Hampton Manor-Punta Gorda: Closed

# of UnitsDate of acquisitionPurchase price
191April 14th, 2017$12,250,000

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Princeton Park: Closed

# of UnitsDate of acquisitionPurchase price
191April 14th, 2017$12,250,000

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Hampton Manor- Williamsburg : Pending

# of UnitsDate of acquisitionPurchase price
191April 14th, 2017$12,250,000

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Lakes at Renaissance: Pending

# of Units Date of acquisition Purchase price
191 April 14th, 2017 $12,250,000

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Royal Valley Mobile Home Park: PendingThe Bentley : Closed

# of UnitsDate of acquisitionPurchase price
191April 14th, 2017$12,250,000

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Investing in Real Estate vs. Relying on a 401k: Two Drastically Different Retirement Outcomes

It used to be that you went to college, got a good job with a pension, and rode that wave until the day you retired. Things aren’t like that anymore and we’re 100% individually responsible for putting away savings SO THAT we can retire. 

Not only are employer-paid pensions practically non-existent, but it’s not common anymore to stay at a single company or even remain in a single career path long term. For this reason, many of us have old, partially funded, half-forgotten retirement accounts scattered throughout our trail of previous employers. 

If this sounds familiar, you’re going to want to declutter your retirement accounts ASAP by rolling each one over into a single, consolidated account.

Red Rover Rollover

You don’t want to be on the verge of retirement attempting to remember all the way back to your 20s and 30s as to who you worked for and what financial company managed that 401K, 403b, or IRA. What a disaster!

Trust me, while some of that is moderately fresh in your mind, you’re going to want to consolidate and rollover all your prior retirement accounts into a single, manageable account you can keep track of easily. 

It’s a beating, but if you do what it takes now – find all the accounts, see all the notaries, file all the paperwork – your future self (and your family) will thank you SO much.

Investing in Real Estate with Retirement Funds

Here’s where you get to the good stuff. Once you can see the value of your combined retirement accounts and their lackluster performance, you become interested in investment opportunities that have the potential to help you accelerate your earnings. 

Did you know you can use your retirement funds to invest in real estate? 

Yup! Sure can!

There are absolutely some rules you need to follow in order to do this, but first, let’s walk through a couple of hypothetical scenarios to see why you might be interested in investing in real estate with your retirement savings. 

Hypothetical Situation 1: Keep My Money Where It Is

First, let’s pretend you have $100,000 in your consolidated retirement account. And let’s say that over the next few decades, you earn about 7% in returns annually. You add $10,000 per year to the account with compounding growth. In 30 years, when you are retirement age, what do you think you’ll have? 

$1.8 million

Not a bad deal. So, you’re thinking, I can handle that, right?

Well, let’s add inflation into the mix. Inflation is about 3.22% per year, which means the cost of living doubles every 22 years. 

The 1.8 million that sounds like boo-coo bills right now equates to less than $900,000 in today’s money. Living out retirement on only $900,000 is downright scary. 

Enter: The Self-Directed IRA

With a self-directed IRA, you have infinitely more control over the types of investments you’re allowed to make with your retirement money. No more being limited to certain mutual funds, stocks, and bonds, although you can certainly invest in those if you want. 

Of course, there are limits – you can’t invest in a vacation home for yourself, for example. But you CAN invest in commercial real estate syndications. These are passive investments where you direct the custodian of your self-directed IRA account to invest the funds in a certain deal on your behalf. Any interest/profit earned from the syndication go right back into your retirement account and build your retirement savings. 

Hypothetical Situation 2: Invest My Money In Real Estate Syndications

Now, let’s pretend that the same $100,000 was in a self-directed IRA account, invested in real estate syndications. You invest in deals with a 5-year hold time and a 2x equity multiple, which means over the course of 5 years, your initial investment doubles (roughly 20% annual returns).

To be clear, that means in 5 years, your $100,000 could be $ 200,000 and 30 years from now, your self-directed IRA could value about $6.4 million. Then, don’t forget about the $10,000 in contributions each year, like in hypothetical scenario 1. Add those in and you’d have over $9.5 million at retirement. 

*Side note: Being able to contribute $10,000 per year assumes that your employer’s 401K allows in-service rollovers. If that is not allowed, you may be limited to contributing $5,500 per year which makes the total in your account in 30 years around $7.4 million. Still not a bad deal at all. 

In Summary

Comparing $9.4 million (or $7.4 million if your contributions were limited) to $1.8 million is a no-brainer. 

The impact on your future life and your kids’ future is nearly unimaginable, but add that to the impact your 30 years of real estate investments made on thousands of families whose apartments and communities you helped improve. 

I’d choose real estate every time. 

The thing is, you can’t make this choice when you’re 65. This is a choice you have to make now. Even if you procrastinate another 5 years, you’re missing out on hundreds of thousands of dollars. 

Do it for your future self, for your family, for your children. The sea of paperwork is worth it to prevent your 70-year-old self and your loved ones from experiencing financial stress and strained relationships because of money. Learn the lingo, and do what it takes today so you can live life on your own terms when it matters most. 

Why Multifamily Investing

Multifamily Market Overview

The demand for rental accommodation continues to significantly outpace supply. The current status quo is that rental housing supply is falling short by hundreds of thousands of units each year across the United States. This situation, according to The National Multifamily Housing Council and The National Apartment Association, looks set to continue for many years to come.

Current demographic preferences reveal a trend at both ends of the age spectrum for renting as opposed to owning. The younger demographic are finding it more challenging to get the financing for property ownership and the baby boomer generation favor downsizing and the increased freedom that allows. The result is that the demand for rental property is increasing.

The combination of these two market factors gives a strong positive indication for sustained revenue growth in the multifamily sector.  The conditions look set to remain positive for multifamily investment in most locations for the foreseeable future.

Let’s take a look now at four more reasons why investing in multifamily makes good financial sense.

 

#1 Economy of Scale

The basic meaning of the economic term, ‘economy of scale’ is that there is a fundamental cost-saving benefit to being bigger.

To quote Investopedia, an ‘economy of scale’ is an advantage “that arises with increased output of a product. Economies of scale arise because of the inverse relationship between the quantity produced and per-unit fixed costs.”

How does this concept apply to the argument that multifamily investing is more advantageous than investing in single-family property?

To give a simple example, if you have been collecting 10 rents for 12 months from your multifamily property and then the roof needs fixing, that’s a much better scenario than collecting 1 rent for 12 months on your single-family property and then the roof on it needs fixing.

The rationale applies even more if you add more single family properties to the equation. The cost of managing 10 individual properties, which could be spread across multiple states, and the cost of hiring different contractors to care for each one would be punitive. The cost would be much greater and the management less efficient and less cost-effective than caring for one multifamily property of 10 units in one geographic location.

 

#2 Greater Control of Property Value

With a single-family property, you are almost completely at the mercy of market forces.

If you need to sell in a down market your hands will be relatively tied. The value of your property will be determined by what other properties have sold for in the local area at that time.

A multifamily property is perceived somewhat differently because of its commercial nature. It is managed and run as a business and therefore a significant part of its value is determined in the same way as a business. This means that the value is much more in your own hands.

Businesses are valued largely on their profitability and, in a similar way; a multifamily property’s value is determined by its net operating income.

Something as straightforward as adding a laundry facility or some paid parking are two examples that can very positively affect the profitability of your multifamily property and in turn, its value.

With a multifamily property, there are many more ways that you can bring your management and entrepreneurial skills to bear to increase the value of the property independently of the surrounding property market.

In a nutshell, you have the ability to raise the value of your multifamily property by decreasing expenses and increasing income.

 

#3 Positive Cashflow

 

In addition to the ideas mentioned previously, namely, adding laundry facilities and paid parking, there are lots of amenities that could be added to your multifamily property to keep positive cash flow.

In addition, the old adage of not having all your eggs in one basket applies here also. A tenant vacancy in a single family rental property will bring your cash flow to a grinding halt. In contrast, if one of your units in your multifamily property is vacant, the impact on your cash flow will be minor because you will still be collecting rent from all the other units.

 

#4 Tax Benefits

One of the great things about supplying housing for the populace is that in doing so you are helping the government fulfill one of their important responsibilities. Not surprisingly, in return, the government offers you certain tax advantages.

One of the most significant tax advantages for multifamily property owners is something called ‘depreciation deduction,’ in effect it can allow you to deduct a large amount of the income your property generates. For details on how it works, take a look at the following Investopedia article, How Rental Property Depreciation Works.

Another way multifamily property tax laws benefit you is that you are permitted to use some of the cash flow from the property itself to pay down the mortgage.

It is permissible to collect revenue but show a much smaller amount of income on your taxes. This allows you to take a portion of that rental income and use it to pay down your debt on the property, which will steadily increase the equity.

With the help of a good tax advisor, you may find that there are many other legitimate ways to capitalize on the tax deductions and incentives and even grants that the government makes available to multifamily property owners.

 

Summary

In the present fluctuating economic climate multifamily properties are tangible assets that represent a sound focal point for your investment and wealth creation strategy.

Due to shorter lease terms that give room for regular increases in rent, multifamily assets represent less of a risk than other commercial real estate investments.

The prevailing demographics are also favorable. The steady increase in the number of professionals in the workplace, families, and empty nesters looking to downsize and simplify their lifestyle means that focusing on the multi-family market makes sense.

Multifamily is and will continue to be a solid strategy for investors looking to achieve financial freedom by means of strong investment returns that are attractively low risk.

7 Eye-Opening Things Every Passive Real Estate Investor Should Know About Taxes

If you’re like me, one of the last things you think about when investing in a new venture, is taxes. It’s way more fun to think about all the potential luxury vacations you’ll take and the new cars you’ll buy, than to think about the taxes you’ll be paying.

Well, I’m here to tell you that, when you start out investing in real estate, it’s actually okay that taxes aren’t on your mind. That’s because, unlike when you invest in stocks and mutual funds, investing in real estate tends to make your tax bill lower, not higher.

Yes, you read that right. Investing in real estate can often help lower the amount of taxes you owe, even while you’re making great returns on your investment.

But how is that possible, you ask?

There’s actually a HUGE difference between the way the IRS views stock market gains and the way they view real estate gains. And that’s exactly what we’ll discuss in this article, specifically from the standpoint of a passive investor in a real estate syndication.

 

But First, a Disclaimer

Just so you know, I am not a tax professional, nor will I ever seek to become one (those people have really tough jobs). As such, the insights and perspectives provided in this article come from my experience only.

You should speak with your CPA for more details, and specifics on your situation.

Okay, now that that’s out of the way, let’s dive in.

 

The 7 Things You Should Know about Taxes and Real Estate Investing

Okay, get ready to have your socks knocked off. As much as taxes can knock one’s socks off, anyway.

Here are seven main things I think every passive investor in a real estate syndication should know about taxes:

  1. The tax code favors real estate investors.
  2. As a passive investor, you get all the tax benefits an active investor gets.
  3. Depreciation is hecka powerful.
  4. Cost segregation is depreciation on steroids.
  5. Capital gains and depreciation recapture are things you should plan for.
  6. 1031 exchanges are amazing.
  7. Some people invest in real estate solely for the tax benefits.

 

#1 – The tax code favors real estate investors.

You may have heard that more people become millionaires through investing in real estate than through any other path. And believe it or not, the tax code plays a big role in that.

You see, the IRS recognizes how important real estate investing is, in providing quality housing for people to live in. As such, the tax code is written in such a way that it rewards real estate investors for investing in real estate, maintaining those units, and making upgrades over time (more on these benefits in a moment).

So as a real estate investor, you’re like the IRS’s teacher’s pet.

Hey, there are worse things.

 

#2 – As a passive investor, you get all the tax benefits an active investor gets.

This is a big deal. This means that, even though you’re not actively fixing any toilets or climbing on any roofs, you still get full tax benefits, whether you’re an active or passive investor.

This is because, as a passive investor in a real estate syndication, you invest in an entity (typically an LLC or LP) that owns the property, and that entity is disregarded in the eyes of the IRS (these entities are sometimes called “pass-through entities”).

That means that any tax benefits flow right through that entity, to you, the investors.

Note: This is different for investing in REITs. With a REIT, you are investing in a company, not directly in the underlying real estate, and hence you don’t get the same tax benefits.

Common tax benefits from investing in real estate include being able to write off expenses related to the property (including things like repairs, utilities, payroll, and interest), and being able to write off the value of the property over time (this is called depreciation).

Let’s focus in on this thing called depreciation.

 

#3 – Depreciation is hecka powerful.

Depreciation is one of the most powerful wealth building tools in real estate. Period.

Depreciation lets you write off the value of an asset over time. This is based on wear and tear and the useful life of an asset.

What is depreciation?

To give you a simple example, let’s say you just bought a new laptop. On day one, that laptop works great. Over time, however, the keyboard gets sticky, the processor slows down, and the battery barely lasts more than a few minutes. Eventually, the whole thing will go kaput and be worth very little, if anything. This is the essence of depreciation.

Essentially, the IRS is acknowledging that, if the property is used day in and day out, and if you do nothing to improve the property, that over time, the property will succumb to natural wear and tear, and at a certain point in the future, the property will become uninhabitable (just like when that laptop eventually dies).

As you can imagine, every asset has a different lifespan. You wouldn’t expect a laptop to last more than a few years. On the flip side, you would expect a house to still be standing several years, or even decades, later.

For residential real estate, the IRS allows you to write off the value of the property over 27.5 years.

Note: Only the property itself is eligible for depreciation benefits, not the land. The IRS is smart enough to realize that the land will still be there in 27.5 years and will still be worth the same, or more.

Here’s an example

Let’s say you purchased a property for $1,000,000. Let’s say the land is worth $175,000, and the building is worth $825,000.

With the most basic form of depreciation, known as straight-line depreciation, you can write off an equal amount of that $825,000 every year for 27.5 years. That means that, each year, you can write off $30,000 due to depreciation ($30,000 x 27.5 years = $825,000).

The reason that this is such a big deal is this. Let’s say, that first year, you make $5,000 in cash-on-cash returns (i.e., cash flow) on that property. Instead of paying taxes on that $5,000, you get to keep it, tax-free.

Wait, really?

Yes, really.*

*Disclaimer: This depends on your individual tax situation. Please consult your CPA.

That $30,000 in depreciation means that, on paper, you actually lost money, while in reality, you made $5,000.

Plus, properties acquired after September 27, 2017, are eligible for bonus depreciation, which can really amp up the tax benefits for that first year.

This is why depreciation is hecka powerful.

 

#4 – Cost segregation is depreciation on steroids.

But wait, there’s more!

In the last example, we talked about something called straight-line depreciation, which allows you write off an equal amount of the value of the asset every year for 27.5 years.

But, for most of the real estate syndications we invest in, the hold time is around just five years. So if we were to deduct an equal amount every year for 27.5 years, we’d only get five years of those benefits. We’d be leaving the remaining 22.5 years of depreciation benefits on the table.

This is where cost segregation comes in.

Cost segregation acknowledges the fact that not every asset in the property is created equal. For example, that printer in the back office has a much shorter lifespan than the roof on top of the building.

In a cost segregation study, an engineer itemizes the individual components that make up a property, including things like outlets, wiring, windows, carpeting, and fixtures.

Certain items can be depreciated on a shorter timeline – 5, 7, or 15 years – instead of over 27.5 years. This can drastically increase the depreciation benefits in those early years.

Here’s an example

Let me give you an example. And this one is based on a true story.

A few years ago, real estate syndication group purchased an apartment building in December of that year. That means that the investors only held that asset for one month of that calendar year.

However, due largely to cost segregation, the depreciation schedule was accelerated for many items that were part of the property, including things like landscaping and carpeting.

The K-1 that was sent out to investors the following spring showed that, if you had invested $100,000 in that real estate syndication, you showed a paper loss of $50,000.

That’s 50% of the original investment.

Just for owning the property for a single month during that tax year.

And, if you qualify as a real estate professional, that paper loss can apply to the rest of your taxes, including any taxes you owe based on your salary, side hustle, or other investment gains.*

*Again, this depends on your individual situation, so please consult your CPA.

This is a game-changer, folks.

 

#5 – Capital gains and depreciation recapture are things you should plan for.

You didn’t think that real estate investing would be 100% tax-free, did you?

Unfortunately, the IRS likes to be included in everything.

In real estate investing, the way they get their cut is through capital gains taxes when a real estate asset is sold, and sometimes, through depreciation recapture, depending on the sale price.

In a real estate syndication that holds a property for 5 years, you wouldn’t have to worry about capital gains taxes and depreciation recapture until the asset is sold in year 5.

The specific amount of capital gains and depreciation recapture depends on the length of the hold time, as well as your individual tax bracket.

Here are the brackets and percentages based on the new 2018 tax law:

  • $0 to $77,220: 0% capital gains tax
  • $77,221 to $479,000: 15% capital gains tax
  • More than $479,000: 20% capital gains tax

For more details and the most up-to-date laws and info, I recommend you discuss the specifics with your CPA.

 

#6 – 1031 exchanges are amazing.

I mentioned above that when a real estate asset is sold, capital gains taxes (and often, depreciation recapture) are owed. However, there is one way around this. And that’s through a 1031 exchange.

A 1031 exchange allows you to sell one investment property, and, within a set amount of time, swap that asset for another like-kind investment property.

Doing so means that, instead of having the profits paid out directly to you, you roll them into the next investment. As such, you don’t owe any capital gains when the first property is sold.

Only some real estate syndications offer a 1031 exchange as an option. Often, the majority of the investors in a syndication have to agree to a 1031 exchange to make it a possibility.

Unfortunately, you cannot do a 1031 exchange on just your shares in the real estate syndication.

The sponsors must decide to do a 1031 exchange on the whole shebang. It’s all or nothing.

Every sponsor is different and approaches 1031 exchanges differently. If a 1031 exchange is something you’d be interested in, be sure to ask the sponsor about it directly.

 

#7 – Some people invest in real estate solely for the tax benefits.

The tax benefits of investing in real estate are so powerful that some people (namely, wealthier folks) do so purely for the tax benefits. You see, by investing in real estate, they can take advantage of the significant write-offs, and then apply those to the other taxes they owe, thereby decreasing their overall tax bill.

This is how real estate tycoons can make millions of dollars but owe next to nothing in taxes.

It’s perfectly legal, and it’s a powerful wealth-building strategy. And, you don’t have to be wealthy to take advantage of the tax benefits of investing in real estate. The tax code makes the benefits of investing in real estate available to every real estate investor.

Recap

Like I mentioned when I started this article, you don’t have to worry about taxes when investing in real estate, especially as a passive investor in a real estate syndication. In most cases, you’ll be able to make money via cash-on-cash returns, yet you won’t owe taxes on those returns due to benefits like depreciation.

To recap, here are the seven things I think every real estate investor should know about taxes:

  1. The tax code favors real estate investors.
  2. As a passive investor, you get all the tax benefits an active investor gets.
  3. Depreciation is hecka powerful.
  4. Cost segregation is depreciation on steroids.
  5. Capital gains and depreciation recapture are things you should plan for.
  6. 1031 exchanges are amazing.
  7. Some people invest in real estate solely for the tax benefits.

As a passive investor, you don’t have to “do” anything to take advantage of the tax benefits that come with investing in real estate. That’s one of the benefits of being a passive investor. You don’t have to keep any receipts or itemize repairs. You just get that sweet K-1 every year, hand that over to your accountant, and that’s it.