Real Estate Investment Guide

Which way is the right way in real estate investments in 2020? What is the future in these investments? An answer to these questions can be an interview with an interested professional real estate broker who can act as a real estate investment counselor. Each prospective investor can be interviewed in depth to find out specific needs in an income property. At the same time their needs are being evaluated, the broker will also communicate what benefits are available in various properties and how to identify them.

Some considerations should be given to the risk of loss for each age bracket of investor. Should an older investor purchase a property with the smallest down payment and highest leverage position? This will limit cash flow and may cause the property to have a “negative” cash flow. Is this what they want–or do they want cash flow from the property?

How about the younger investors? Are their objectives for long-range estate building or for current cash flow? Would they be more willing to take chances with a marginal investment that might bring big returns later?

Each investor must decide these answers for himself or herself. But, only after enough information has been furnished so that an intelligent decision can be made.

When a new investor has a better idea of the type of property that will do the right job for him/her, or them, then and only then should they be exposed to the market place and shown specific properties. Now the investor or investors can evaluate the various benefits and risks for the information shown on each property and apply the information to their own situation.

What is right for you? A new rental unit? A strip center? A one hundred-unit apartment property? Perhaps you should have five or six apartments or commercial properties in scattered locations. Real estate counseling can show you that you can choose which is right for you and know the reasons why it is right! 

Some Benefits of a Tax Free Exchange

The main benefit of a tax-free exchange is just that–freedom from a tax. The gain that could be realized by one or both of the principals in the exchange transaction does not need to be recognized at the time of the closing. The gains tax is deferred until the property owner makes a taxable disposition of the new property at some later time.

It takes more patience and hard work to set up an exchange than it does to arrange a straight purchase and sale of real estate. Some property owners and their agents simply do not understand the benefits of an exchange or are worried about the strict requirements imposed by the Internal Revenue Code.

Owners need to know that the 1031 Exchange is just another tool like a purchase, sale, option or lease.

The real estate exchange has become a normal business tool used by investors, corporations and business owners throughout the country. If you have not used this tool, you may have already paid too much in taxes.

The benefit from the tax postponement is apparent. The owner can reinvest the full equity in other property, including gains, without any decrease in value due to tax payments. In effect, the government extends an interest-free loan to the investor, who then is able to obtain leverage over and above that obtained from regular mortgage financing.

An example is a trade up to a larger income property.

An investor owns a 10-unit apartment building that is too small for an on-site manager. The income is desirable and a sale would be costly because of a large gain. The equity could be exchanged up into a larger apartment property that would adapt to professional management. The larger property would have increased income to cover the bigger loans and management fees. After the transaction the owner can have the same or higher income, hire a professional property management company and be relieved of management problems.

“Like-Kind” Property

To qualify as a 1031 exchange, the property being sold and the property being acquired must be “like-kind.”

The Like-Kind Property Definition is a very broad term which means that both the original and replacement properties must be of “the same nature or character, even if they differ in grade or quality.” In other words, you can’t exchange farming equipment for an apartment building, because they’re not the same asset. In terms of real estate, you can exchange almost any type of property, as long as it’s not personal property, it must be an investment property.

Some examples of types of exchanges that would be allowed

•  Exchanging a duplex for an apartment building.

•  Exchanging a single family rental property for a commercial office building.

•  Exchanging a rental property or vacation rental for a warehouse.

•    Exchanging a single-family rental property in Nevada, you could exchange it for a commercial rental property in Texas.

There are strict rules that must be followed to make a real estate exchange, and the original replacement property must be within the U.S. to qualify under section 1031.

Let’s get together to evaluate your present portfolio of properties and review your plans for future acquisitions. A real estate exchange might be something that you may want to consider in the future.  o

Managing A Portfolio Of Houses

When you think of a large real estate management company, you may think
of them managing high-rise office buildings, huge apartment complexes
and condominium homeowner associations. They do of course. But you may not think of owners of single-family homes as big management clients. But over the past years, those real estate investors who specialized exclusively in homes have increased greatly. Many people think this is the safest investment of all.
If you might think of this as a small investment, think of some investors
who own 100 or more homes in the $300,000 value range! Even if values
decreased some, owners like these are still multi-millionaires.
Many of these investors have had the enormous increase in value of these
homes that took place in the last decades. The houses are managed like any other real estate investment; they are like apartments that are in scattered locations, and are managed the same way but without an on-site manager.
Now might be the time to look into an investment in houses! Buy an extra
one for a rental – buy several scattered rental houses and you have the equivalent of scattered apartment units, or as one owner calls them, “horizontal apartments”.

An Investment For Anyone
The potential for higher returns is better in real estate than in some
alternatives, such as the stock market. Many investors are “stock
shy” after the stock market ups and downs of the last few years.
Investing in single-family homes can be particularly attractive, since
they will have little chance of taking any huge drop in value at one
time. Over the next few years, the values should have a steady
increase. Compared to the stock market, the amount of capital required
can be remarkably small. The leverage is better, with down
payments still as low as 10% of the value. You may be able to make an
investment in a significant property with just a down payment in the
$25,000 to $30,000 range (or even less). Someone else, either a lender
or maybe the seller of the property will put up the rest of the investment
capital. Real estate is always the perfect place for the use of borrowed money. Good loans are available if the borrower has good credit.
It might be smart to obtain a line of credit to cover any unexpected expenses that may occur. Since the idea is to have a “leveraged” investment, why not borrow as much of the needed cash as possible?
The Return On The Investment
If the increase in value in homes continues like it has been (and it will), the potential for capital gains on a leveraged OPM (other peoples money) investment can be significant. Remember, an increase in value affects the whole value of the property, not just your equity.
The Best Locations
Remember the old saying about the most important thing in value when searching for any kind of real estate. It is still location, always location. This will remain the same in homes as in any other real estate investment. What should you look for?
An owner-occupied community. You will probably be able to get higher rents in an area where the other houses are owner-occupied. Owner-occupied houses will usually be better maintained and the neighborhood will be more stable. We can check the neighborhood by looking at the property-tax register. Since the name and address of the owner is provided, simply see if the address of the owner is the same as the property address.
Since the objective in this investment is increase in value, we are looking for the possibility of the resale. We will always have greater appreciation in a neighborhood where people maintain their property with pride.
Be aware of the location of schools, churches, shopping – just as you would if you were purchasing the property for your own residence. Your ultimate buyer of the property will be doing the same. Make sure of the zoning of the neighborhood and any adjoining areas. This will insure that you will not have any sudden surprises after you make your purchase.

High Leverage – A Benefit With Options

Leverage is the use of borrowed money to control something of value. Real estate investments for many years have afforded the investor some extreme leverage situations. Let’s examine leverage. If double-digit inflation returns, controlling the maximum amount of real estate may be extremely desirable.
High leverage is an excellent benefit. Remember though, that with an option there is a problem. Options have an expiration date. If you haven’t gotten the desired increase in value by the time the option expires, you must make the choice – buy the property and wait longer, or let the option expire.
An option is simply a contract that gives the purchaser a right to buy a certain property at a certain price for a certain period of time. Sometimes a seller will sell an option to purchase his property because the amount of money paid will solve an immediate problem, and it really does make him feel that the property is sold, or will be sold.

Always ask yourself a few questions before buying an option:
• Will you have enough money to exercise the option at the expiration date if no loans are available?
• Do you think the property will increase substantially in value during the option period?
• Will the profit be large enough to chance the loss of a small investment in the option on the property?
Suppose you buy an option to purchase a property during a period of the next three years. You have set the option price at today’s market value and put up only about 10% of the ultimate purchase price. You wait three years and find that you guessed right! The property has increased in value by $100,000. You can now make some choices on the next move:
Exercise the option. You can buy the property. Maybe you can borrow the amount of the purchase price on the land and buy for no money down. To sell at a long term gain, you must now hold it for six months, or longer.
Sell the option. You might sell the option for the $100,000 cash to someone who wants the land. This would be an immediate long term gain since the option has been owned for more than the minimum time period.
Settle the option. The profit is yours because the present value is higher. What if the original owner who sold the option to you now sees more future value in the property and would like to continue owning it. The original owner might buy the option from you or settle it with you in some other way. Perhaps a joint ownership could be arranged, with both of you taking a further holding position for more profits in the future.
The Risk
Remember, the market tends to reward those who take risks. When you minimize risk too much, play it too safe, you may give up the chance for larger profits.
See Us For Investments
Serious real estate investors may want to own real estate for cash flow, tax shelter and reasonable growth. Maybe you would also like to invest something for a long term growth, such as land speculation. Come in and see us. Perhaps we can help you with choices and do some of the research for you.

Determine Market Value With Appraisal

The purpose of any real estate appraisal is to determine the market value of the property being appraised. The handbook of the. Appraisal Institute defines market value as; “The most probable price which a property should bring in a competitive and open market under all
conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (a) buyer and seller are typically motivated: (b) both parties are well informed or well advised, and each acting in what he considers his own best interest; (c) a reasonable time is allowed for exposure in the open market; (d) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (e) the price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.” If we put this another way, the
value of a particular property is made up of the future benefits that the owner of the property can expect to receive from rental or other income. In determining the future benefits that an owner can receive from a property, the current use of the property is considered, and all other uses
that it may be capable of in the foreseeable future. As an example, a property that is being used as farmland could be usable for a residential subdivision in a few years, but later might be usable as commercial or industrial sites. Decision Making Knowing the value of property is a vital part of the decision making process of all buyers, sellers and users of real estate. Therefore, valuation is an integral part of all real estate activity. It is needed for your personal planning. Also, zoning, community planning, taxation require a knowledge and use of appraisal. If the property is held, or will be held for investment purposes(and most are, even small residential properties) an additional question might be, “What will it be worth in the future?”
There can never be perfectly sure answers, but the closest that anyone can come to it is by the appraisal from a professional appraiser. This trained specialist can give a good accurate estimate of a property’s value. When an Appraisal is Needed When we refer to “Market Value” we have to remember that it is not necessarily the same as market price. Market price represents the actual dollar amount put on a property by a buyer and a seller at the time of a negotiated transaction. This might be higher or lower than the value an individual appraiser might place on the property. This difference might be due to differences of opinion, or it may be that the property, to this particular buyer or seller, has a greater or lesser value because of some special consideration, such as financing that the buyer can obtain or the need of a seller to raise cash quickly.
While the owner or a prospective buyer can order an appraisal at any time, there are times when it is almost always required. Here are some of the recommended times to get an appraisal;
1. Purchase and sale To determine whether a proposed purchase or sale is at a fair price or competitive price. The value fixed by the appraiser may strongly affect the final price, but the financing and tax aspects of the overall transaction may be such that a buyer might offer more or a seller could be willing to take less for the property.
2. Exchange Appraisals of each of the properties in a planned exchange should be made if the exchange will have prices on the properties (rather than just equity for equity). A good estimate of value on each will assist everyone involved to establish equities in the priced exchange.
3. Finance Always when a new loan is required for a new buyer. Often, the lender will appraise the property conservatively and slightly lower than the new buyer. This can be understandable when the buyer may be prepared to put up as little as 10% of the value, and the lender is being asked to put up all or most of the balance of the purchase price.
4. Lease Before entering into a long-term lease, both the lessor and lessee each may need a very accurate idea of the value. This might be a basis for negotiation by either person, to determine if the proposed lease is for a fair rental amount.
5. Remodel What if a renovation or modernization of an older building is being planned? The appraisal may be requested to be made on the basis of the property as it is now and as it will be when the renovation is completed. The purpose of the appraisal would be to determine if the additional income would be sufficient to amortize the capital investment and also return a profit to the owner.
6. For insurance purposes It may be important to establish replacement costs, less the physical depreciation, to determine how much fire and casualty insurance should be purchased to adequately cover the property. An appraisal, updated on a regular basis, may also be needed to establish proof of loss or to establish the basis for settlement in cases of partial or total loss under insurance contracts.
7. For condemnation purposes To estimate damages that are adequate, but not in excess of fair compensation, when negotiating a condemnation award, or seeking the determination of fair compensation for a condemned property in court.
8. For property tax purposes To make a proper assessment for local real estate taxes, or to review and contest an assessment to reduce real estate taxes.
9. Income tax liability It may be necessary to appraise a property to determine the liability for income taxes in a taxable exchange, or in a liquidation of a corporation owning real estate.
10. For estate tax purposes To determine inheritance and estate tax liability when real estate was owned by a decedent at the time of his or her death.
11. For gift tax purposes To determine the tax liability when real estate is the taxable gift.
12. Syndication As a basis for offering investors an interest in real estate through syndication or participation in a corporation or real estate investment trust.

Providing Rentals For The Senior Citizen

Not all retired people want to own their own home. Many prefer to be tenants. Many feel that the proceeds from the sale of their old home can be used to supplement their pension and social security, rather than reinvested in another home. The money can be used for travel, visits to children and grandchildren or for medical expenses. For living quarters, these senior citizens prefer to be rent payers, not owners. A modest-sized apartment suits their needs and, as tenants, they are relieved of any worries about maintenance and repairs.

Construction Design

Developers and investors are finding a huge, and relatively untapped, market for rental units designed specifically for the older tenants. These are architecturally sound structures designed with the special needs and concerns of the elderly in mind. For example, these buildings have wider than usual front doors to accommodate canes and wheelchairs, handrails in the aisles, fewer stairs and more ramps and inclines, and better than usual security systems with intercoms and spotlights. Inside the apartment units, there would be conveniences that the elderly appreciate (hand grips at the tub and toilet, electrical outlets at waist level, and cabinets that don’t require bending or stretching to reach).

The Rents

When planning the investment in the rental market for the elderly, one financial objective should be to provide units that rent in a price range that is affordable for social security payment recipients. The upper end of the price range can be met by those elderly who have a private pension in addition to their social security payment. The lower end of the range should be affordable for persons who rely primarily on social security payments to meet living expenses. Any of these tenants
who have a nest-egg from the proceeds of the sale of a prior home can plan to use some of the money to upgrade into the rental unit that they prefer.

The Tenants

Elderly tenants are financially dependable because they have a dependable monthly income. They are stable tenants because they are usually not interested in moving. They almost never move because they “need more space”. They usually are quiet (no late parties) and they take pride in keeping their unit looking nice.

All of this adds up to few vacancy problems, few rent collection problems, and fewer maintenance expenses.

Well-Planned Landscaping

Property managers must watch the nickels and dimes as well as the dollars that are spent on the property. Save one dollar in operating costs and (assuming a 10% cap rate) value of the property increases by $10. That is why good real estate managers are always looking for new ways to economize. In addition to saving money, we are always looking for a way to invest a little in the property for a good return.
A well-planned landscape has a recovery value of 100% to 200% in increased rentals at the typical suburban office building. In addition, the owner gets back more than just dollars spent; the landscaping dramatically influences an owner’s positive image in the community.
A well-maintained lawn, pruned shrubs with splashes of colorful flowers help an office building have “curbside appeal”. It says to prospective tenants, visitors, clients, and the community at large that the building’s owner is stable and intends to stay around a while. Clients instantly have confidence that “these people can handle my needs”.
When a property has poor grass, weeds, and unimaginative shrubs, it sends the message that the owner doesn’t care. The owner is often perceived as someone who probably takes short cuts. And if the owner neglects the landscaping, prospective tenants wonder will the details of the leases, repairs, and overall maintenance of the building itself also be neglected?
Good Design
Overplanted landscapes are as hard on the eyes as sparse ones. A good design will combine the factors of function, balance, and symmetry. Function, for example, considers such things as the placement of walkways, parking lot access, and building entrances. Things like trash receptacles can be screened by planting evergreens and hedges. A good design might include:
Repetition. This is the repeating of a plant or a theme to give the impression of one continuous landscape and tie the property together.
Focal points. An area is highlighted by a tree, garden, or sculpture for visual appeal and eye direction.
Balance/scale. Plants are placed symmetrically and sized in proportions so as not to overpower or diminish an area.
Compatibility. Species of flowers and shrubs are selected that will complement the colors, textures, and forms in both the landscape and the building.
Long Range Planning
The professional landscaper will select trees and bushes that will not obstruct traffic when they are fully grown. Fast maturing shrubs can detract from the overall design unless they are carefully thought out in advance.
The owner has other options to choose in addition to natural growing plants and flowers. He can select stonework, cascading water, and lighting accents to create a favorable impression for the building.

Your Real Estate Investment

Knowing what you can do in some investment situations can be the difference between an annual profit or loss in your currently owned commercial property or the one you intend to acquire. How you acquire it can be important.
The professional commercial real estate broker is in the position to represent a client in real estate transactions by setting up sales, exchanges, leases, purchase and sales of options, and management of real estate. This real estate practitioner stays aware of current tax laws and court decisions in order to structure transactions, but does not give legal or tax advice (unless he/she is also an attorney or a certified public accountant). In any complex transaction that might result in changes in any owner’s legal or tax situation, the other members of the “consulting team” should be the owner’s attorney and/or tax advisor. We always recommend consulting with these professionals during the planning and closing of major real estate transactions. All can affect taxes and estate planning.
We are the heart of your professional team, creating the real estate transactions that will be needed to expand your estate. Let’s get together to evaluate your present portfolio of properties, or review your plans for future acquisition.
Starting with your present position and your goals for the future, we can set out moving directly toward achieving those goals.

Investing In Industrial Properties

Investing In Industrial Properties
If you haven’t considered industrial properties as an investment vehicle, it may be time to take a look. Warehouse and distribution (W&D) properties are of interest because their standard layout suits a wide range of users, in contrast to specialized manufacturing facilities. Industrial properties look good for the following reasons:
• The market for industrial property is doing well with vacancy rates nationwide below those of other commercial buildings.
• There is a shift in the location and nature of demand, caused by changing technology and trade patterns, that will present investment opportunities.
• Institutional investors who have portfolios that are light in industrial assets are acquiring W&D properties for diversification.
With any kind of investment, of course, there are always risks. The most significant is the potential for rapid functional or geographic obsolescence. Because of this, investors must carefully analyze factors such as location, construction, ceiling height, and the number and location of docks, as well as other factors.
The Healthy Property
The turn-down in real estate did not affect industrial property as much as other properties because this property did not encourage speculative building; as much as 30% of the cost of W&D properties is in non-depreciable land, so they held limited appeal for tax-motivated investors. Foreign investors have largely avoided the W&D sector because it lacks the “trophy quality” that makes offices, hotels, and resorts attractive. As a result, warehouse development was driven more by demand than by capital seeking an outlet. Also the size of the properties discouraged many institutional investors who prefer to invest in larger properties than the typical $1 million to $10 million W&D property.
Choosing The Investment
Choosing the right property may be a little more difficult. Certain factors may be driving the W&D market toward greater efficiency, changing how and where business will be done:
• Inventory control systems. Computerization and techniques such as bar coding can insure faster and more reliable deliveries from shipper to destination. Combined with just-in-time systems, it reduces inventory and space requirements.
• Automated space. Using robots in W&D facilities will grow over time, encouraging more efficient use of space.
• Regulations. With the trend toward deregulation during the past decades, there has been a reduction in delivery costs by trucks and planes, causing a shift away from rail and water. This widens the possible locations for W&D facilities and encourages the construction of fewer and larger facilities. Since trucks and planes speed deliveries, the amount of inventory stored and the space needed can be reduced.
Investment in W&D facilities must be very carefully thought out because of the conflicting needs for greater demand for space while using existing space more efficiently.

The Land Under A Business–The Most Valuable Asset

Anyone who owns a home that was located in a hot housing market a few years ago knows that the land can be worth more than the actual home. Now many companies are figuring out the same about their own real estate holdings. Many entrepreneurs spend their adult lives building a business up so that it can be sold at their retirement or passed down to their heirs. Now many of them are finding that the land under the business is worth far more than the business itself. Major retail firms are in this category. A lot of companies will be more attractive for their hard assets than their actual sales, particularly during a recession.
The Lessor’s Benefits
When land values soar, strategies must change. An example could be the developer of upscale homes who wants to keep the ownership of the valuable land as an investment. The use of the land lease can widen the market by reducing the purchase price of the house. In certain parts of the country, the value of the land equals the value of the house. Leasing the land can cut the purchase price nearly in half. With this type of land lease, there is usually a provision for a rent increase halfway through the lease term in accordance with the results of a reappraisal of the land.
The Lessee’s Benefits
The land lease results in the following benefits for a builder or developer:
1. She/he can acquire a valuable parcel of land with very little cash investment.
2. This leasehold that is acquired is an asset that can increase in value, and then could be used as security for a loan, or could be sold for a profit.
3. The rental payments are fully deductible by the lessee. If he/she had purchased the land instead of leasing it, only the interest portion of the payments would be deductible.
4. With a subordinated land lease, the lessee-developer gets the equivalent of a 100% loan on the land.
Land Rent and the Term of the Lease
Usually, a developer-lessee will attempt to get the longest possible term in the lease because the shorter-term land lease would have a smaller market for resale. A long-term land lease is generally a net lease under which the lessee pays the carrying costs, including real estate taxes.
When the land rental is a fixed amount, it is a percentage of the fair market value of the land when the lease is executed. This lease will often include a provision for reappraisal of the land at fixed intervals, with new adjustments in the rent. In some cases, for instance with a shopping center, the landowner might demand a share of the percentage rentals over and above the fixed land rent. (Much of the income in the shopping center will come from percentage overages from the sub-lessees.)
A Subordinated or Unsubordinated Lease
If the owner of the land will not subordinate the to a leasehold mortgage, the developer should get a reduction in rent because the unsubordination will cause his or her financing to be more expensive. Subordination could be the most important item in the terms of the lease. Even a short subordinated lease might be better than a longer unsubordinated lease, even though the longer lease is more salable.
The landowner may or may not allow the interest as owner-lessor to be subordinated to the interest of a leasehold mortgagee. When there is a subordination to the mortgage, the lender, in effect, gets a fee mortgage on the land rather than a leasehold mortgage.
When the lease is unsubordinated, the landowner-lessor has first rights over the lender in case the lessee-mortgagor should default. With these terms, the lessee could find that he/she cannot get a loan, or can get one only at a higher rate of interest. Without the subordination, the mortgage is, in effect, a second lien since the lessor’s claim on the rents takes precedence over payments on the mortgage.
The objections of an owner to subordination of the lease could be as follows:
1. He/she could lose the property if the lessee defaults on the leasehold mortgage.
2. Subordination reduces his or her possibility of mortgaging the fee interest in the land, which would be a logical move for the lessor.
If the subordination were part of the terms, the landowner would record the right to receive any notice of default from the leasehold mortgagee and the right to cure the default. The expense would be reimbursed to the owner by adding the amount to the lessee’s rent obligation.

Considerations In Ground Leasing

Landowners may choose the ground lease as a way to benefit an easy and risk-free investment vehicle and as a way to secure the long-term appreciation of the property. Sometimes a ground lease can put the lessor at risk. That is because the deal centers on the concept of sharing economic returns. The lessor becomes a partner of the lessee because the total rent is usually determined by the lessee’s net operating income or net cash flow. If the lessee does well, the lessor does too. However, if the lessee’s business is a loser, so is the lessor.
Therefore, the lessor must consider the financial feasibility of the project. Independent analysis should show that the project represents the correct improvement of the site and that the projected payments will actually be received by the lessor.
There are at least four things that a prospective land lessor should remember before entering into a transaction:
• In most land lease transactions, the economic return to the lessor ultimately reflects the underlying performance of the real estate operated by the lessee.
• The lessor’s evaluation of the deal must focus on the quantity of income projected pro forma but also must include a clear assessment of the likelihood of actual receipt of projected rent.
• Because the conditions and complexities of a land lease can mask the risk associated with achieving the projected rent levels, accurate assessments of the strengths and weaknesses of the real estate is essential.
• Land lease provisions must be tested against the current fee value of the land.