position realty

Position Yourself For Success

How To Begin Investing In Rental Properties ~ Buy and Hold

In my judgment, investing in real estate to hold is the best method yet discovered for a person of modest means to become wealthy. Unfortunately, that doesn’t make it easy. Buying and holding real estate successfully requires accomplishing a lot of very different tasks simultaneously or it won’t work. To boil it down, there are five major components:

1 – Acquisition

2- Financing

3- Rehab

4 – Management

5 – Maintenance

In my experience, these five components of buy and hold real estate investing are the basis for building wealth in real estate investing. I will explain each in detail below.

Acquisition

You make your money when you buy. And that is just as true for buy and hold as it is for flipping. Some buy and hold investors can get a little lazy. Whereas flipping creates discipline by quickly showing whether the deal was a good one or not given how much money was made or lost on the sale, buy and hold has no sale. So it’s easier to justify (consciously or subconsciously) lower quality deals. Don’t make this mistake!

Poor deals on the acquisition side will hurt buy and hold investors in the long run just like flippers. More money will be thrown away, cash flow will be lower and refinances won’t pull money out or will force investors to keep high interest private loans. Buy and hold investors should use the same aggressive marketing and negotiating tactics as flippers and not settle for anything less.

Financing

Financing is generally the hardest part for buy and hold investing. Fortunately, there is an assortment of ways to finance properties to hold, but all of them require thriftiness. The first is to save money from a job and use that money to buy investment properties. For this model, FHA loans can be great here because you can buy any property up to a fourplex, live in one side and rent out the rest.

In addition, flipping and holding are by no means mutually exclusive. Why not hold every third or fourth property while flipping the rest? Or better yet, use creative financing (like subject to’s or seller financing) to buy a property for no money down. Or get a ma’ or pa’ private lender to lend you the full down payment. Or partner with someone who has money. Then they can bring the money and you can do the work. It’s not easy, but there are plenty of financing solutions available.

Rehab

The Sydney Opera House was budgeted to cost $7 million and take six years to complete. It ended up costing $102 million and taking 16 years! In other words, it always costs more and takes longer than you think. Contractors and employees are notorious for overcharging, procrastinating or providing poor quality work. So be careful when hiring and be quick to fire if needed.

The best contractors and employees generally come from referrals. Ask for them from people you trust whenever you can. Often local REIA groups will have a list of referred vendors and contractors. And when you are vetting such vendors, ask for references and check them thoroughly. And do not pay them up front!

It’s also important to work hard at accurate budgeting. Make sure to add in a contingency of 15-20% for the things that will inevitably pop up. And always double check your budget against your results. This is important to make sure 1) your buying criteria is right and 2) that you are not under-financing these properties.

Management

The big question is whether to hire a management company or do it yourself. The advantage to hiring a management company is that it frees up more time to look for properties. The disadvantage is that they cost money and that some are incompetent or even criminal. If you do hire a management company, just as with contractors, vet them thoroughly. You should ask for referrals from people you trust and then from the management companies’ themselves. And do not be afraid to fire them. A management company can make or break you and the bad ones will break you quicker than you think.

If you decide to do it yourself, it has to be a primary focus. Property management is the nuts and bolts of real estate, and without it, everything falls apart. Learn the law and consult with an attorney to make sure you are in compliance. In addition, you must have a thick skin and be able to tell a tenant “no” or some of them will walk all over you. Furthermore, know that you will eventually need to hire someone for leasing, maintenance and/or bookkeeping. In the meantime, you will need to be able to do basic bookkeeping yourself in order to properly do your taxes, assess your situation and obtain bank financing.

Maintenance

If you decide to manage yourself you should at least find a roving handyman you can call for maintenance issues (unless, that is, you are very handy). When you have enough units, you can hire someone full time. You will also need to have plumbers, electricians, HVAC technicians and the like on call for such issues.

If you use a property management company, the maintenance and turnover is the most important thing to watch as overcharges will usually go there. If maintenance expenses are out of hand, demand an explanation. If the explanation is unacceptable or the situation doesn’t change, switch companies. The same goes for prolonged vacancies.

These are, of course, just the broad strokes. For more information, read ,The Millionaire Real Estate Investor by Gary Keller and How I Turned $1000 into a Five Million in My Spare Time, by William Nickerson or view the many articles and books on this site.

Position Realty
Office: 480-213-5251

How To Retire Early Investing In Commercial Real Estate

We all work hard at our J.O.B., don’t we? We work hard each day and hope to retire when we’re 65, that’s the American dream, right? Many of us are looking for something better, maybe a scenario where we can retire earlier or perhaps enter a state of semi-retirement. The answer: investing in commercial real estate.

Imagine working really hard to find a good building at a fair price, putting the financing together, and hiring a property manager to run the whole thing. Was that a lot of work? Of course. But don’t you work hard anyway? Here’s the difference….

Commercial Ownership – What’s It Really Like?

Imagine the day you close on the building and your property manager takes over. Ask most commercial building owners, and they will say they spend anywhere between 2 and 5 hours per week on their building if it’s managed by a professional management company.

What have you done? You went from a job that took 40-50 hours of your time each week to one that takes a fraction of that. And you replaced part or all of the income of your job with that from the commercial building.

You’re working less while maintaining your income.

What would this mean to you? Maybe you could spend more time with your family. Maybe you want to travel more. Pursue a hobby. Give back. Or maybe do more deals.

How is something like this possible with commercial buildings? The answer is in how commercial buildings are valued.

How Do you Make Money On Commercial Investments?

The value of a commercial building is driven by its net operating income, the amount of income left after all expenses are paid. The more money the building spits out after all expenses, the more it’s worth.

In many parts of the country, a building is worth 10 times its net operating income. This “10 times multiplier” is referred to as the “capitalization” or “cap rate” for short. Don’t worry about this for now – it’s not important to the point I’m trying to make. Let’s just use a cap rate of 10 for our discussion.

Let’s say a building has a net operating income of $100,000, which would make it worth $1M. If you could somehow make the building generate $10,000 more each year, maybe by increasing rents or decreasing expenses, you would have generated $100,000 in value (a cap rate of 10 times the additional income of $10,000 is an additional $100,000 in value).

Let’s look at a more specific example, so that you can start visualizing how this “math” could work for you in real life.

Assume you bought a 10-unit building for $540,000, and you had to put 30% down. The building was bought at a “10-cap” based on our formula we’ve used so far. Which means its net operating income (or NOI) is $54,000 per year, times our cap rate of 10 is $540,000. The income per unit is $1,000, and the expenses are 55% of the income. The building is in great shape and has been managed by the owner himself.

So far there is nothing special about this deal.

However, suppose you found out that the average market rent in the area is actually a $200 higher per month. Suppose further that you meet a property manager who manages two similar buildings in the area, and he tells you that his expenses are only 45% of income.

Let’s say it takes us 3 years to get the building to where it should be, i.e. with each unit bringing in $1,200 per month and lowering our expenses to 45% of income. Here’s how this would impact our financials:

By making small improvements each year, we have added $25,000 to our Net Operating Income. What is our value now?

Our new NOI is $79,000, so our value now is about $790,000 ! That is an increase of $250,000 in three years! Isn’t that incredible?

But that’s not all.

You also had between $2,600 and $4,700 in monthly income from this building over those three years.

That’s still not all. You (emm, I mean your tenants), paid down $21,500 of your mortgage balance during that time, too.

Here’s what you get if you add everything together:

Your down payment was $160,000, and your total profit if you sold this building in 3 years is $284,000. This means you nearly doubled your investment!

In the meantime you enjoyed an average of $3,500 per month in cash flow.

Maybe you need more than that each month to quit your job. No problem. Buy a bigger building. Or get a second or third one. Three of these buildings will give you $10,000 per month in income and almost a $1M of profit in 3-5 years.

Retirement Possible In 5 years After Investing In Commercial Real Estate?

Would it be a lot of work? Absolutely. Do you work pretty hard right now? Probably.

Imagine working just as hard for the next 5 years and being able to retire. Imagine. 5 years.

And then you can do whatever you want. Keep working. Keep finding new deals (why stop?). Travel. Family. Give back. Whatever.

You don’t have all the answers, and you probably feel overwhelmed. That’s to be expected. The point I’m trying to make is, make sure that whatever you’re working hard at gets you to where you want to go.

Give the professionals at Position Realty a call to discuss your investment goals and objectives.

Position Realty
Office: 480-213-5251

8 Best Markets for Flipping Houses

More investors are rehabilitating homes and looking to sell them for profit, a move known as flipping. RealtyTrac recently evaluated more than 600 metro areas to find where flipping single-family homes offers some of the highest returns based on the investor’s gross profit. The top eight metros for house-flipping are:

Orlando
Average purchase price: $103,701
Average flipped price: $168,677
Gross profit percent: 63 percent

Las Vegas
Average purchase price: $133,198
Average flipped price: $203,945
Gross profit percent: 53 percent

Phoenix
Average purchase price: $146,528
Average flipped price: $210,290
Gross profit percent: 44 percent

Tampa, Fla.
Average purchase price: $79,538
Average flipped price: $113,676
Gross profit percent: 43 percent

Memphis, Tenn.
Average purchase price: $68,318
Average flipped price: $96,870
Gross profit percent: 42 percent

Miami
Average purchase price: $138,064
Average flipped price: $189,291
Gross profit percent: 37 percent

Lakeland, Fla.
Average purchase price: $68,444
Average flipped price: $93,715
Gross profit percent: 37 percent

Nashville, Tenn.
Average purchase price: $108,851
Average flipped price: $146,872
Gross profit percent: 35 percent

PositionRealty.com
Office: 480-213-5251

How To Buy Real Estate in Your IRA

Here’s the big question that confuses many: Can you have real estate investments in your IRA or Keogh? YES. You can. So that was easy, now what?

The next question arises about leveraged real estate and how is it done. Yes. You can leverage real estate in a retirement vehicle, but it is so important to do it right, and all too often it isn’t. So rather than go into the details of how it’s been done wrong, let’s just get it right.

Always Vest in the Name of the Trustee

IRA’s have custodians or trustees, as do Keogh’s and other qualified plans. Vesting must always be in the name of the custodian or trustee. IRA’s never have individuals as custodians or trustees, unless an individual is properly certified under IRC 401 12(n) as a person who qualifies as a non-bank trustee. If you are one of those, you already know all this. If you are not, read on.

If you decide to buy property for the benefit of your account, and somehow the title or escrow company got your name on it rather than the trustee, that needs to be changed, even if it means starting the title/escrow work over. If you are the trustee of your qualified plan, the title must be in your name as trustee for the appropriate type of plan you have. If you are a co-trustee, yes, everyone has to be on title.

The Plan Must Make the Payments

Now back to leveraging. Your IRA or plan makes the payments. The payments are made from your account or plan, from whatever available cash there is to pay for the underlying debt. Remember that the property that you bought is the collateral for the loan your plan is paying for. So if title is vested properly, and I now am sure no one will make the improper vesting mistake, who makes the payment? The owner.

Yes, many times third parties make the payments, many of us have been there, but in this case it’s serious. The plan has to make the payments. If that means making contributions, or selling other assets in the plan to make payments, so be it. If you don’t, you’re in default, and that means that the asset will be departing from your portfolio unless it’s cured.

Should Your Retirement Plan Invest in Real Estate?

So that was easy. Now the part that becomes a little more interesting: Should you have real estate in your IRA, SEP-IRA, Keogh, or other qualified plan? The answer is yes, no, maybe so. OK, it’s not a good answer as such, but let’s examine the real situation.

IRA’s

If it’s your IRA, it’s your retirement. You should be a savvy real estate investor, or really know your way around real estate and notes. Also, remember your beneficiaries. Many times we have seen beneficiaries holding notes and property that the spouse had not necessarily paid real close attention to. In some cases the information left behind was not in the condition it should have been in to leave behind to anyone. Our suggestion and opinion is that real estate investments in an IRA should be made by professionals. If you fit in this category, in our experience has been great for many as part of a balanced portfolio or investment strategy.

Keogh’s and Qualified Plans

Read IRA’s directly above. If you are alone it’s one thing, but when you affect the retirement and lives of others it becomes somewhat more complicated. If you are making decisions in a pool for your employees, the quality and type of deal you are making is significantly important. Your employees, (including spouses and children) will be impacted by the type of portfolio you put together. Usually a retirement portfolio is composed of stocks, bonds and money markets. If you use mutual funds, it works similarly, a stock fund, a bond fund and a money market fund. Within those classifications one can diversify. If you make the investment decisions, you need to be very careful about diversifying. If you want to include real estate, you certainly may, but balance it in terms of risk and proportion in your portfolio. Be certain that the investment is arms length, and well considered.

One thing that you should always consider is getting professional advice. This means all the advice, and be sure it’s documented. Real estate can be an excellent component to a retirement plan, it just has to be done properly. If your plan allows self direction, meaning that you permit your employees to direct their own investments, then you need to make sure that they (and you) receive the proper information about investments and make that information constantly available. Information and education are key to reducing your liability over the long term also.

So can you have real estate in your IRA and Qualified Plan? Yes. But please follow the rules and get good advice, and it will pay back big dividends in more ways than one.

PositionRealty.com
Office: 480-213-5251

7 Steps For A Successful 1031 Tax Deferred Exchange

A 1031 exchange is a tax-deferred exchange which allows an owner of business or investment property to exchange that property for new property without incurring income tax on the gain.

The 1031 Exchange Process

Prior to closing on the sale of the sold property:

Step 1: Consult with your tax advisor for a 1031 tax exchange

Step 2: The Agreement
Contact an 1031 exchange intermediary to reserve an account number to use on all the exchange documents. The owner of the property (“the Owner”) should complete both an Exchange Agreement and a Qualified Exchange Trust Agreement.

Step 3: Assigning the Sold Property Contract
The Owner assigns rights but not obligations under the Sale Contract to a Qualified Intermediary and provides notice of the assignment to the Buyer. At the closing, title for the sold property is transferred directly from the Owner to the Buyer (known as direct deeding). A copy of the completed Assignment of sold property Contract and a copy of the Sale Contract should be sent to your intermediary.

Step 4: Net Proceeds
Net proceeds from the sale must be payable to the Qualified Intermediary. Payment may be in the form of a check payable to them or a wire transfer. It is important that the Owner never have actual or constructive receipt of the funds from the sale. Once proceeds are received by them, they are invested for the benefit of the Owner.

Within 45 days following the sale and transfer of the sold property:

Step 5: Identifying Replacement Property
The Owner completes the Identification of Replacement Property form. Replacement property must be specifically and unambiguously identified. For real estate, this could be a valid street address or a legal description. Identification requirements for personal property may vary depending on the item, but make, model and year are usually sufficient. Delivery of the Notice to the intermediary may be by hand, fax, mail, or over-night courier and must be postmarked by or received by 11:59 p.m. on the 45th day. Prior to midnight on the 45th day, the Identification may be amended or revoked, but after the 45th day, no changes in the Identification will be accepted.

Within 180 days following the sale and transfer of the sold property:

Step 6: Assigning the Replacement Property Contract
The Owner assigns rights but not obligations under the Purchase Contract to the Qualified Intermediary and provides notice of the assignment to the Seller. A copy of the completed Assignment of Replacement Property Contract and a copy of the Purchase Contract should be sent to the intermediary.

Step 7: Disbursements
Owner sends a Direction to Disburse Funds from the Exchange Account. Funds are made payable to the Seller of the Replacement Property or to the Seller’s agent. At the closing, title to the replacement property is transferred directly from the Seller to the Owner (direct deeding).

You can always check out what the IRS says about 1031 Exchanges prior to entering into a 1031 Exchange.

PositionRealty.com
Office: 480-213-5251

The Truth About 4-Family Investment Properties

Many of 4-family properties sell at a price where the purchasers will not see a dime in positive cash flow for 10 years or more. Why? In my humble opinion, there are several reasons. First, 4-families are very much in demand among newer investors who, in all honesty, don’t have the first idea how to properly evaluate cash flow. These buyers fall into the trap of determining the value by looking at what other people have paid for comparable 4-families to determine value, rather than doing a cash flow analysis to see how much money they’ll make at a particular purchase price. As a result, they pay what everyone else is paying—which, as you’ve already seen, is often more than one can pay and make any money!

Compounding the problem is the fact that many 4-families are sold by agents who also have no investing expertise. I’ve had many an agent “prove” to me that a 4-family is a good deal because it has a positive cash flow after mortgage payment, taxes, insurance, utilities, vacancy loss, and maintenance fees are taken out. What they don’t seem to understand is that, as the owner, I would also have to pay for extermination, evictions, mileage and wear-and-tear on my car, bank fees on my business account, accounting fees to keep my taxes straight, turnover and advertising costs associated with those vacancies, and the all-important replacement reserves for items that wear out slowly, such as boilers, roofs, and so on. When I show an agent that my real, true-to-God expenses on a particular building will outstrip income by 25% or more, they invariably tell me that I’m exaggerating—after all, the CURRENT owner makes money hand over fist! (Sure he does—he paid $20,000 for the building in 1954!)

Another reason for the gap between selling price and price at which a buyer could make money is that 4-families seem to be a favorite of super-conservative investors, many of whom pay all cash or a very hefty down payment, and, as a result, are able to get cash flow out of even the most overpriced properties. Think about it: if you didn’t have a mortgage payment on these properties you’re looking at, would they make money? Of course! Would they make a decent return on your investment? Heck no! But some investors aren’t looking for double-digit returns; they’re looking for an attractive, easy-to-manage property where they can sink their money and get a (more-or-less) guaranteed return.

My suggestion is this: leave the 4-families to the under-educated and over-conservative, and focus on the slightly larger properties that small investors like yourself can both afford and actually make money on. Five to 12 unit buildings give you the benefits of size plus eliminate the competition from over-paying amateurs and the better-funded corporate investors (who want much larger properties. And as an added bonus, it’s much easier to negotiate owner financing on these properties!

PositionRealty.com
Office: 480-213-5251

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