Accredited Investors

So, you’re interested in spreading your wings in real estate investing. However, to become an accredited investor and invest passively in potentially lucrative deals, you must meet specific income/ net worth requirements.

If you do meet these requirements, taking part in accredited investing is one of the smartest decisions you can make. Why? Because these types of passive investors can generate cash flow without having to work a regular 9-to-5. In addition, you can easily generate higher returns and lower your risk when you participate in an apartment syndication deal versus trying to handle your own deal.

If you don’t have much experience in real estate investing, don’t worry. Accredited investors can invest with me. I am confident that I have the experience, tools, and knowledge you’re looking for to help you to maximize your time and revenue as an accredited investor.

Take a peek at the blogs below to become familiar with the accredited investor definition, and explore how to get started in this field. For instance, you can find out the benefits of investing in apartment syndication deals, and the best places to invest in such deals. Then, if you enjoy what you read, feel free to check out my hundreds of other blog posts for other valuable real estate investing insights. Also, take a peek at my Best Real Estate Investing Advice Ever book for even more strategies for winning as a real estate investor.

Commercial Real Estate For Sale | 9 Ways to Find More Deals

Need help generating more commercial real estate leads?

You have come to the right place. From basic strategies like using a commercial real estate broker to generating leads through the landscapers (yes, that is correct!), this blog post is an ultimate guide for finding commercial real estate for sale.

Let us get started by first talking about the two different types of commercial real estate for sale – on-market and off-market.

On-market vs. off-market commercial real estate for sale

The tactics for finding commercial real estate for sale are simple. You don’t need a Ph.D. in commercial real estate or a 160IQ to find commercial real estate for sale. However, uncovering the best deals – that is, the deals with the most “meat on the bone”, upside potential and built in equity – require will a higher time investment.

In general, of the two types of commercial real estate, on-market deals are easier to find.

On-market commercial real estate for sale are deals that are listed by commercial real estate brokers. These are the easiest deals to find because they are heavily marketed by brokers. Consequently, there typically isn’t as much “meat on the bone” compared to off-market deals (of course, there are exemptions).

In fact, an on-market deal selling above market value is not uncommon. Since the on-market commercial real estate for sale is heavily marketed, many more commercial real estate investors will submit offers, which can result in a bidding war and an increase purchase price.

Also, on-market commercial real estate for sale may take longer to close on. Generally, the offer process for on-market deals includes a touring period, a call-to-offers date, a time range for the seller to review all of the offers, a best-and-final offers round, and a best-and-final sellers call before the deal is even placed under contract.

However, these potential drawbacks can be minimized or avoided entirely by a commercial real estate investor who has a strong track record of closing on similar deals in the past and/or has a pre-existing relationship with the listing broker. At the end of the day, the seller’s main motivation is closing. Therefore, on-market commercial real estate for sale can be advantageous for commercial real estate investors who are (rightly) perceived as closers. They will get awarded more on-market deals, even if they don’t submit the highest purchase price.

Off-market deals is the other category of commercial real estate for sale. Off-market deals are not listed by commercial real estate brokers. However, commercial real estate brokers can be good sources for off-market leads (more on this later in the blog post). Therefore, generating off-market commercial real estate leads requires more proactive effort.

Experienced and reputable commercial real estate investors will close more off-market deals because this isn’t their first rodeo. The sellers know they are operating a well-oiled machine and the likelihood of the deal closing is high.

Who would you rather have perform open-heart surgery on a loved one? A freshly minted medical school graduate, or the top heart surgeon in the state who has complete thousands of successful procedures? (Rhetorical question). Therefore, a seller is more confident signing a contract with an experienced commercial real estate investor who has a history of closing rather than a brand-new investor with no deals under their belt.

The main benefit of off-market commercial real estate for sale is the potential for the juiciest piece of “meat on the bone” at closing. It is common for commercial real estate investors to secure a contract on an off-market deal at a purchase price that is 1%, 5%, 10%, or more below the appraised value. This means that at closing, the investor has instantly generated 1%, 5%, 10%, or more in free equity. The reason is because there is less, or no competition. Usually, there is only one buyer, so bidding wars are avoided.

Also, if the seller is highly motivated, the closing process can be fast. However, it is also possible to have an extremely long closing horizon. A negotiation period lasting multiple months – even up to a year or longer – isn’t uncommon with off-market commercial real estate deals.

As I mentioned previously, a commercial real estate investor can secure the deal at a better price because there is less competition. However, this is not always the case for large commercial real estate deals. Larger commercial real estate for sale is likely owned by a sophisticated investor. They will know the market value of their asset and will not accept a lowball offer (unless they are motivated to sell because they are distressed – more on this later in the blog post). In fact, it is possible to pay above market value for an off-market deal. Since the seller isn’t receiving multiple offers, the market won’t set the price. Therefore, unsophisticated commercial real estate investors may get a sucker price.

Lastly, the commercial real estate investor can work directly with the owner in order to determine their unique needs for selling, which means that there is more opportunity for creative financing.

Overall, both on-market and off-market commercial real estate for sale have their pros and cons. Therefore, the best approach is to pursue on-market and off-market deals.

So, how do you find on-market and off-market commercial real estate for sale?

Let’s start with how to find on-market commercial real estate for sale.

How to find on-market commercial real estate for sale

On-market deals are always widely marketed by commercial real estate brokers. Therefore, they are very easy to find.

1. Commercial Real Estate Brokerages: Most of the larger commercial real estate brokerages list their deals for sale on their websites. If you simply Google “commercial real estate brokers in (city)”, you will be presented with a long list of commercial real state brokerage. However, I recommend being more specific by searching for commercial real estate brokers who focus on your niche. For example, if you are looking to find apartments for sale, Google “commercial apartment brokers in (city)” or “commercial multifamily brokers in (city)”.

Each commercial real estate brokerage’s website will have a section where they list commercial real estate for sale.

For example, when I search “commercial apartment brokerages in Chicago”, SVN Chicago Commercial is a top result. On their website, they have a property search function with a list of all their commercial real estate for sale:

 

One approach is to visit the commercial real estate brokerage’s website each week to look for new opportunities. The more efficient method is to subscribe so that new offerings are sent to your email inbox automatically. Locate the “subscribe” function on the brokerage’s website and input your contact information.

Repeat this process for as many commercial real estate brokerages as you want, and you will receive commercial real estate for sale in your email inbox every day.

2. LoopNet: Another way to find on-market commercial real estate for sale is on LoopNet. LoopNet is an online listing platform where commercial real estate brokers can list commercial real estate for sale.

Every large commercial real estate brokerage in a market should have a website where they list commercial real estate for sale. But some of the smaller commercial real estate brokerages may not have a website, or their website isn’t easily found on Google. Smaller brokerages do, however, list commercial real estate for sale on LoopNet.

LoopNet is also very easy to use. Simply select a property type and market, and you will be presented with a list of all the commercial real estate for sale.

Usually, most of the commercial real estate for sale on LoopNet are a repeat of deals listed on commercial real estate brokerage’s websites. However, others will be brand new deals you’ve never seen before (listed by smaller brokers who lists you aren’t subscribed to).

How to find more off-market commercial real estate for sale.

Finding off-market commercial real estate for sale generally requires more effort compared to on-market. Unlike on-market, there isn’t a website with a list of off-market commercial real estate for sale.

The overall idea behind off-market deals is to find an owner who is motivated to sell their commercial real estate before that owner has enlisted the services of a commercial real estate broker.

There are three main ways an owner can be motivated to sell their commercial real estate.

The most common reason why an owner is motivated to sell is because they are “distressed” in some form or fashion. There are literally countless ways an owner of commercial real estate can be distressed. Here a few examples:

  • Delinquent on taxes
  • Delinquent on mortgage
  • Building code violations
  • Health code violations
  • Liens
  • Facing foreclosure
  • Natural disaster damaged the property (i.e., fire, hurricane, tornado)
  • High vacancy, usually due to evictions
  • Recently experienced a large increase in taxes
  • Mismanaged by their property management company
  • Lots of deferred maintenance
  • Falling out with business partner
  • Personal reasons (i.e., divorce, death in family, divorce, illness, etc.)

A second common reason why an owner would be motivated to sell is if they are at the end of their business plan. For example, the typical hold period on a value-add apartment deal is 5 to 10 years. The apartment is acquired, renovations are performed over 12 to 24 months, the property is held for cash flow for another 3 to 9 years and is sold. The motivation is to sell so that they and their investors can realize the gain in equity and reinvest into a new opportunity.

The third common reason why an owner would be motivated to sell is because they are tired of being a landlord. They’ve owned the commercial real estate for 10, 20, 30 or more years and are ready to cash out to retire.

As I mentioned previously, the overall idea is to implement market strategies that target these types of motivated sellers, or people who know these types of motivated seller. I have previously created a detailed blog post that outlines how to create a list of motivated sellers – 7 free and paid online services to generate off-market apartment deals.

Now what do you do with this list?

3. Direct mail: Probably the most common strategy for finding off-market commercial real estate for sale is direct mail. A direct mail campaign consists of sending out a batch of letters to a list of motivated commercial real estate owners with the purpose of sparking a conversation that results in the acquisition of their property.

I have previously written a blog post that outline how to use direct mail to find off-market commercial real estate for sale – the ultimate guide to a successful direct mailing campaign. Overall, the strategy includes creating a list of motivated commercial real estate owners, creating a marketing piece to send to the owners, screening incoming calls and qualifying deals, and ultimately negotiating an offer price.

Direct mailing campaigns can be used to target all three types of motivated sellers – distress, at the end of the business plan, and tired of being a landlord.

4. Cold calling/cold texting: An iteration of the direct mail approach is cold calling and cold texting. After a list of motivated commercial real estate owners is created, rather than sending a marketing piece, pick up the phone and call and/or text the owner.

For example, click here for a story about an investor who was able to find two apartment communities totaling 340 units by texting motivated apartment owners.

The extra step required for this strategy, depending on the service used to generate the motivated seller list, is skip tracing. Most of the free and inexpensive list generating services only output an owner’s mailing address. Therefore, to acquire the owners phone number, you must “skip trace” the list. Here is a list of skip tracing services investors who have been interviewed on my podcast use:

Like direct mail, cold calling/texting can be used to target all three types of motivated sellers.

5. Thought leadership platform: A more creative and indirect approach to is to use a thought leadership platform to find commercial real estate for sale. A thought leadership platform offers unique information, insights, and ideas that will position you as a credible and recognized expert in your industry.

Common examples of thought leadership platforms are podcasts, blogs, YouTube channels, newsletter, publishing books, hosting conferences, and meetup groups.

Click here for an in-depth blog post on the process for how to create a thought leadership platform.

With a thought leadership platform, you will build new friendships and business relationships. It allows you to stay top of mind of commercial real estate entrepreneurs and professionals because you are constantly providing valuable, free information. Essentially, you can continuously network with people on a global level 24/7.

Now, what did I write earlier about how to find off-market deals? You must communicate with motivated owners and people who know motivated owners.

Well, with a thought leadership platform, your following (readers, listeners, views, etc.) will consist of both parties. Some aspect of your thought leadership platform should let your following know what types of deals you are looking to purchase. This can be as direct as saying “send me deals” or as indirect saying “I am a value-add apartment syndicator.” Assuming you have a website and a “contact us” function, your followers can reach out if they or something they know are motivated to sell their commercial real estate.

Something I also mentioned earlier about both on-market and off-market deals is that the stronger your track record, the more likely you will be awarded a deal. The main weight of your track record is your previous commercial real estate experience. However, having an established thought leadership platform will also increase your credibility in the eyes of owners and commercial real estate brokers.

“This guy/girl has a massive following on YouTube. He they must know what they are doing!”

Therefore, not only is a thought leadership platform a great way to find off-market commercial real estate for sale, but it will also help you get awarded more deals.

Unlike direct mail and cold calling, a thought leadership platform isn’t typically a direct approach to finding commercial real estate for sale. The exception would be if you created a meetup group to find commercial real estate for sale. Click here for a blog post I wrote about real estate investors who directly sourced deals through a meetup group. Therefore, I do not recommend using a thought leadership platform as your only approach to finding commercial real estate for sale. It should be used in tandem with other strategies on this list.

6. Call “for rent” ads: Another creative approach to finding commercial real estate for sale is to calling “for rent” and “for lease” ads.

As I mentioned previously, an owner may be motivated to sell their commercial real estate because of vacancies. Therefore, when you see a “for rent” or “for lease” ad, you know that they are experiencing some level of vacancy at their commercial real estate. You have immediately identified a potential pain point.

Depending on the number of vacancies or length of the vacancy, they may be at the point where they are willing to sell.

This strategy works better for smaller commercial real estate. It is unlikely that an owner of a 300-unit property, for example, will sell based on 10 vacant unit. Whereas an owner of a 10-unit property would be motivated to sell if all 10 units were vacant.

Additionally, with larger commercial real estate, the contact information provided in the “for rent” or “for lease” ad is likely a leasing agent and not the owner.

However, don’t let that stop you from trying this strategy on large commercial real estate. Maybe, once they are ready to sell, they remember you (especially if you consistently follow up) and give you a first look at the deal before going to market.

7. Nearby apartments: For every on-market commercial real estate for sale you come across, reach out to the owner of surrounding properties and attempt to purchase two deals: the on-market deal and an off-market deal.

This is an approach I used in the past to find commercial real estate for sale. Click here for the full story on this strategy in action. In short, our commercial real estate broker reached out to the owner of an apartment across the street from an on-market deal. The owner happened to be interested in selling, so we put both deals under contract.

At the time, the market was very competitive, and the on-market deal entered into a bidding war. However, because of the economies of scale and complementary nature of the off-market opportunity, we were able to pay a little bit more for the on-market opportunity, ultimately coming out as the victor of the bidding war.

8. Commercial real estate brokerages: As I mentioned at the beginning of this blog post, commercial real estate brokerages can also be one of the best ways to find off-market commercial real estate for sale. However, there is a caveat.

Before commercial real estate brokers bring a property to market, they may send the opportunity to commercial real estate investors who they know can close on the deal. This is either to give them a chance to actually purchase the deal prior to going to market or to, at minimum, give them a head start.

The key phrase above is “who they know can close on the deal”. Therefore, unless you have the established track record I’ve mentioned multiple times in this blog post, you likely won’t have access to off-market deals from commercial real estate brokers.

When a commercial real estate investor first speaks with a commercial real estate broker, the broker will ask questions to gauge how serious the investor is.

“Are they able to close on a deal or are they a tire kicker who is wasting my time?”

If they don’t think you are capable of closing on a deal, there is zero percent chance they will send you off-market commercial real estate for sale.

I interviewed a top commercial real estate broker in Washington, DC, and he provided me with the five questions he asks investors to determine if they are serious and capable of closing. You can read the full blog post by clicking here, but the five questions are:

  • Have you completed a deal before?
  • Can you send me examples of what you’ve done?
  • Do you understand the market?
  • How would you finance a potential deal?
  • What are your goals?

If you haven’t completed a deal, cannot answer simple questions about the market, don’t have the cash and/or financing capabilities, and don’t have a vision, no broker is going to send you off-market commercial real estate for sale. However, the exception would be if someone else on the team does have the required track record. When that is the case, your reply to each question would be “well, my business partner has…” or “my property management company has…”

9. Commercial Real Estate Vendors

Anyone involved in the rendering their services to commercial real estate, like electricians, carpet installers, roofers, plumbers, HVAC professionals, pool repairman, lawn mowing companies, landscapers, etc. can be your own personal “birddoggers”, generating motivated seller commercial real estate leads with zero competition.

One of Joe’s family members owns a lawn mowing company. One of their clients was behind on their payments. They asked Joe, “do you know why a property management company wouldn’t pay a contractor for services?” Joe replied, “well, it’s not the property management company but the owner who is the problem. They likely have liquidity issues and cannot pay the bills.”

Just like a commercial real estate owner who isn’t paying their taxes or mortgages, one that isn’t paying their contractors may indicate motivation to sell. Therefore, to generate potential commercial real estate for sale, form relationships with local commercial real estate vendors and ask for a list of clients who are in arrears.

Simply calling up random lawn mowing companies may not be the best use of your time (although it might work). The better approach is to use a vendor’s service first and then ask them to notify you of local apartments who are behind on their payments.

Conclusion – How to Find Commercial Real Estate For Sale

These are eight ways to find more commercial real estate for sale.

Which strategies should you pursue?

I recommend everyone who is interested in finding more commercial real estate for sale to implement to the two on-market strategies – subscribing to commercial real estate brokerage’s listings and searching on LoopNet.

Next, I recommend starting a thought leadership platform, for both the credibility and networking benefits.

Then, of the remaining off-market commercial real estate lead generation strategies, I recommend starting with one. Test is out for six months and analyze the results. If it works, great – keep doing it. If it isn’t working, select a different strategy to test for another six months.

Unfortunately, there isn’t a one-sized fits all approach to finding commercial real estate for sale. The strategy or strategies that work best depend on the market, the overall economy, your business plan, and your level of experience.

However, a commercial real estate investor somewhere out there has been able to find commercial real estate for sale using each of the eight strategies in this blog post.

The key is consistency!

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BEC 2021 Goes Virtual During Pandemic

Well folks, we have to acknowledge that COVID-19 isn’t going anywhere…at least not anytime soon. As a result (and as you may have noticed), BEC 2021 will be held virtually, for the first time, due to COVID-19. And, while we are disappointed not to be together in person, we are excited to funnel all our efforts into a virtual networking experience like no other. Seriously. As soon as you sign up, you will start reaping the benefits.

What do I mean? We really had to think out of the box on this one. The big question was: How can we make a networking event successful in a virtual environment? The Best Ever Real Estate Conferences are great because they provide attendees with the opportunity to network with fellow investors and industry influencers from around the world. That is it’s greatest benefit and we know how critical that is to you and your business.

In order to offer all attendees the opportunity to share business strategies, meet high net-worth individuals, and learn something new, we came up with a solution, several in fact, that I think you will love.

We’ll have video conferencing and chat rooms dedicated to hundreds of different networking topics. If you want to meet like-minded folks from around the country, if you want to find a partner, deal, or money from the comfort of your home office, or if you just want some good old fashioned new conversations in a world devoid of connections, then this virtual event is a can’t miss.

Exclusive to this year’s virtual event, when you sign up you will be thoughtfully placed into a Mini Mastermind group with your fellow attendees of groups no bigger than 8 people. No other conference provides you the opportunity to connect so intimately and learn as thoughtfully from your fellow attendees this far in advance from the actual date of the event. We’re making the virtual networking easy for you this year. The Mini Mastermind groups start as soon as you sign up, so make it count and register now.

Additionally, in the months leading up the conference, we’re offering all of our ticket buyers free access to exclusive monthly webinars discussing topics such as the current political climate and how the incoming Biden administration‘s decisions on a range of issues could impact the commercial real estate market and industry directly.

So, while 2021 has presented us with challenges from uniting in person, we are going to continue building the essential dialogues and connections in the world of real estate. We are looking at this as an opportunity to expand our network to include those that normally would be unable to attend and offer exciting new elements made possible by the virtual environment.

To find out more about BEC2021, visit www.bec2021.com.

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Kevin Riordan Shares Bold Insights on Institutional Investing

You may face a day when the funding needed for your target real estate deal merits an institutional investor. Though this is a sign of success, it can be daunting if you are unfamiliar with raising institutional equity. Real estate investor and longtime pension fund executive Kevin Riordan explains how to begin. As a guest on the Joe Fairless Best Ever Show podcast, he summarizes institutional raising and what entrepreneurs seeking equity can expect.

About Kevin Riordan

Kevin has deep institutional expertise stemming from extensive business and Wall Street experience. He took a commercial mortgage REIT, Crexus Investment Corp., public in 2009 and knows the process firsthand. A full-time professor of real estate at Montclair State University, Kevin grounds his investing in accounting and finance mastery.

Kevin’s career spans 30 years of institutional investing, focusing on raising capital for commercial real estate. As a young CPA, he moved from the accounting group to real estate at work after hands-on experience making transactions. At age 30, he moved to TIAA CREF, a pension fund for educational institutions, and broadened his investment analysis and real estate deals experience. Kevin leveraged 20 years there to create initiatives merging public capital with commercial real estate.

Kevin sees two sides to the business of providing institutional capital for equity. One side is through joint ventures with property developers handling the operations. The other aspect is funding entrepreneurs planning to buy or develop properties.

We Are the Money: The Equity Side

During his tenure at TIAA CREF, Kevin formed many joint ventures with real estate operators. The total project costs ranged from $12 million to $30 million, and the institution would cover up to 100 percent of the funding.

A typical partnership structure has the equity investor receiving a preferred return until reaching a hurdle rate. A hurdle rate is the minimum acceptable rate of return that an investor expects. At this point, the property developer receives a promote, which is an amount above the developer’s contribution. The contract should contain the exact terms agreed to.

Project costs vary with the type of property built. Kevin recalls one apartment building with 210 units in a quaint northern town that cost about $14 million. In contrast, a downtown Atlanta development with some construction challenges ran closer to $29 million.

The project begins with a construction loan to start operations. The institution uses its capital to pay off the loan and shares ownership with the developer. This arrangement grants the institution a preferred return on investment and access to the property’s initial cash flow.

Kevin provides an example of how these transactions typically work. If you put up capital of $1 million at a 6 percent return, your preferred return would be $60,000. The property’s first $60,000 return goes to you, and you and the developer split subsequent gains.

Funding Entrepreneurs: The Buy Side

What if you are a multifamily property investor seeking additional funding and not a real estate developer? Kevin speaks to this situation, too. Many investors start by using their financial resources and then raise funds from friends, family, and professional networks. They may top out and need to raise more capital to pursue their target transaction. Individuals often reach this point when they’ve rolled proceeds from multifamily properties into larger projects and face steeper equity requirements to continue growth.

When institutions invest in these types of projects, the funding is typically in the form of a mortgage instrument that allows the entrepreneur to buy a property or begin development. In return, the investor acquires a coupon or share of the mortgage debt.

If you plan on approaching an institution for capital, you want to present yourself and your business plan in the best possible light. Serious potential investors will conduct due diligence on you as a candidate and on your proposed projects. Kevin shares tips on how to prepare.

Document Your Track Record

A potential investor will first ask you, “What have you done?” The institution’s top concern is that you have a successful track record. Document and quantify your achievements and be prepared to discuss them.

Here are some foundational questions to be ready for:

  • Which transactions have you done?
  • What was your role in each?
  • How did each investment perform?
  • How were the deals structured?
  • Who were the other partners?

As in a job interview, expect to walk a serious investor through your process on at least one deal.

Create a Detailed Plan

Kevin describes his experience taking Crexus Investment public and meeting with major institutional investors for the first time. He had worked for a large pension fund and was now on the other side, taking his first company public. When visiting Fidelity Investments, BlackRock, and other large players, he found their concerns shared a common thread. In addition to his track record, they wanted to see a detailed and thorough plan.

Kevin stresses that despite differences in scale, multifamily property buyers and institutions must perform similarly to succeed. Nonetheless, the transaction must meet a minimum equity threshold for institutions to consider it. He notes that a $500,000 deal, a hefty commitment for most individuals, is too small for institutions.

Approach Investors at the Right Time

If you are considering institutional equity for your next project, should you approach investors before or after entering a transaction? Kevin suggests working with investors first to secure funding. At this point, they will evaluate you based on your track record and business plan. Ideally, you’re proposing adding one or two zeros to a solidly performing portfolio.

The alternative is to proceed with a deal on a contingency basis. One drawback of this strategy is that you may sacrifice some credibility with partners who prefer to have funding locked first. Another potential issue is not obtaining equity in time or being denied altogether. Lining up institutional financing first is a cleaner strategy.

Prepare for Due Diligence

Let’s assume you have passed an institutional investor’s due diligence, and you have the green light to put together a deal. The institution will draft a profile of your project, and funding is contingent upon meeting the requirements. Your job is to find or develop a suitable property and to check all the associated boxes, as Kevin puts it.

The institution will expect your project to satisfy given criteria such as:

  • Property location
  • Asset type
  • Expected rate of return
  • Deal structure

After analyzing the target project in depth, you should be prepared to meet the checklist. However, institutional investors also vet your company’s suitability for executing the project and managing it for the long haul.

Kevin emphasizes that investors assess a company holistically, looking for breadth as well as a compelling investment story. They want to understand how your business’s core people and operations will drive the project’s success. To do this, they look at history as well as current circumstances. For example, did your company triumph over a setback, such as a regional downturn or sudden loss?

Kevin suggests preparing for an evaluation of your past and present operations and any principals besides yourself.

Areas of scrutiny include:

  • Accounting systems
  • Reporting
  • Operating agreement or articles of incorporation
  • Other company principals
  • Financial history
  • Response to adverse conditions
  • Plan for operating the new property

How to Find Institutional Investors

Suppose you have your CV, company, and investment plan in place but have no institutional contacts. How do you reach out to these large equity investors?

Kevin suggests you partner with an intermediary such as a real estate consultant or mortgage broker. Many of these professionals arrange equity as well as debt and can facilitate the right introductions. When contacting mortgage brokers, for example, ask whether they work with institutional equity.

You and the institution will benefit from an intermediary’s services. Institutions prefer this approach because it weeds out the deluge of nonstarters and helps identify quality prospects. As an entrepreneur new to the process, you will gain valuable guidance from a high-caliber consultant or broker.

Make Your Bold Move

What is Kevin’s best advice for real estate investors new to institutional equity? Paradoxically, it is to act boldly while sensibly mitigating risk.

Kevin refers to a personal lesson learned. Following the Great Recession, he could have purchased $2 billion of Barclays Bank mortgage debt. Instead, Kevin bought only $750 million and left a significant profit on the table. He attributes the decision to caution over boldness.

If you haven’t already, you will eventually encounter a deal that seems like a fortune-changer. You will probably need to move quickly and irrevocably. According to Kevin, the key is to balance bold action with a clear understanding of the risks in a given investment opportunity. These decisions are always challenging, but isn’t that the fun?

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Real Estate Investing Advice from 7 US Military Veterans – Happy Veteran’s Day

Many former US military service members become real estate investors after transitioning to civilian life.

Discipline, a strong work ethic, loyalty, collaboration, leadership, effective communication, problem solving and many more skills obtained in the military are also beneficial to growing a real estate business.

Additionally, because of their background, they bring a different perspective to real estate investing – things that civilians like me may not have thought of. Fortunately for you and me, many veterans have come on the podcast to share these unique insights.

In honor of Veteran’s Day, here is the Best Real Estate Investing Advice Ever from 7 US military veterans interviewed on the podcast.

1. Think Big, Act Small

Seth Wilson: Founder and Managing Director of Clarity Equity Group

Military experience: Four-time combat veteran of 14 years, and currently serves in the Missouri Air National Guard as a pilot of the C-130 tactical airlift aircraft

Episode: JF2208 Veteran To Founder

Best Ever Advice: Thing big but act small. When setting goals, always aim high. But make sure that you paying attention to the details and taking massive intelligent action every single day in pursuit of your goal.

2. Get Out There and Take Risks (That Won’t Destroy You)

David Pere: Founder of From Military to Millionaire

Military experience: US Marine Corps since 2008

Episode: JF2102 From Military to Millionaire

Best Ever Advice: Just get out there, do it, and take risks. Having a safety net (in David’s case, his job in the military) can give you more confidence to take greater risks. But, David did put a ceiling to the level of risk one should take – if you take a risk and fail, it shouldn’t utterly break you. That is, you should be able to mentally and financially dust yourself off, recover, and get back in the game. The greater risks you can take, the larger the payoff.

3. Find Your Own Unique Niche to Reduce Competition

Phil Capron: Multifamily investors and Senior Mentor with Michal Blank

Military experience: Naval Special Warfare Combatant Craft Crewman

Episode: JF1984 From the Military to Multifamily

Best Ever Advice: When in the military, Phil’s smaller special ops unit did the missions other crews weren’t able to. The other, bigger units lacked the tactics, training, equipment, or personnel. Similarly, Phil pursues deals and strategies that other, large operators aren’t willing or able to do.

Whatever the big operator’s investment criteria is his is the opposite. As a result, he has access to deals that they don’t have access to, which has allowed him to do deals in competitive markets.

Therefore, if you are having a hard time finding a deal, ask yourself what you can do differently to create a niche for yourself with minimal to no competition.

4. House Hacking and the Real Formula to Success

Eric Upchurch: COO and Co-Founder of Active Duty Passive Income and Senior Managing Partner at ADPI Capital

Military experience: Army Special Operations

Episode: JF1890 From Military Life to Civilian Work & Real Estate Investing

Best Ever Advice: First is to use the VA loan if possible (the similar option for civilians is the FHA loan). Zero (or minimal) money out of pocket for a cash flowing asset. Target a four-plex, live in one unit for at least one year and one day, and repeat. You will live rent free(ish) and/or generate cash flow each month.

Second was Eric’s real formula to success: “Learn, network, add value, take action. If you do those things over and over again, success will hunt you down.”

5. Always Follow Through with Commitments

Jamie Bateman: Founder of Labrador Lending

Military experience: Captain in Army Reserves

Episode: JF2224 Note Investing Strategies

Best Ever Advice: Jamie’s best ever advice was three-fold. First is to focus on your strengths and outsource your weakness to others. Second is to consistently think about how you can add value and contribute to something bigger than yourself – both in business and your personal life. Third is to just do what you say you are going to do. Keeping your word is very important. There are many people who make a commitment to do something and then disappear, never follow-up, or follow-up too late.

6. Set 10X Goals Based on Your Potential, Not Current Abilities

Vincent Gethings: Co-Founder and COO of Tri-City Equity Group

Military experience: 14 years in Air Force

Episode: JF2204 Investing While Overseas

Best Ever Advice: Set goals based off of your potential and not your abilities. Many people have limiting beliefs, which force them to set goals based on what they think they can accomplish based on their current experience, education level, relationships, etc. As a result, they set the bar extremely low. They use the SMART (specific, measurable, achievable, realistic, and time-based); Vincent hates SMART goals because of the R, realistic.

Instead, Vincent is more of an adherent to Grant Cardone’s 10X rule. Set big, scary, audacious goals, and then take massive action toward them. Don’t be realistic, because that doesn’t give you any chance to grow.

7. SHUT UP!

Bill Kurzeja: Owner and Founder of Professional Success South

Military experience: 8 years of service as a Sergeant

Episode: JF2155 sales Skills to Improve Your Business

Best Ever Advice: Shut up and listen. We have two ears and one month, so use them accordingly. In sales, most of the time people will tell us exactly what they want and how to win them over. We just need to listen, use the information, and apply it back. This starts by setting the table – that is, proper preparation beforehand, which includes research and practice.

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Passively Investing in Apartments – Fund or Individual Deals?

There are many ways to passively invest in apartment syndications. Knowledge of these different strategies is important to understand which is the best wealth generating vehicle for you.

In this blog post, I want to educate you on the differences between investing in individual apartment syndications and investing in an apartment syndication fund.

But first, we need to distinguish between the type types of passive apartment investments.

Passive apartment investments are either debt investments or equity investments.

For debt investments, the passive investor is acting as a lender to the apartment or the apartment syndicator. The loan is secured by the property and the passive investor receives a fixed interest rate as a return.

For equity investments, the passive investor is a shareholder in the entity that owns the apartment. Depending on the equity structure, the passive investment receives a preferred return and/or a share of the total profits.

Click here to learn more about the differences between debt and equity investing.

Passive investors who prefer equity investments over debt investments will chose to invest in individual deals or into a fund.

The first option is to invest in a single deal at a time. One deal. One business plan. One market.

A fund (i.e., a private real estate fund) is a private partnership that owns more than one piece of real estate. For apartment investing, numerous passive investors commit an amount to invest and the apartment syndicator use the passive investors’ capital to purchase multiple apartment communities.

The apartment syndicator of the fund will either execute one or multiple of the apartment syndication business plans: value-add, turnkey, or distressed. And they may focus on investments in a single or in multiple markets.

What are the different types of funds?

Close-ended fund: For a closed-ended fund, you would commit to invest a certain amount of capital when the apartment syndicator is accepting investor capital. Usually when the apartment syndicator commences a fund, they will continue to accept commitments until they’ve achieved their desired funding goal. Then, the apartment syndicator will begin purchasing apartments over a specific period of time – usually 3 to 4 years after the start of the fund. The apartments are held for a specific period of time – generally 3 to 7 years, depending on the business plan. Therefore, most close-ended funds are 10 years. But apartment syndicators may have the option to extend a close-ended fund by one or more years. 

Typically, your initial equity investment is not returned until the end of the fund. However, some close-ended funds will distribute lumpsum profits once an apartment is sold or refinanced. The apartment syndicator may also have the option to recycle proceeds from sales or refinances back into the fund if, for example, the apartment is sold or refinanced a certain number of years after acquisition or less.

Open-ended evergreen fund: The other fund option is an open-ended, or evergreen, fund. The main difference between evergreen and close-ended funds is that evergreen funds do not have a specific end date. Therefore, the apartment syndicator is continuously accepting investor commitments. To exit an evergreen fund, you would need to sell your shares in the partnership rather than having to wait until the end of a close-ended fund.

How does close-ended and open-ended funds compare to individual deal investing?

When passive investor money is due: When investing in individual deals, once you have committed to investing, funds are typically due in full shortly thereafter. Once you commit, you sign the deal documents and submit your funds.

When investing in a fund, once you have committed to investing, your funds may or may not be due shortly thereafter. The committed amount is submitted at a capital call. A capital call occurs when the apartment syndicator of the fund has identified an acquisition and requires a portion or all your committed capital to cover the purchase costs. 

When the apartment syndicator sends a formal capital call notification, you are legally obligated to fulfill their call based on your committed capital investment amount. Typically, a capital call will only require a portion of your capital investment, but it is possible that they request the full committed amount. If you fail to meet the capital call, the apartment may force you into default and to forfeit your entire ownership share.

Compensation structure: The compensation structure for funds and individual deals are the similar. You are offered a preferred return and/or profit split. Oftentimes, the profit split will change and become more favorable to the apartment syndicator once a certain return threshold, like IRR, is passed. 

The timing of the ongoing distributions after you’ve submitted funds are similar since you are actually submitting your capital once a deal/deals are identified. 

However, the time from commitment to receiving your first distribution is longer when investing in a fund because of the gap between commitment and the first capital call. Additionally, you may not submit your full investment amount until one, two, three, or more years after committing, depending on the length of time over which apartment syndicators plan on acquiring apartments. Since you receive a return based on submitted funds and not committed funds, the ongoing distributions will be lower at first.

Return of Capital: When investing in individual deals, you will not receive your initial equity back until the asset is sold. When investing in a fund, you will not receive your initial equity back until the fund is closed. The exception would be an evergreen fund, where you can sell your shares at any time (or after a lock-out period).

The apartment syndicator of both approaches will provide you with a projected hold period (for individual deal) or fund length (for funds). Assuming you were to invest with apartment syndicators who follow the same business plan, you will typically receive your initial capital back sooner when investing in individual deals. 

Profit upside: The overall return upside is lower for funds compared to individual deals. If you are investing in an individual deal that performs exceptionally well, your return increases in the same proportion. However, your return on investment in a fund is based on the average return of the entire portfolio. Therefore, if one or a few apartments perform exceptionally well, the performance of the other average or below average deals will flatten the overall return.

Risk: On the flip side, since by investing in a fund you are investing in multiple deals, the probability of losing a portion or all your initial capital investment is lower. If one or a few apartments perform poorly, the performance of the other apartments in the fund will cover (or at least reduce) your losses.

However, when investing in a fund, you place more trust in the apartment syndicator, especially early on in the fund when there are zero or a few apartments. When investing in an individual deal, you can qualify the GP and the deal. If you don’t like the syndicator, you can pass. If you don’t like the deal, you can pass. If you really like the deal, you can invest as much as you want.

When investing in a fund, you can only qualify the apartment syndicator. If you don’t like thm, you can pass. But at a capital call, if you don’t like the deal (if you even get to see the deal), you have no choice but to invest. Conversely, if you really like the deal, you cannot go all in. Therefore, qualifying the apartment syndicator is even more important prior to investing in a fund to minimize risk.

Taxes: From a tax perspective, distributions from an individual investment and a fund are the same. Ongoing cash flow payments are considered income and are subject to the income tax. Taxable income may be reduced if depreciation is passed on to the passive investors. Profit at the conclusion of the partnership are considered gains and are subject to capital gains tax.

Feasibility: Only accredited investors are qualified to invest in funds whereas sophisticated investors can invest in certain individual deals.

Another minor advantage of funds to individual deals is the paperwork. When investing in a fund, you complete once set of documents at the beginning of the fund and then are invested into multiple apartments. Each individual deal you invest in outside of a fund come with its own set of paperwork.

Which is the ideal passive investment?

First, you need to determine if you are an accredited investor.

Assuming you are an accredited investor, all other things being equal (the GPs, market, and business plan) the only major differences between the two options are return and risk. 

Investing in individual deals come with a higher level of risk, meaning both the profit upside and profit downside is greater.

Investing in funds diversifies your investment into multiple apartments and markets, reducing the risks and resulting in a more stable return.

If you want to maximize the chances of preserving your capital in return of a lower return, investing in a fund is the ideal option for you.

If you are more focused on growing your capital and potentially receiving a higher return, investing in individual deals is the ideal option for you. 

 

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The Best Shortcut to Getting Started in Multifamily Investing

You know what one of my favorite things is about interviewing multiple people each week for the Best Real Estate Investing Advice Ever Show? Occasionally, I will come across an investor with a mind-blowing amount of creativity and hustle.

They were in a bad financial spot, having no money to invest and no real estate experience. Yet, through massive effort and ingenuity, they were able to get started in real estate investing. 

Usually, they identified a unique, unconventional path – dare I say, a short cut – to success. 

One recent guest I interviewed that fit the above description was Chris Thomas. In fact, before interviewing him, I read his biography and was perplexed. It said he was a short-term rental investor with only two and a half years of experience, yet he had somehow amassed a portfolio of over 250 rentals (at the time of the interview).

“How is this possible?” I asked myself. Once the interview began, I was even more confused. Chris was in the backyard at one of his rentals, wearing a t-shirt covered in sweat (which I was actually kind of jealous of because it was around 30 degrees in Chicago) and holding his iPhone as the camera and microphone. He tells me that before he got started in real estate, he was a high school dropout on welfare (and was maybe even without a home for a period of time).  

After telling me more about his background, he begins to explain his investment strategy. To be honest, even 10 minutes into the interview, I was still uncertain as to how he built his portfolio. All I knew was he somehow began quickly amassing short-term rentals.

It wasn’t until I asked Chris, “how did you buy over 20 rentals in 8 months with no money and no experience? I don’t understand” that I finally realized what he was doing. And the reason for my confusion is that I had never heard of someone implementing that kind of strategy before. I didn’t realize it was possible (or even legal).

Now that I understand what he did, I’m here to convey his strategy to you. 

Here is how Chris went from welfare to controlling over 250 units, without prior real estate experience.

Overall, Chris uses over people’s money to lease and furnish individual units in large multifamily buildings. Then, he manages the unit as a short-term rental on AirBnB.

The first thing Chris needed to do was secure private equity from investors. The problem was that he didn’t know anyone with money. So, he told me that for two days in a row, with little sleep, we sent 500 messages on LinkedIn. The reason it took so long is because he had to manually type each message since LinkedIn marks copy-and-pasted direct messages as junk.

Chris found LinkedIn profiles with the word “investor” in their tagline. Then, he reviewed their profile and sent a custom message based on their interests or an article they recently liked. He said the was completely transparent in the message. He explained what he was doing (rent, furnishing, and AirBnBing apartments), that he was new to this but was working with someone who currently managed one AirBnB, and asked if they would be interested.

Of the 500 messages, 40 responded. After further conversations over the phone, 11 agreed to invest.

Next, Chris needed to find units to rent, which also required massive effort. He reached out to many property managers and apartment owners, asking if he could rent, furnish and AirBnB their unit. Countless managers and owners declined. However, enough agreed to allow Chris’s new investors to pick up 3 to 5 units each.

After the investors submited their funds, Chris was responsible for furnishing the unit and managing the AirBnB process in its entirety. The investor is only responsible for signing on the lease and setting up a direct deposit for the monthly rent.

Each investor invests $7,500 to cover the first month’s rent, security deposit, furniture, and Chris’s $1500 to $2000 fulfillment fee. Each month, the investors receive the cash flow left over at paying expenses and Chris’s $500 to $750 management fee, which is approximately $2,000.

When Chris and I spoke, he was managing 70 units for other investors. That means he made between $105,000 to $140,000 in fulfilment fees and was generating between $35,000 and $52,500 each month in income. 

Once he had proof of concept with his investors’ investments, he began investing in the units in the same buildings. At the time of our conversation, Chris was personally invested in 187 units. 

He said the units generate ~$2,700 per month in income. Based on a $5,000 ($7,500 minus the fulfillment fee) investment per unit, the annual ROI is nearly 650%. 

Now, I didn’t write this blog post with the intention of convincing someone to execute Chris’s strategy, because I am uncertain whether it can work in every market (or if it is unique to California Chris’s market) or if it adheres to securities law regarding raising capital. 

However, I think we can use Chris’s story as an example of how hard work and imagination can allow you to overcome whatever obstacle is keeping you from getting started or scaling. If a high school drop out on welfare can create a seven-figure real estate business in less than three years without any money or experience, what is your excuse?

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Accredited Investor Status – What It Means For You

Let’s take a look into the term “accredited investor”. Every week I have the privilege to speak with investors who are excited to start investing in multifamily syndications or real estate “private placements”. These investors are usually on the search to find access to deals. Since I am a full-time passive multifamily investor myself, I’m always happy to lend a hand, however, it is important to note that many operators and general partners in this space require an accredited investor status to participate in their offerings.

What does accredited investor mean anyway? Besides a designation that gives a person access to private placement investment opportunities.

According to www.investor.gov the SEC (Securities and Exchange Commission) definition of an accredited investor, in the context of a natural person, includes anyone who:

  • Earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
  • Has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence). 

 

There are other ways to qualify which can be found on www.sec.gov but for the purposes of this blog, I’m going to assume most of the audience falls under the individual accredited investor status.

 

Why Accreditation Exists

The SEC created this definition to identity investors and entities who are considered “sophisticated” and are able to absorb a potential financial loss. Essentially, the criteria was created as a protective measurement to protect inexperienced investors from getting into riskier projects; especially because they may not have the financial means to cover a loss. Additionally, the SEC uses this label to regulate investment companies against advertising to or soliciting investments from non-accredited investors. 

The Advantages to Being Accredited

In short, the advantage to being an accredited investor is that you have an opportunity to hear about more deals, gain access to them, and ultimately invest in those deals if you choose. A few examples of accredited investor opportunities may include:

  • Real Estate Syndications (Private Placements) 
  • Angel Investing / Venture Capital
  • Hedge Funds

Becoming an Accredited Investor

It’s really quite simple to “claim” accredited investor status. In fact, some private placements only require self-qualification. Essentially, you check a box as part of the legal documents process that certifies you are an accredited investor and by which method you meet the qualification requirements. There are of course, additional disclaimers and fields where you confirm that you understand the implications involved. 

In other types of private placement offerings, such as a 506(c), you may be required to submit a letter of verification from a CPA, attorney, broker-dealer or a third party verification service such as www.verifyinvestor.com. In any case, you should only certify that you are an accredited investor if you actually are. If you falsely claim that you are accredited, it could cause some legal ramifications down the road for you and the company you invest with.

Summary

Ultimately, being an accredited investor allows you access to additional investment offerings and opportunities that most do not have access to. If you are actively looking for deals and talking to investment firms in the industry, it is likely that you will come across opportunities for accredited investors only. Keep in mind that this is for compliance and regulation purposes. If you are not and accredited investor, don’t worry, there are plenty of investment opportunities available that you may be able to participate in as a non-accredited but “sophisticated” investor. I will cover this topic with more detail in an upcoming post. 

To Your Success

 

Travis Watts 

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Rich Fettke on Supercharging Remote Teams

Real estate is a high-touch business that must now adapt to working remotely. If you want a more effective team or professional network, real estate investor Rich Fettke has actionable insight for you. Rich is co-CEO of Real Wealth Network and took his company completely virtual almost ten years ago. As a guest on the Joe Fairless Best Ever Show podcast, Rich offers tips on building a happy and motivated remote team.

About Rich Fettke and Real Wealth Network

Rich Fettke is co-CEO of Real Wealth Network, an educational and referral service for the passive investor in single and multifamily properties and other opportunities. He brings a strong track record in business and personal coaching helping entrepreneurs grow their businesses.

A turning point came when Rich was diagnosed with terminal cancer. He and his wife, Kathy, scrambled to plan their children’s futures should the worst happen. After much research, Kathy determined that real estate investing was the path to financial security.

The diagnosis was overly dire, and Rich survived cancer. Inspired by Kathy’s research on income generation, the couple founded Real Wealth Network to help friends learn to invest in multifamily and other real estate. The company has grown to include brokerage and syndications operations that offer opportunities for passive investing.

Rich develops teams and systems for his 25 employees, all currently working remotely. Here are his must-haves for a dynamic remote team.

Define Your Culture

Some business areas need pruning during tough times, but your company culture is not one of them. If Rich Fettke has one key takeaway for you, it’s this: “Be sure to determine your core values and use them as hiring criteria.”

Know Your Core Values

Almost every company lists impressive-sounding values and claims to honor them. But when pandemic constraints or other hardships test a business, the truth reveals itself. You must commit to executing on your values every day and holding yourself and the rest of your team accountable.

Here are some of Real Wealth Network’s values that translate directly into actionable tips for remote work.

  • Integrity
  • Transparency
  • Connection
  • Accountability

Get your team’s input and buy-in on the company core values. Employees are more dedicated and self-directed when they feel some cultural ownership.

Hire to Your Core Values

An employee or partner is either adding or subtracting value. No matter how alluring a candidate’s profile, he or she will compromise your team if core principles are misaligned. Even a passive investor can impact your network’s wellbeing.

Rich suggests including core values in your interview questions. Tell candidates one of your values and ask them to walk you through a scenario when they had to act upon that value under pressure. What was at stake, and how did they handle it?

To help vet leaders, Rich also asks prospective employees how they would manage others in light of those values. If your team member fails to deliver, how do you address that? If your ordinarily effective peer is dropping the ball, how do you intervene? These spontaneous answers can reveal a lot about a candidate’s values, strengths, and fit for your unique team.

Lead with Values

After you document your core values and refine your hiring process, the hard work begins. Each day, your remote team has to show up and live those values virtually. Unlike when working onsite, the in-person feedback and social cues that help keep us on our toes are lacking. Subtle employee behaviors or oversights are also easier to miss. Your remote team must understand behavioral expectations and the exact consequences of falling short.

Expect Integrity

You’ve probably known quality employees who were let go with seemingly no warning, or perhaps experienced this yourself. Rich explains how Real Wealth implements the three-strikes rule transparently so that everyone is clear on accountability. This approach avoids the murkiness that often surrounds many companies’ evaluation process, especially in remote environments.

As a manager, you hold a one-on-one with the employee having the issue, advise this is strike one, and explain why. You make sure the employee understands and can repeat it back. You reiterate the three-strikes rule and that a third strike means termination. If employees gain a third strike and are terminated, they almost always admit responsibility and a lack of enthusiasm for the job.

In contrast to giving three chances, don’t be afraid to jettison employees who consistently violate integrity standards. Everyone has an occasional off day, but people who don’t meet your company’s ethical standards need to move on.

Show Transparency

You want to set up transparent systems and processes and encourage open, honest communication. It’s essential to let your team know the metrics evaluating their behavior. Rich shares that at Real Wealth, flagrant integrity violations merit instant dismissal. Breaking the core value of connection by being rude, on the other hand, might call for three strikes.

Gossip and complaining might be a little tougher on a remote team but still occur. Rich and Kathy decided that transparency meant no behind-the-back talk, however seemingly innocent. When you don’t interact in person, it’s easy to blindside employees with poor feedback after it’s too late for them to correct deficits.

In a rush to execute under pressure, businesses sometimes skip transparency basics such as creating an organization chart and job roles. Even a real estate investor with a small team will benefit from organizational clarity. It’s especially important to document in a remote environment, as the days of yelling a question over the cube wall are over.

The documentation should be concise, visual, and stored in an accessible central location. Your team members need to know:

  • What’s expected of them
  • The performance metrics
  • How to get help
  • How much problem-solving ownership they have
  • Who the managers and experts are

In a unique spin on visioning, Rich suggests creating an org chart for your business as it will be in five years. As your company grows and you fill positions, you’ll be encouraged to replace your photo with those of hires who can do their roles better than you can.

Build Connection

Effective systems encourage people to connect in productive and enjoyable ways. You want to avoid typical group time wasters, such as unnecessary meetings.

Rich and Kathy hold quarterly all-hands meetings to communicate important news. This “state of the company” address covers accomplishments, financial performance, profit sharing, and upcoming changes.

When conditions permit, Rich believes in the old-fashioned company retreat for much-needed team bonding. At the yearly three-day event, team members focus on what went well and not so well, what they learned, and the roadmap ahead. They also celebrate each other’s accomplishments. This in-person time builds relationships that help power the group through the rest of the remote year.

Accountability: Rock Your Team Mindset

If you work remotely, it’s easy to fall prey to distractions or a sense of disconnection from the company mission. Real Wealth met this head-on by implementing the Entrepreneurial Operating System®, or EOS, a holistic operations toolkit for smaller businesses. This method sets specific expectations for employees, helps them focus on the bottom line, and gives them ownership of results.

If you’re wondering which system Rich uses to track employee progress, his answer is rocks. Each team member has three to five “rocks” that represent quarterly targets. Rather than micromanaging employees, managers tell them, “Here’s your rock.” The employees own delivering results.

To make quarterly targets more tangible, people can place actual rocks in jars on their desks. That visual reminder of what’s essential helps them prioritize work and minimize distractions.

Another strategy is to partition teams under leads who can work closely with the smaller group. This model promotes individual accountability and open communication.

Run Lean on Tech

The right platforms for your business enable remote collaboration without intruding. How do you balance tech need and overhead?

For starters, Real Wealth doesn’t always meet over video. Skipping the virtual face time cuts down on complexity and that angst of having to look good on camera. The company holds a monthly all-hands meeting, and teams hold weekly meetings. Most video calls involve screen sharing but no distracting faces, allowing attendees to focus on the well-structured agenda. The monthly meeting is an opportunity for people to see each other and connect visually.

After grappling early on with tech overkill, Real Wealth now leverages a few platforms with high returns. For project and portfolio management, Rich and his team use the tried-and-true Basecamp. To help manage meetings and follow-up items, they use Ninety, which implements EOS principles. GoToMeeting and Zoom are favorites for video calls.

Your Turn

Remote teams are the new social business climate. Even if passive investing, you want to mind your business relationships actively. Use Rich Fettke’s experience to help you hone your professional core values and processes. You will enrich your team or network on all levels.

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Investing in Apartments as a Limited Partner

Why Apartments Are “The Asset of Choice” 

Large multifamily properties have historically been owned by institutional investors such as mutual funds, REITs, insurance companies, and pension plans because of the stability and yield that apartments offer. 


Being a Limited Partner investor allows an accredited investor and in some cases, a sophisticated investor an opportunity to buy a passive ownership stake and participate in these same large real estate acquisitions; a 400-unit apartment building, as an example. The Limited Partners (individual passive investors) can experience the same buying power, leverage, and potential tax benefits, just as institutional investors do. 

 

The individual passive investor has the benefit of owning a percentage of an apartment community without the day-to-day management obligations. Additional benefits may include monthly or quarterly cash flow distributions, potential income sheltering through depreciation and tax benefits, debt leverage, principal pay-down, and potential appreciation in value.

Predictable Income


An apartment building’s revenue is derived from rents paid by the residents for leased units and other income-generating items such as covered parking spaces, fenced-in yards, coin laundry facilities, on-site storage facilities, to name a few. A strong property management team will focus on attracting qualified residents to the property and carefully have lease agreements executed, often with contracts lasting 12 months or longer. These practices in turn, generate long-term, consistent cash flow for the Limited Partner investors. 

 

Forced Appreciation


By making improvements to an existing property (known as a value-add business plan), the property’s value can increase through this repositioning process. By increasing rents and occupancy, higher levels of revenue are generated. Since multifamily apartments are primarily valued based on the income they produce, a value-add business model can in-a-sense, “force” the property to appreciate in value rather than relying on market conditions or annual inflation. When the property is refinanced or sold, the proceeds can be returned to the Limited Partners or in some cases, can be rolled into another “like-kind” investment property using a 1031-exchange to defer the taxes.

 

Steady Cash Flow


One of the greatest advantages of real estate investing is the steady, and often tax-sheltered, monthly cash flow. Few investments can be bought with the same kind of steady cash flow return combined with the appreciation potential.

 

Tax Benefits


Distributions made to the Limited Partners are treated more favorably than most other types of investments because a significant portion of the distributions are often not considered income according to the tax code. This is due to the flow-through of expenses and depreciation. Additionally, the capital appreciation is deferred from taxation until the assets are sold and may be further deferred from taxation if a 1031-exchange is implemented. 

 

Total Returns


An apartment’s combination of stable cash flow (primarily derived from rents), capital gains (resulting from increased property value upon sale), principal paydown (from residents paying down the loan balance over time) and tax savings (due to the current IRS rules and the additional benefits from the Tax Cuts and Jobs Act passed in 2017) provide returns that can be quite impressive given the current state of the stock market and the lack of yield offered by banks, money markets, CDs, and bonds. 

 

A Hedge Against Inflation
Historically speaking, rents, property values, and the replacement cost of real estate improvements rise with inflation. This makes real estate a particularly effective hedge against inflation, and might be an asset class to help you balance your investment portfolio, especially in the low yield environment we are in today. 

 

Ownership of Real Estate
Passive investors desiring steady income with a balance between risk and reward, may consider multifamily apartment investing as a Limited Partner to provide a solid foundation for building lasting wealth. Additionally, the ability to use a “hands-off” investing approach can be useful in building passive income streams that, in turn, free up time to spend on what matters most to the individual investor. 

 

To Your Success

Travis Watts 

 

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People Are Fleeing Urban Centers for the Suburbs – What This Means for Apartment Investors

One of the main metrics I look at when analyzing a prospective market to invest in is the population growth. 

The thought process behind this is simple: if the population is increasing, the demand for real estate is increasing, and vice versa. 

Of course, there are other relevant factors like the supply side of the equation. However, there are some investors I’ve met who ONLY select markets based on the net migration. If more people are moving out of the market than are moving in, it is automatically disqualified.  

U-Haul is actually a top source for migration data, which they release annually. you can view their migration reports here.

When you understand where people are moving to and moving from, you can adjust your apartment business plan accordingly. If you are in a market with a positive net migration, you are sitting pretty. However, if you are in a market with a negative net migration, there may be trouble on the horizon.

One of the biggest migration trends resulting in part due to the coronavirus pandemic is the urban-to-suburban pipeline

Not only are more people interested in leaving urban markets, but in some states, such as New York, the exodus has already begun.

The Hill, in their article “Americans leave large cities for suburban areas and rural towns”, says that approximately 250,000 residents plan on moving out of New York City while another two million consider moving out of the state altogether. Also, more than 16,000 New Yorkers already moved to suburban Connecticut. 

And this trend isn’t unique to New York. 

“A record 27.4% of Redfin.com users looked to move to another metro area in the second quarter of 2020,” reads a Redfin analysis performed in July 2020

The most popular destinations are Phoenix, Sacramento, Las Vegas, Austin, and Atlanta. Here is a breakdown of the top 10 metros by net inflow of Redfin users and their top origin.

 

The locations with the large outflows were New York City, San Francisco, Los Angeles, Washington DC, and Chicago. Here is a breakdown of the top 10 metros by net inflow of Redfin users and their top origins.

 

Are any of your investment markets on either one of these lists?

There is also an increase in demand for rural markets. For example, according to US News, 57% of realtors who responded to their survey said they’ve seen an increase in interest in rural Montana. The main reasons were because of its low coronavirus infection rate, as well as because they grew up and had family there. The same The Hill article cited above said real estate sales in Montana were 10% higher year-over-year, and that rural Colorado, Oregon, and Maine experienced similar increases in sales.

So why are people leaving the urban centers? 

Another telling article was written in NASDAQ entitled “The Urban-to-Suburban Exodus May Be The Biggest in 50 Years.” This article provided more data on the reasons why New Yorkers were fleeing urban centers. The top 5 reasons were cost of living, crime, looking for a non-urban lifestyle, concern over the spread of the coronavirus and the ability to work from home.

One of the major COVID-related changes that is driving more people out of urban centers is working from home

According to MARKINBLOG, 88% of companies are encouraging or requiring employees to work from home due to COVID and 99% of people prefer to work remotely. Compare this to just 3.4% of the US population working remotely pre-COVID, this has the possibility to massively disrupt real estate, especially the type of real estate that will be demanded.

Since employees aren’t required to go to the office, they are choosing to live in areas that are more affordable, closer to family, and closer to local amenities while still having direct access to a downtown. Hence, they are leaving urban areas for the suburbs. 

However, they are also choosing to head to the suburbs due to the type of homes that are offered. For example, people are looking for more outdoor spaces (whether that is a private yard or nearby greenspaces and parks) and homes with an extra room to convert into a home office. Greenspace is universally nonexistent in a lot of urban areas, and the cost of an extra bedroom in urban areas is also financially unrealistic for many would be buyers and renters. Therefore, if they want to see real green grass and trees, as well as have a home office, the suburbs or rural areas are their only options.

What this means for you?

As a multifamily real estate investor, you need to understand the population and migration trends in your investment market.

If you are heavily invested in major urban centers, it may be time to consider a pivot and diversify into suburban areas.

This is great news for those already invested in suburban areas, as you should benefit from both an increase in rents as well as an increase in value due to falling cap rates.

Newer investors can take advantage of the low barrier of entry since real estate is generally more affordable in suburban and rural markets.

No one knows for certain what the future holds for real estate post-COVID. However, due to other factors leading up to the pandemic (which I outline in my article about why I am confident in multifamily) combined with the migration trend outlined in this article, I believe multifamily real estate in suburban areas will thrive in the years to come.

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Residential Lenders Tighten Their Lending Standards – Why This Is Good News for Multifamily Investors

A little more than a year before the onset of the coronavirus pandemic, I wrote a blog post entitled “Why I Am Confident Multifamily Will Thrive During and After the Next Economic Correction” (which you can read here).

The economy was experiencing a record long expansion and showed no signs of stopping. However, like most economic expansions, various economic and real estate experts were warning about an impending recession.

“The stock market is inflated” and “real estate prices and rents will not increase forever” they said. 

However, whether the economy continued chugging along or experienced a minor or massive correction, I was confident is multifamily real estate’s ability to continue to perform. 

My confidence was not emotionally driven or biased because I am a multifamily investor. It was based on my analysis of the facts. The most telling fact was the change in renter population

Historically, more people rent during recessions (which is one of the reasons why I was attracted to multifamily in the first place) and more people buy during economic expansions. The former held true for the 2008 recession as more people began to rent. However, during the post-2008 economic expansion, the portion of renters continued to increase (more US households were renting in 2016 than at any point in 50 years). 

Therefore, I predicted that the portion of renters would increase or, at minimum, remain the same during and after the next correction. 

Then, coronavirus hit and induced an economic correction (or a temporary slowdown, depending on who you ask).

But, sure enough, a study published on June 17th, 2020 projected a decline in homeownership and concluded that  “the demand for rental housing will increase somewhere between 33% and 49%” between 2020 and 2025.

In both my January 2019 article and the June 2020 study, one of the reasons why more people are renting is due to tightened lending standards (other reasons were student loan debt, inability to make a down payment, poor credit, and people starting families later).

A metric that is used to measure lending standards is the Mortgage Credit Availability Index (MCAI). The MCAI is based on a benchmark of 100 set in March of 2012 and is the only standardized quantitative index that solely focuses on mortgage credit. A decline in the MCAI indicates that lending standards are tightening while an increase in the index are indicative of loosening credit.

Between December 2012 and November 2019, the MCAI was steadily trending in the positive direction, increasing from the high-80s to the high-180s.

  

However, starting in December 2019, the MCAI began to decline. The three largest drops were in March 2020 (decline of 16.1% to 152.1), April 2020 (decline of 12.2% to 133.5), and August 2020 (decline of 4.7% to 120.9, the lowest since March 2014).

Joel Kan, Mortgage Bankers Association’s Associate Vice President of Economic and Industry Forecasting said in the August 2020 report, “credit continues to tighten because of uncertainty still looming around the health of the job market, even as other data on loan applications and home sales shows a sharp rebound. A further reduction in loan programs with low credit scores, high LTVs, and reduced documentation requirements also continued to drive the overall decline in credit availability.”

People will always need a place to live. Their only two options are to rent or to own. As indicated by the massive MCAI declines since the end of 2019, less and less people will be able to qualify for residential mortgages. The programs available to people with low credit or who cannot afford a high down payment have disappeared. 

Therefore, by default, more people will be forced to rent.

One last interesting thing to point out is how the MCAI during the current economic predicament compares to the 2008 recession. 

Here is an expanded MCAI graph that shows credit availability back to 2004. The pre-2011 data was generated biannually, making it less accurate than the post-2011 monthly generated data. However, the graph still highlights an important point. At least as it relates to the availability of credit at the time of this blog post, the current economic recession is nowhere near as severe as the 2008 recession.

To receive the monthly MCAI report, click here.

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Debunking a Common Myth About Apartment Insurance Rates

A common practice when underwriting multifamily apartment deals is to assume a stabilized insurance expense equal to the T-12 insurance operating expense. In other words, the assumption is that the insurance premium paid by the current owner will remain the same after acquisition.

This practice was indeed correct for the past five to ten years. However, according to commercial insurance expert Bryan Shimeall, who was interviewed on the Best Real Estate Investing Ever podcast, this is no longer a safe assumption.

Due in part to the onset of coronavirus, as well as to the increase in the number of people entering the commercial real estate investment realm, insurance rates are rising fast.

Towards the end of 2019, the insurance market transitioned from a soft market to a hard market. 

In a soft market, insurers are competing for apartment investors, resulting in more competitive rates. Therefore, when underwriting deals, apartment operators were assuming the T-12 insurance rate would remain the same after acquisition, or even potentially decrease. 

However, in a hard market, the opposite is true and apartment investors are competing for insurers. As a result, insurance rates are rising. 

The magnitude of the increase is geographically driven. According to Bryan, an apartment investor should expect between a mid-single-digit and up to a 20% increase in the insurance rate when underwriting deals.

He also said that insurance companies are pickier about the types of apartments they will insure, as well as offering non-renewing insurance policies. If an apartment qualifies for insurance, there is no guarantee that it will continue to receive the same rate, the same coverage, or any coverage at all once the initial contract has expired.

Now that you know about these recent changes to insurance rates, what changes should you make when underwriting apartment deals?

The most important thing you need to do is have a conversation with your real estate insurer. If you do not have one, you need to find an insurance company or broker that specializes in real estate.

Ask the insurer about the insurance rate increases in the market you invest in.

Another important factor besides geography that is driving the rate increases are the history of losses. Bryan says it is more important than ever to provide your insurer with the history of losses as soon as possible.

Once you know you are serious about a deal, email the listing broker (if on-market) or the owner (if off-market) and request a copy of the history of losses for the apartment. 

Your insurer will need accurate and complete information about the history of losses at the property to provide an accurate insurance quote. Without the history of losses, the insure will generate a quote based on a clean history.

If your insurer obtains the history of losses report that isn’t clean, the insurance rate will be higher. Depending on the type of losses, the insurer may decide to not provide insurance at all. 

The worst-case scenario is your insurer receives the history of losses and won’t provide insurance on the apartment after you’ve invested tens of thousands of dollars into due diligence. Another bad scenario is the new insurance quote is significantly higher than your original projections and you need to back out of the deal or renegotiate a new purchase price.

Therefore, to avoid canceling contracts and wasting thousands of dollars, do not assume an insurance rate that is the same as the current insurance rate. Instead, have a conversation with your insurer prior to submitting a contract to understand the projected rate increase in the market. Then, obtain a history of losses as soon as possible so that your insurer can provide you with the most accurate quote before you have progressed further into the due diligence period.

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High Net Worth Frugality – How To Save Like The Wealthy

Frugality has played a major role in my life, starting in childhood and being brought up by two very frugal parents. I have tremendous gratitude looking back on the lessons learned and seeing the impact that saving money has had. In this post, I want to share with you some interesting data I recently came across and a unique perspective on frugality.

Americans spend the majority of their money on three expenses: Housing, Transportation and Food, according to the U.S. Bureau of Labor StatisticsYou probably already knew that, so I want to dive a bit deeper in a direction I think we could all benefit from. I want to share with you how High Net Worth Individuals save and spend their money compared to everyone else in these three primary categories. Obviously, there is no official handbook or methodology that all wealthy individuals follow; so I compiled some data and research so we can take a peek behind the scenes. 

#1 Housing 

You might be familiar with the fact that Warren Buffett paid $31,500 for his home in Omaha nearly 50 years ago and he has not increased his spending in this category ever since. This is an extreme example, but how much do you think the average American spends on housing as a percentage of household income? To my surprise, the data shows nearly 30% of household income is spent on housing costs according to the U.S. Bureau of Labor Statistics

 

Now let’s take a look at another High Net Worth example; we’ll use Tim Cook (the CEO of Apple). Tim Cook has an estimated net worth of 650 million dollars and he bought his California residence for 1.9 million dollars. This home purchase represents less than 3% of his net worth (if he paid cash) or a mortgage payment of approximately $7,500 a month if he financed the home with a traditional loan and 20% down payment. If the house is mortgaged, that means Cook spends approximately .072% of his annual income on housing costs based on the 125 million in compensation he received from Apple in 2019. It’s interesting that Buffett and Cook have the ability to buy nearly any home they desire, but they chose to embrace a reasonable frugality in this category. There are, of course, hundreds of other High Net Worth examples like these, but it is fascinating to consider this mindset when the majority of American homeowners max out their debt leverage to buy the most expensive house they can afford.  

 

#2 Transportation

According to a study done by researchers at Experian Automotive (and published on Forbes), 61% of wealthy individuals (defined as earning $250,000 or more in income per year) drive Hondas and Toyotas and Fords. You may also be familiar with the fact that many billionaires drive inexpensive vehicles as well, many of which are valued under $30,000. A few examples include:

 

  • Steve Ballmer (Billionaire) Ford Fusion Hybrid MSRP $30,000
  • Mark Zuckerberg (Billionaire) Acura TSX MSRP $30,000
  • Jeff Bezos (Billionaire) Honda Accord MSRP $20,000
  • Ingvar Kamprad (Billionaire) Volvo 240 MSRP $25,000

 

According to AAA research agency, the average American spends $9,282 a year on their vehicle, which equates to $773.50 a month. The median household income (for 2018) was $61,937 according to Current Population Survey and American Community Survey, which are surveys conducted by the U.S. Bureau of Labor Statistics and the U.S. Census Bureau. Americans dedicate nearly 15% of household income to a vehicle. 

 

#3 Food

This is one of my favorite topics when it comes to personal finances. In this post, I will keep it brief, but you can check out some of my other blogs and articles that dive deeper into the topic. According to The National Study of Millionaires, which is a 71-page nationwide study conducted on 10,000 U.S. millionaires and their spending habits, it was found that 36% of millionaires spend less than $300 each month on groceries and 64% spend less than $450, and only 19% spend more than $600 a month on groceries. The punchline; non-millionaires spend about 57% more on groceries compared to millionaires. But that’s just groceries, so what about restaurants and dining out? I’ll get right to the point on this one… 

 

To turn a profit, many restaurants charge around a 300 percent markup on the items they serve. When you go out to eat, you are paying for service, convenience and atmosphere. There is certainly a time and place for restaurants, but if you are eating out frequently, consider that you could make a $15 meal in a restaurant for $5 at home. The statistics are also interesting. According to a study from the JPMorgan Chase Institute that focused on fifteen specific metropolitan areas, studying credit and debit card purchases from more than fifteen billion anonymous transactions and characterizing them by quintiles of income, the poorest 20% spent 16.6% of their income at restaurants, trailing the wealthiest income quintile at 17.8%.

 

Takeaways

Perhaps it’s time to remove “The Joneses” from our life and start keeping up with ourselves instead. 

 

There are two sides of the money coin. One side is about making money and the other side is about saving money. Long-term financial success requires a commitment to both. We can’t forget about mentors like Mike Tyson, who amassed over 300 million dollars in a career and filed for personal bankruptcy in 2003 after going completely broke. Or perhaps the more recent example of Johnny Depp “losing” his 650 million-dollar fortune due to wild spending habits like $30,000 a month on wine and renting 12 storage facilities to store his “memorabilia”. We all know of athletes and celebrities who unfortunately were not taught about frugality, or simply chose not to pay attention. The goal for you and I may not be to join the Billionaires Club, but perhaps it’s a worthwhile pursuit to find a balance between having enough and living life on your own terms. 

 

To Your Success

Travis Watts 

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How to Create a Compelling Property Management Incentive Program

As an apartment syndicator, your most important team member is their property management company. The property management companies main responsibilities are to manage the day-to-day operations and implement your business plan.

However, what if – due to market conditions or lack of skill on the part of the property management company – the your net operating income projections aren’t being met? Occupancy is low. Collections are struggling. Rental premiums aren’t being met.

One strategy to turn operations around, or to avoid operational challenges all together, is to create a property management incentives program.

Why Create an Incentive Program?

An incentive program creates an alignment of interest between you and the property management company. The better they perform, the more money you, and your investors, and they make.

What is an Incentive Program?

An incentive program is an agreement between you and the property management company in which the property management company is given an objective, and if they complete the objective, they are rewarded.

Two Types of Incentive Programs

Incentive programs fall into one of two categories. 

  • Type 1: Incentive programs that begin at acquisition and end at sale. 
  • Type 2: One-off incentive programs that end after a fixed amount of time.

Examples of Type 1 Incentive Programs

The most obvious and common is a program in which the objective is to effectively manage the property and the reward is a property management fee equal to a percentage of the collected income. Plus, they aren’t fired.

Other objectives are investing their own money in the deal, acting as a loan guarantor, or bringing on their own investors. The reward for all three is more equity or cash flow.

You can also create type 1 incentive programs for key performance indicators, or KPIs. For example, the objective is to grow total revenue by a certain % each year. Or maintaining or exceeding a specified occupancy rate. 

Just make sure the objective results in alignment of interest. For example, a bad objective is to grow the occupancy by a certain percentage each year, because there is a maximum occupancy rate. Once they achieve high-90’s, it will become impossible for them to achieve their objective without first sabotaging occupancy so that they can then increase occupancy again to receive a reward.

Examples of Type 2 Incentive Programs

Type 2 incentive programs are used when you want to target a specific KPI that is underperforming. For example, if occupancy drops below 90%, you can create an incentive program. The objective is to achieve a specified occupancy rate within a specific time frame (i.e., achieve 95% occupancy within two months). 

Once the desired objective is achieved, they receive a reward and the incentive program expires.

Type 1 vs. Type 2 Incentive Programs

Both incentive programs can be beneficial.

The type 1 incentive programs create alignment of interest from the start. Whereas the type 2 incentive programs can be used during the business plan to improve a specific lagging KPI. 

However, you need to be careful and mindful when creating incentive programs. For example, if you set an occupancy-based type 1 incentive program (i.e., maintain 95% occupancy), the management company can accomplish this goal by offering unnecessary concessions to increase occupancy. Or for a “number of new leases”-based incentive program, the management company can let in unqualified renters to inflate the number of new leases.

Therefore, type 2 incentive programs are the ideal option for KPI-based objectives. If a KPI is lagging, target it with an incentive program. Whereas the type 1 incentive programs are ideal for non-KPI-based objectives, like effectively managing the property, investing in the deal, etc.

Other Best Practices

The objective of the incentive program needs to be realistic and attainable. For example, an objective to raise occupancy from 85% to 100% in two weeks is too unrealistic. A good strategy to ensure that the incentive program is practical is to plan a brainstorming session with key members of the property management team and discuss objectives and rewards.

Also, be creative with the rewards. They can be financial based, like a gift card or bonus. However, other reward ideas are dinners with you or someone in your company, an extra paid vacation day, a free education or training course, a special trophy or plaque, etc. 

Lastly, the best incentive programs do not punish property management companies for failing to achieve the objective. If they miss the mark on an incentive program, don’t reduce their management fee. However, this doesn’t mean that you NEVER punish (i.e., fire) a property management company

Overall, incentive programs are a great way to create extra alignment of interests with your property management team and can help you target specific KPIs that are lagging behind.

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President Trump Signs Coronavirus Relief Executive Orders

President Donald Trump signed an executive order on Saturday night after negotiations reached a deadlock in the House over another coronavirus relief package.

Click here to read the full memorandum.

Here is everything you need to know about the executive orders:

Unemployment Benefits

Unemployment benefits include an additional $400 per week, retroactively starting August 1st. The federal government would contribute $300 and the states would contribute $100.

White House economic advisor Larry Kudlow said Sunday that people could expect checks in a couple of weeks.

Eviction Moratorium and Renter Assistance

The executive order did not provide specifics on a renewed eviction moratorium or renter assistance. Instead, it defers to other governmental agencies to make that determination.

The decision to ban evictions will be decided by the Health and Human Services Secretary and Centers of Disease Control and Prevention Director.

The decision to provide financial assistance to renters will be decided by the Treasury Secretary and Housing and Urban Development Secretary.

Student Loan Payment Deferrals

Student loan debt interest would be waived through the end of the year. This only applies to loans held by the Department of Education, so it does not apply to privately held student loans.

Payroll Tax Cut

The federal tax withholding for the payroll tax would be deferred (not forgiven) starting September 1st and through the end of the year for people earning less than $100,000 a year.

The Treasury Secretary may also exercise his authority to defer the withholding, deposit, and payment of the tax, meaning it may be forgiven. He could also extend the program for a full year.

 

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Why Multi-Family? Why Now?

Why Real Estate? 

Most people who are career focused and have money to invest or people who are coming to the end of a professional career, often look to real estate as a viable investment option either for building equity or for income generation. Unfortunately, real estate investing is typically thought to be a sole ownership strategy. Very few people are aware of the passive investing opportunities in multi-family private placements or “apartment syndications”. 

Why Multi-Family?

Syndications and/or private placement offerings are all about “pooling” your money together with other investors to purchase large assets that may otherwise be unattainable as a sole ownership purchase (for example, a 300-unit apartment building). If you have 10 million dollars to use as a down payment, you might have the means of purchasing an asset like this individually; however, if you prefer to only invest $100,000, that’s where a syndication structure can be a huge benefit and allow you to participate in a deal of this size. 

Why Value-Add?

I tend to invest in value-add projects. In this business model, the General Partner or Managing Partners and their teams often add value to the apartment community in a number of ways. Common value-add strategies include renovating the units, updating to modern appliances, countertops, in-wall USB ports, smart thermostats, on-site storage lockers, improve the landscaping, renovate the clubhouse, gym, pool, parking lots etc. Every property is unique and the business plan will be different for each; the overall goal is to update the property and match the current market demand while increasing below market rents along the way.

The value (price) of an apartment complex is primarily derived from the NOI (net operating income), which is comprised of the total collected rents and income minus expenses to operate the property. When the net operating income increases, the value of the complex increases. For example, let’s say the annual net operating income on a property increases by $100,000 a year. A $100,000 a year rent increase could potentially bump the purchase price up by nearly one million dollars (for example/educational purposes only). 

Why Invest? 

Multi-family real estate investing has a lot to do with diversification of an investment portfolio. There are two common reasons why people invest in real estate. Most people either invest and wait for the property to increase in value or “force” the appreciation (equity investing) or they rent it out and collect the cash flow (income investing). Why not do both? Value-add business plans are often designed to capture both of these strategies. 

Multi-family real estate is a diversified asset in itself. This is largely due to the fact that when you buy an apartment building, you are investing in many units. With single-family homes, you have (1) unit and (1) tenant. If your tenant moves out or doesn’t pay rent, you are 100% vacant and 100% unprofitable. With a 300-unit property, it is not uncommon to have the ability to lose 70-90 tenants at any given time, and still be profitable. The diversification does not stop there. Many people invest passively in syndications because they can spread out their risk geographically among several properties and Sponsors.  

Why I Decided to Invest in Multi-Family

In 2015, after a complete burnout of trying to expand my single-family portfolio, I decided to return to the drawing board in search of a more sustainable and scalable approach to investing in real estate. I was desperate to become a hands-off investor after realizing how active this business can be. In 2015, after reading 52 books, listening to podcasts, networking in real estate groups and seeking mentors, I ultimately decided that multi-family real estate was my solution. More specifically, investing passively in apartment communities via private placement offerings (syndications). 

These Were a Few of My Reasons:

  • I needed a hands-off approach to invest in real estate 
  • I wanted tax advantages equal to or exceeding single-family 
  • I wanted geographic and asset type diversification 
  • I was seeking a recession-resistant asset class
  • There was (and still is) a nationwide demand for affordable housing 
  • I wanted to leverage other people’s expertise, track record and deal flow

Whether you decide to be active or passive in the multi-family space, I wish you success in your journey. This asset class has truly been a blessing for my family and I. I have a passion for helping educate others in real estate. If you have any questions, please reach out anytime. I would be happy to connect on a call or email to help in any way I can.  

 

To Your Success

Travis Watts 

 

 

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“You Shouldn’t Use the Radio to Generate Leads” Myth Debunked

“Don’t waste your money or time advertising on the radio.”

“The radio is prehistoric.”

“No one listens to the radio anymore.”

I am certain you’ve heard one or a version of the above in your real estate career. Consequently, most real estate investors believe they should not use the radio to generate leads.

However, the statistics on radio usage may surprise you. Radio is still one of the most powerful mediums in the United States with a weekly reach of around 90% among adults. Since adults are listening to the radio and adults own real estate, the radio can be a great way to generate leads.

But the myth isn’t quite debunked just yet… Enter Chris Arnold.

We interviewed Chris on the Best Real Estate Investing Advice Ever Show. He has closed on over 2,500 real estate deals. And guess what? Every single deal came from a lead generated using the radio!

Now, the myth is officially debunked.

One of the main reasons why Chris has had so much success using the radio is because most people believe the myth this blog post is attempting to debunk. How many real estate investors do you personally know who use the radio to generate leads? For most of you, I bet the answer is a big fat zero.

Many people are listening to the radio yet very few real estate investors utilize it to generate leads. Therefore, there is a massive supply-and-demand imbalance from which Chris is benefiting, and so can you.

How can you replicate Chris’s success on the radio? Here’s his simple four-step process:

Define Target Audience: First, you need to define your target audience. Chris’s target demographic are people over the age of 50, because this is the demographic that is likely motivated to sell a home due to things like retirement, inheritance, tired of being a landlord, etc. Since defining a target audience isn’t the purpose of this blog post, click here and here to learn more about this topic.

Create the Advertisement: Once you’ve defined your target demographic, the next step is to create your advertisement. Like any advertisement, it needs to touch on the pain points of your target demographic, as well as include how you will alleviate that pain point and a call-to-action. Chris says you can either record the ad audio at home or, if you don’t have the proper equipment, you can use the local radio station’s studio.

Find a Radio Station: After you’ve created your advertisement, you need to find the right radio station on which to air your advertisement. Selecting the right radio station is easy. You’ve already defined your target audience, so all you need to do is determine the type of music they prefer. Since Chris targets the 50+ demographic, he airs ads on classic or old school rock stations. If your target demographic is rural, he says country music radio stations are best. Or R&B stations if your target demographic is urban.   

Negotiating the Costs: The last step is negotiating the costs of the advertising spot. Chris says the average person calls into a local radio station, asks for their media packet, and pays that price. However, Chris pulls reports on the value of the radio station prior to calling. Based on the reports, he calculates how much the advertising spot is actually worth. Then, once he calls the radio station, he tells them how much he is willing to pay based on his research rather than asking how much do pay. As a result, Chris is able to pay $1,500 for 100 sixty second ad spots per month.

 

One of the major benefits of using Chris’s method is that it is a set-it-and-forget-it strategy. Record the ad, send it to the radio station, and wait for the phone to ring. This is contrasted with other, more active marketing strategies like cold calling, direct mail, or driving for dollars.

And, as I mentioned previously, the number 1 benefit of using the radio to generate leads is that no one else is doing it. 

Chris’s episode is scheduled to air July 22, 2020. Be sure to mark your calendars so that you can listen to his episode to learn even more about this powerful lead generation strategy. 

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How to Navigate 2020 – 5 Tips for Real Estate Investors

What a crazy year this has been! It has certainly been a rollercoaster to say the least, but the good news is that there are ways you can not only survive, but thrive in 2020 as a real estate investor. 

Here Are 5 Tips That Can Help:

#1 Educate, educate, educate. Working from home? Can’t travel? Attend some online events, webinars, read a few books, listen to podcasts, watch “how-to” videos, get on BiggerPockets and read blogs. 

“An investment in knowledge pays the best interest” – Benjamin Franklin 

#2 Re-define your goals and investing criteria. What are your long-term goals? What do you REALLY want to gain from investing in real estate? It’s not all dollars and cents and it’s not all about cashflow vs equity. Take a couple hours this summer to write down what it is you really want to achieve in life. Money can only be exchanged for experiences or “things” – what are you after? 

“You should set goals beyond your reach so you always have something to live for” – Ted Turner

#3 Volunteer your time – seek mentors. Learn from other’s successes and failures. Mentorship can come in many forms, but the most effective is usually in the form of having a personal coach or mentor. This has made the biggest impact in my life over the past decade. Have money to spare? Consider hiring a coach or mentor. Don’t have money to spare? Consider volunteering your time to add value to others in exchange for mentorship.  

“The richest people in the world look for and build networks. Everyone else looks for a job” – Robert Kiyosaki 

#4 Get your personal finances in order. What can you do to reduce overhead or save additional cash? Could you start a side business for some additional income? Stay focused and disciplined on your long-term objectives. Any time you spend money on things you don’t need, you move further from your goals.

“Personal finance is only 20% head knowledge and 80% behavior” – Dave Ramsey 

#5 Learn from mistakes. You will make mistakes and you will likely lose money based on inexperience; I know I have. Reading biographies, seeking mentors, asking people about their “lessons learned” can help you cut the learning curve. 

“It’s good to learn from your mistakes. It’s better to learn from other people’s mistakes” – Warren Buffet 

I hope you find these helpful. Even if you only implement ONE of these, you will be 90% ahead of most. This year, more than ever, is a time to grow, expand and thrive. 

To Your Success

Travis Watts 

 

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Senate Announces HEALS Act Stimulus Package: Here’s What You Need to Know

On Monday afternoon, the Senate Republicans unveiled the Health, Economic, Assistance, Liability Protection and Schools (HEALS) Act, the second stimulus package meant to offset the economic impacts of the coronavirus pandemic.  

Here’s what we know so far about the potential terms of the second stimulus package based on the HEALS Act:

Second round of stimulus checks: Like the CARES Act, the HEALS Act should send payments to qualifying individuals and families. The payment amount was up to $1,200 per person in the CARES Act, and the HEALS Act will likely follow the same payment model. What is undecided are the eligibility guidelines. However, it seems like the negotiation is between keeping the eligibility guidelines the same or allowing more people to receive the payment. Therefore, people who were eligible for the CARES Act stimulus checks will likely be eligible to receive a second payment. The goal is for people to receive checks in the beginning of August.

Unemployment benefits: People who applied for unemployment for the first time due to COVID or were already collecting unemployment will receive a weekly payment on top of the ordinary unemployment benefits. People who were unemployed received $600 a week from the CARES Act. However, the HEALS Act would reduce the extra payment to $200 a week and over time increasing to $500 a week.

Payroll Protection Program (PPP): The PPP program provides forgivable loans to small business to cover payroll (and other costs) as an incentive to keep employees on the payroll. The HEALS Act is expected to target the hardest-hit small businesses with PPP loans. 

Employee retention tax credit: This tax credit program was introduced in the CARES Act. Companies receive tax credits for wages paid to their employees during the pandemic as another incentive to keep employees on the payroll. The HEALS Act proposes to include additional tax relief for companies who hire and rehire workers. 

Return-to-work bonus: If an unemployed person gets a new job and begins working at a previous job again, they will receive a bonus of up to $450 a week on top of their wages.

Renter assistance: The renter assistance programs proposed would help tenants pay their rent, help landlords pay expenses and put another hold on evictions for up to a year.

The next step is for the House to negotiate the terms of the act to finalize the bill. Hopefully, Congress comes to an agreement by next Friday, August 7th, which is the last Senate session before a month-long recess. 

We will keep you posted on any developments regarding the next stimulus package.

 

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How to Go From Solopreneur to a Business That Can Run Without You

Want to go from working 20, 30, 40 or more hour per week while doing one deal a month to working an hour per day while doing over 100 deals per year?

Mike Simmons, a wholesaler and fix-and-flip investor who Theo interviewed on the podcast, was able to go from a solopreneur to operating a business that runs without him by following one simple trick.

For nearly five years, Mike worked 7:30am to 4:30pm in a W2 job. After work, on weekends, and sometimes even during his lunch breaks, he would work in his fix-and-flip business. Since it was just him, he did it all. He found the deals. He negotiated the contracts. He attended closings. He managed the contractors. Overall, he spent 20 to 30 hours on his business each week, resulting in one deal per month. 

Flashing forward to present day, Mike almost never sees the houses that he buys. He doesn’t attend closings. He doesn’t find deals or buyers. Yet, he completes over 100 deals per year.

His secret? Every step in the flipping and wholesaling process is automated, and he has hired an employee who is responsible for overseeing each of these processes.

When to Hire?

The first step in going from solopreneur to a business that can run without you is knowing when to start delegating. In other words, when do you hire your first employee?

The answer depends on how quickly you scale your business. 

Here are three examples of when you should hire your first employee.

You identify a bottleneck. Mike’s first bottleneck was the process of ensuring a wholesale transaction is completed once a deal is under contract and an end buyer is identified. He spent more time on this part of the process and less time finding deals and finding buyers (among other things). So, his first hire was a transaction coordinator to oversee this step in the process.

Your business is generating enough income to pay the salary of an employee. Mike paid his first employee $12 per hour. So, he was generating at least that much income in his business

There is something you really dislike doing or are really bad at. Another reason why Mike’s first hire was a transaction coordinator was because he had poor attention to detail skills. He needed an employee who was detailed oriented.

Who to Hire and In What Order?

As I mentioned above, you hire your first employee when you’ve identified a bottleneck in your real estate process and/or when there is something you don’t like doing or are not good at. Also, when your busines generates enough income to pay an employee’s salary.

After you’ve first hire, who do you hire next?

The decision on who to hire next is similar to deciding who to hire first. Either there is something else you don’t like to do or are bad at, or a new bottleneck is created by the previously hired employee.

Mike’s second hire was a salesperson. Mike thought of himself as a decent salesperson. However, he didn’t like it. After hiring a salesperson, not only was he able to focus on aspects of the business that he enjoyed more but he was also able to complete more transactions due to the higher level skills of this new hire. 

Mike made his third hire based on a newly created bottleneck. The salesperson was responsible for answering the phone calls for income leads. This took time away from the salesperson getting in front of potential sellers and negotiating contracts. To remove this bottleneck, Mike hired a person to answer the phones. That way, the salesperson could spend more time negotiating contracts and less time on the phone qualifying leads.

Now that Mike had a dedicated person to answer the phones, he had the capability to handle more leads. Therefore, he hired a marketing person to generate more leads to keep the person who answers the phones busy.

Overall, the order in which you hire new employees usually starts with tasks you don’t like doing and eventually evolves into alleviating bottlenecks created by a previously hired employee.

Doer vs. Leader

When you are a solopreneur, you are wearing all the hats in your business. You are working in your business.

Once you start to hire employees, you slowly work less “in” your business and more “on” your business.

When you work in your business, you are a doer. When you work on your business, you are more of a leader.

The skills required to be a real estate doer are different than those needed to be a real estate leader.

One tip Mike provided about how to be a better leader to your employees is to document a process prior to hiring someone to oversee that process. A bad leader hires an employee for a role and says, “just get it done.” A good leader hires an employee for a role and says, “here is what you need to do in order to be successful.” But rather than telling them what they need to do, you can provide them with documentation with the step-by-step process for how to successful in their role.

 

To go from a solopreneur to operating a business that runs without you requires hiring employees. To ensure that the business runs successfully without you, make sure you are hiring employees for the right reasons and in the right order. And as you hire more and more employees, make sure you are improving your leadership skills.

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“It is Too Difficult to Invest Out-of-State” Real Estate Investing Myth Debunked

There are three phases to a real estate rental investment. 

  • Find the deal
  • Acquire the deal
  • Manage the deal

Most real estate investors find it is easier to handle the three phases in a local market. 

Finding deals requires implementing lead generation strategies. Lead generation strategies are either remote (i.e., direct mail, online advertising, cold-calling) or in-person (i.e., bandit signs, driving for dollars, door knocking). If you are investing in your local market, you can take advantage of both lead generation categories.

Once you find a deal, you can drive to the home or building yourself to perform due diligence to determine and offer price. 

After you have acquired the deal, you can either self-manage or oversee a third-party property management company.

When investing out-of-state, your options for finding, acquiring, and managing deals are limited…or are they?

Theo recently interviewed Andrea Weule on my podcast, Best Real Estate Investing Advice Ever. She lives in the highly competitive Denver, CO market, so she buys rentals out-of-state. In that interview, Andrea debunks the myth that you cannot invest out-of-state and provides interesting ways to generate leads and perform due diligence remotely.

The first phase is to find a deal. Andrea finds her out-of-state deals in three ways. First, she works with a real estate agent who sends her on-market deals off the MLS. She says that ignoring the MLS results in ignoring low hanging fruit. 

Secondly, she creates a list of motivated sellers. Andrea’s targets home that have been owned for more than 20 years and where the owner is 55 years old or older. She finds that these owners are often motivated to sell. They are approaching retirement and are thinking about the next phase in their life, which may require the selling of their home.

Andrea uses ListSource to create this list.

Then, she sends a sequence of three mailers for each address. Rather than using a generic “we buy houses” letter, she creates a message that speaks more directly to the 55+ years old demographic. The letters include questions like “are you looking for your next adventure?” or “do you want to eliminate the stress of owning a home?” 

These first two strategies (direct mail and MLS) are remote lead generation strategies. The third strategy Andrea implements is traditionally performed in-person – bandit signs. However, rather than flying to the market and placing the bandit signs herself, Andrea hires someone local to the area.

The process is simple. She creates a job posting in the “gigs” section on Craigslist with the purpose of hiring someone to place bandit signs in the local market. Andrea sends them the bandit signs, which have a GPS tracker. The GPS tracker allows her to confirm that the sign was places in the correct location. Once the bandit sign is place, she requests that they send her a picture. Lastly, Andrea will send them their payment via PayPal.

Andrea uses a similar strategy for the second phase of the real estate investing process – the acquisition. If someone is interested in selling her their property, she performs basic due diligence to determine an offer price. 

Back to Craigslist. She will create another job posting. But this time, she is hiring someone to take pictures of the prospective property, as well as to do a Zoom Tour. With the combination of the pictures and video from the Zoom tour, she has all the information she needs in order to submit an offer.

 

Overall, it is a myth that it is harder to or that you cannot invest out-of-state. All it takes is a little creativity and the use of technologies.

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5 Tips for Raising Money from Family Offices to Buy Apartments

The typical progression for raising money for apartments goes like this:

  • For the first deal, you raise money from your family and/or closest friends
  • After the first deal, you continue to raise money from your family and/or closest friends. However, people who you are less familiar with begin to invest. Examples would be extended family, less close friends, work colleagues, and others who you’ve known for a few years or less
  • As you do more and more deals, you begin to raise money from investors who were referred from other investors. You also attract passive investors from your thought leadership platform
  • Eventually, you transition to raising money via 506(c), which allows you to advertise your deals to raise capital

The commonality between all steps in the above progression is that you are raising money from individual investors (or two investors who are a couple). 

Another, more advanced model for raising capital is to pursue private institutions. An example of a private institution from which you can raise money are family offices.

According to Investopedia, family offices are private wealth management advisory firms that serve ultra-high-net-worth investors. They are different from traditional wealth management shops in that they offer a total outsourced solution to managing the financial and investment side of an affluent individual or family. 

Family offices can be a great source of equity for advanced apartment syndicators. Seth Wilson, the founder and managing director of Clarity Equity Group, raises money from family offices for his real estate deals. 

We recently interviewed Seth on the Best Real Estate Investing Advice Ever Show. His episode is scheduled to be air on 9/16/20. In that interview, Seth provided his top five tips for raising money from family offices.

1. You Must Have Relevant Experience

The first step before you even consider raising money from a family office is that you must have experience. If you’ve never done a large apartment deal in the past, a family office isn’t going to take you seriously. If you’ve only been doing large apartment deals for a few years, a family office still isn’t going to take you serious.

It took Seth over 12 years and $65 million worth of real estate in order to raise money from family offices.

There is not a shortcut. If you want to raise money from family offices, the first step is to have years of experience successfully buying, managing, and selling apartment buildings.

2. You Must Be An Expert

It is likely that if you meet the “experience” requirement, you will meet the education requirement as well. 

The reasons why you need the relevant experience and need to be an expert on apartment investing are two-fold. First, family offices are entrusted by an individual or family to invest on their behalf and, more importantly, preserve their net worth. The individual or family did adequate due diligence on the family office prior to using their services. The family office did adequate due diligence before hiring their employees. Therefore, they are going to do adequate due diligence on you and your business.

Secondly, and because of reason number one, they are generally more sophisticated than your family, friends, and others you are used to raising money from. They are going to ask more complex, detailed questions about you and your business plan. When you are an expert, you can hold your ground when these questions are asked. They must be confident in your ability to conserve and grow their client’s investment.

3. Put Together the Look

Whether you like it or not, Seth says that a book is judged by its cover, especially in the higher echelons of investing. 

A family office is most likely not going to invest in your deals without seeing you in person. Therefore, you need to wear the proper attire. And there isn’t a one-sized-fits all approach. 

The acceptable attire when visiting a family office based out of Denver is a lot different than one in Manhattan. Seth says that the best way to learn the dress code is by asking. Call the receptionist, ask what the dress code is and dress one notch higher.

4. Speak to the Right Contact

When you are ready to raise capital from family offices, maximize your chances of success by speaking with the right contact.

If you are reaching out to a family office who manages the wealth of a second-generation or later family (i.e., the wealth was created by the parents, grandparents, etc.), the best person to speak with is the Chief Investment Officer. Seth said that more established family offices will have an investment committee who sign off on all investments. The CIO typically sits on this committee. If you can win over the CIO, you’ll have your inside person on the investment committee to argue your case.

If you are reaching out to a family office who manages wealth for a first-generation family (i.e., the wealth was created by someone who is still alive), you want to speak to the patriarch or matriarch of the family. The person who made the wealth is likely heavily involved in investment decisions.

5. Take Massive Action

Like all things in real estate, raising money from family offices requires massive amounts of action. Seth recommends having one or two great phone calls with family offices each day. Use resources you already have to add value and take care of them.

Focus on building a business relationship and a personal relationship. For example, if you come across something that you think they would personally be interested in, text them. 

You also want to make sure you are physically meeting them in person. Seth has no problem flying out in the morning, having an hour or so meeting with a single family office in the afternoon, and fly home in the evening. 

Raising money from a family office is a great way to take your apartment syndication business to the next level. But it is a strategy that takes time to work up to. You must establish relevant experience and expertise before making the jump from “family and friends” to family offices.

Once you have a track record, make sure you dress the part, know who to speak with, and take massive action.

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Turn a Decade Into a Year – How to “Knowledge Hack”

I love helping other people cut the learning curve. There have been several instances in my life where I condensed years and even decades of time by using a simple “Knowledge Hack” strategy. 

 

I Have a Question For You…

Have you considered having a mentor? Is it worth your time to read books, listen to podcasts, watch how-to videos, and network with others? 

 

Today I was researching some of the most successful people in America from the Forbes 400 List and realized that almost all of them had mentors at some point, and many still have mentors today. 

 

A Few Examples Include:

 

  • Bill Gates had Ed Roberts as a mentor
  • Oprah Winfrey had Mary Duncan as a mentor
  • Mark Zuckerberg had Steve Jobs as a mentor
  • Warren Buffet had Benjamin Graham as a mentor
  • Sam Walton (And family) had L.S. Robson as a mentor
  • Michael Dell had Lee Walker as a mentor 

 

Rather than thinking about having a “mentor” think of the word “coach” instead. It’s essentially the same thing, but using the word “coach” helped me put all of this into perspective years ago.   

 

A Quick Story

From 2009 to 2015 I did everything on my own as an active real estate investor in the single-family home space. It wasn’t because I thought I knew it all, it was because I did not see the need for a mentor or coach at the time. 

 

What I finally realized in 2015 (after 7 years of trial and error), was there were other people in the active real estate investing space who were operating much more efficiently than I was. They had more connections and were finding better deals and had a broader range of skill sets and ultimately… they were more profitable than I was. I had to do some soul searching, self-reflection, and take a long, hard, look in the mirror. Was active investing really the best use of my time and skills? 

 

What Happened Next?

I made a decision to start partnering with investment firms who had better skill sets, track record, connections, and efficiencies than I did. I essentially “piggybacked” off their success by becoming a limited partner investor in other people’s private placement offerings (mostly in multifamily apartments). This provided a hands-off approach to investing where I had the best of both worlds. I could participate in real estate, which I love and enjoy, while not having to be “in the business” of real estate in an active way, which I did not enjoy. 

 

After dedicating some time to networking, reading, listening to podcasts, watching how-to videos and seeking mentors, I inevitably became a full-time passive investor in real estate. I left the active single-family strategy behind because I was tired and burned out from trying to do it all myself, trying to make the right calls and know all the ends and outs. In addition, the hands-on approach was taking too much time away from the things I loved doing. I had far less spare time because my real estate projects were consuming more and more of my availability. 2015 was the beginning of an entirely new education process that has been life-changing to say the least.  

 

Takeaway

Mentors can come in many forms. The best advice I ever received was to seek out a mentor or “coach” who is doing what you want to do and is successful at doing it…because success leaves clues. 

“If I have seen further than others, it is by standing upon the shoulders of giants” – Sir Isaac Newton

 

To Your Success

 

Travis Watts

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Demand for Multifamily Rentals to Increase by Nearly 50% in Next Five Years

On January 18th, 2019, I published an article on my blog entitled “Why I Am Confident Multifamily Will Thrive During and After the Next Economic Recession.” 

In summary, historically, homeownership rates decrease during economic recessions and increase during economic expansions. 

During the post-2008 economic expansion, the Dow Jones tripled, unemployment was cut in half, and the GDP rose by nearly $5 trillion. At the same time, the renter population increased nearly every single year and grew by more than 25%. 

The reasons why more people decided to rent than own during the most recent economic expansion include high student debt, poor credit, tighter lending criteria, people starting families later, and inability to afford home payments. 

Since these reasons aren’t going away, I predicted that when the next economic recession occurs, the same percentage of people or more will rent. And when the economy begins to improve, the same percentage of people or more will rent.

Flash forward over one-and-a-half years and many experts believe we have entered the next economic recession, due in part to the coronavirus pandemic.

So what are people saying about the demand for multifamily rentals?

A study released by apartment properties acquisition and management company, Middleburg Communities, projects a drop in homeownership rates and a significant increase in demand for rental housing over the next five years.

Here is an excerpt from a GlobeSt.com article published on June 17, 2020 entitled “As Homeownership Declines, Demand for Rental Housing to Climb.”

“The June 11 report projects a decline in U.S. homeownership to 62.1%, the lowest rate in more than 20 years, before a partial recovery to 63.6% in 2025. Depending on the effects of the recession, the demand for rental housing will increase somewhere between 33% and 49% over that time period, the report concludes.

The analysis points to changing demographics playing a role in the changing demands. Married households are more likely to own homes, and their numbers are declining. The numbers of households with incomes of more than $120,000 is expected to drop while those with incomes of less than $30,000 are projected to increase.

“We do not claim to know the precise trajectory that household incomes will take over the next five years,” the report said. “However, with 19 million jobs lost as of this writing, the direction of household incomes in the near future is clearly negative.”

The number of non-white householders, who typically rent at a higher rate, is also growing.

But demographics alone are a “weak” explanation for homeownership shifts, according to the report. Student loan debt, inability to make a down payment, tightened lending standards, high rents and a shift in preferences play a role, too.

The report also zeroed in on three variables that offer a “reasonable” explanation for slumping homeownership: “lending standards, as measured by the average credit scores of mortgages, median net worth by age of householder, and the previous year’s deviation from the demographic-based projection, essentially inertia.”

The report notes that additional stimulus packages from the federal government could bolster homeownership rates.”

(Emphasis Added)

Like I said over one-and-a-half years ago, homeownership decreased during the economic expansion due to people starting families later, student loan debt, inability to make a down payment, and tighter lending standards.

Therefore, this study reinforces my thoughts on multifamily investing – there will be the same or increased demand for rentals during and after the current economic recession.

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1031 Exchange: The Rules

As the owner of investment properties large and small alike, there’s a vehicle available in which you can actually continuously invest into larger properties and delay the capital gains expenditure that is due to reveal itself at some point. This vehicle is called a 1031 Exchange.

 

According to the United States Internal Revenue Code (26 U.S.C. § 1031), a 1031 Exchange allows a taxpayer to defer the assessment of any capital gains tax and any related federal tax liability on the exchange of certain types of properties. In 1979, federal courts allowed this code to be expanded to not only sell real estate but also to continuously purchase within a specific timeframe with no liability assessed as that time.

 

In addition, these exchanges must be utilized for productive use in business or investment. Prior to 2018, properties listed under the code included stocks and bonds and other types of properties. However, as of today, the 1031 Exchange only includes real property which makes this excellent for investors.

 

1031 Exchange Rules Explained 

 

There are 7 primary 1031 Exchange rules which require a deeper study: 

 

  • Like-kind property 
  • Only for Investment or Business Intentions
  • Greater or Equal Value Replacement Property Rule
  • “Boot” is denied
  • Same taxpayer rule
  • 45 day identification window 
  • 180 day purchase window

 

1031 Exchange Rules Explained 

 

Like-Kind Property

 

According to the IRS, each property must be utilized in trade or business for investment purposes. Keep in mind that property used personally, like personal residences or second homes, will not qualify for the 1031 Exchange opportunity. 

 

However, real property, most commonly known as real estate, does include land and anything attached to the land or anything built upon it, or an exchange of such property held primarily for sale does not meet the requirements for the utilization of a like-kind exchange.

 

Only for Investment or Business Intentions

 

To meet the criteria for a 1031 Exchange, the real estate must be utilized for investment or business purposes only. The investment vehicle must be property that is not considered a primary residence but is used to generate income and profits through appreciation and that can take advantage of certain tax benefits.

 

For example, real property identified for investment purposes can be any property that is held for the production of income, whether it be a rental for leasing option, or if the value increases over time (capital appreciation). In order for it to meet the criteria for the tax deferral, the property must be held strictly for either investment or business use.

 

Greater or Equal Value Replacement Property Rule

 

The greater or equal value replacement property rule identifies a limitless amount of properties as long as their combined value does not exceed 200% of the originating, or previously sold property. In addition, this rule also includes the acquired properties to be valued in the neighborhood of 95% or higher of the property that is being exchanged for.

 

“Boot” is denied

 

The term boot is where money or the even exchange of items considered to be “other property.” If it is determined that a taxpayer does receive boot, that booted exchange or a portion of will become taxable.

 

Rules of Thumb for the Boot Offsetting Provisions:

if the seller receives replacement property of the same or higher value than the net sale price of the property previously sold, and in addition, the seller spans all of the proceeds from the acquisition on the property being replaced, then that exchange does meet the criteria to be totally tax deferral. If the seller follows these guidelines, then there is no consideration of this being considered “cash boot” received and either took on new mortgages in addition to the previously dissolved mortgage or the seller gave the “cash boot” to reconcile any received “mortgage boot.”

 

The Same Taxpayer Rule

 

It is mandatory under the same taxpayer rule that the seller who previously owned the property that was sold must be the exact same person, via tax identity, who takes over ownership of the property being replaced. The question is why? The answer is because if the taxpayer changed their identity, based on tax law, then there would be no continuous action of the tax. Therefore, the proceeds are subject to become taxable.

 

45 Day identification Rule

 

Under the 1031 exchange code, the taxpayer has a 45 day window from the date of the sale of the previously owned property to identify the replacement property. The 45 day window is commonly referred to as an identification period. This process must be done in writing with the authentic signature of the taxpayer.

 

When identifying the replacement property, remember the following suggestions:

  • Any real property as long as it is being considered for business or investment purposes may qualify. The property can be located anywhere in the continental United States. In addition, in 2005 there were certain temporary regulations that were allowed for rental real estate to be purchased in Guam, and the Northern Mariana Islands, and also in the US Virgin Islands.
  • The property must be clearly identified with a physical street address or legal property description, and in some cases, specific unit addresses are mandatory.
  • In the process of identification, the property may be changed or additional real estate can be added by 12 midnight on the first 45th day of your identification window. Keep in mind that there are two rules that must be remembered and they are the 3-Property Rule and 200% Rule. Sometimes, revoking your original identification may be required while you are in the process of making a new one.
  • If there is any property purchased within the window of the 45 day rule then there is no formal identification needed, however, keep in mind to take the identification of other properties in consideration.
  • Purchasing replacement properties from relatives should be given careful scrutiny.

 

180 Day Purchase Rule

 

When completing a 1031 exchange, the 180 Day-Purchase Rule mandates that the replacement transaction must be completed within 180 days or six months in total. Regardless, the rule always applies. This means that conveyance of title must be completed by this date. If you ever decide to participate in an apartment syndication, please adhere to this rule.

 

Executing a 1031 Exchange

 

Example 1: Assuming that a taxpayer has decided to invest into a multifamily unit and he has decided to sell it. To the taxpayer’s surprise, the property generated $300,000 in gains, and after closing, the net proceeds were $300,000. With the taxpayer staring at a capital gain tax liability of 200,000 in taxes (federal capital gain tax, depreciation recapture, state capital gain tax, and net investment income tax) after the property sells. Only $100,000 in net equity is available to be reinvested into another property.

 

Example 2: If the same investor chose to complete an exchange, the investor would have had to have identified the new replacement product being a multifamily unit within 45 days and invests the entire 300,000 into the purchase of the replacing property with no capital gains due.

 

For an investor, a 1031 exchange is an excellent opportunity. When you decide to invest in properties, it is natural to migrate to larger units, specifically multifamily properties.

 

As you continue development and growth in this area, you may even want to consider becoming an apartment syndication investor. This will allow you to pool resources from other sources that will facilitate the overall growth of your portfolio and investment profile. Understanding the 1031 Exchange can generate large revenue and save taxes.

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