a low credit score can stop you before you get started. The best mortgage terms are available to applicants who have the high scores. Review your credit reports compiled by the three reporting agencies. Fix any errors and follow their advice on how to improve your score.

2. Make Sure You Have Enough Savings For The Down Payment

You may need a down payment as high as 20 percent to get the best interest rate. You may also be required to have enough additional savings equal to the first two months of your net income.

3. Obtain A Mortgage Pre-approval

A pre-approval will prove to real estate agents and sellers that you can get a mortgage. The pre-approval amount will also help you understand the homes that you can afford to buy.

4. Deal Directly With Home Builders

You may decide that the home you want is likely to be a new build. You may want to initiate a relationship with a home builder to either build a home for you, or help you find a home that is already built. When you know a builder, they can be more helpful than they might be for someone they don’t know.

5. Limit Your Requirements

Sellers in a competitive market can choose who buys the home, so limit your requests of the seller. This doesn’t mean that you should forego having a home inspection, but it does mean that you might want to make some of the suggested repairs yourself.

6. Be Flexible

Buying in a seller’ market means you will face a lot of competition. Sellers can afford to ignore picky buyers, and they will instead look for buyers who are more flexible. Let the seller set the closing date which is usually an important consideration.

7. Research

Learn as much as you can about the entire home buying process so you will be prepared to participate effectively. An informed buyer is easier to work with, and you will also benefit from being knowledgeable. Researching home prices and neighborhoods will help you decide when you have found a good buy. Learn the selling prices of homes in the category you want to buy. You can find the selling price online, and this would be the best indicator of the value of the home.