The final Yardi Matrix monthly report on multifamily rent trends for 2018 showed Sacramento is significantly below its previous pace as the fastest-growing rental market in the country.

Sacramento has experienced decelerating but steady rent growth, due to a continued influx of new residents from pricier Bay Area markets and a limited multifamily supply. The metro’s average rent rose to $1,454 as of October, slightly above the national rate. Despite becoming less affordable, Sacramento remains an accessible living option among the region’s metro areas. The market’s strong appeal to investors has maintained a high transaction volume, which is expected to surpass the 2017 level.

To prevent hundreds of multi-story, wood-frame apartment buildings from collapsing as they did in the 1989 Loma Prieta earthquake, Oakland is requiring seismic upgrades of all those at risk in the next big shaker.

By John Wilhoit, Jr.

The question that will come to mind as you read this is “who does that”?  The unfortunate answer is too many people charged with operating valuable assets- multifamily assets. We are in an industry full of talented people. Mostly.  There will always be exceptions and bad actors. The exceptions are often those lacking training. The back actors- they are just that.

By Daniel Bornstein, Esq.

We have said in many venues that rental property owners in Oakland are swimming upstream against an ever-expanding regulatory regime. Now, “vacant” property owners – loosely defined as owners of properties that go “unused” for more than 50 days – will be hit directly in their checkbook, thanks to the passage of Measure W, also known as the Oakland Vacant Property Tax.

Voters resoundingly said yes for the measure, aimed to fund homeless programs and services, affordable housing, code enforcement, cleaning up blighted properties and illegal dumping. The law was cleverly marketed – who can be against ending endemic homelessness and removing eyesores from the neighborhood?

by Steve Haskell, Vice President

Below is a hypothetical example of a 1031 exchange investor that purchased DSTs with loans on them.  It exemplifies the risk of debt, and the potential benefits of remaining as debt free as possible when investing in DSTs.

James had $500,000 from the sale of an apartment duplex he owned for over 25 years. He owed $150,000 in capital gains and recapture of depreciation, so he decided to defer his taxes by conducting a 1031 exchange into DSTs.

Despite not having a requirement to take on debt, James’s financial advisor had him exchange into a DST with 50% loan to value. He assured James it was ok because the DST sponsor company was well known and had been around for years, it was a modest level of debt, that the appreciation potential would be higher with the debt and that debt can provide some tax sheltering.  James invested in the DST and took on $1M in property, $500,000 of it being debt.

The property was sold 4 years later at a major loss due to the loan coming due. The advisor did NOT educate James on the risk of debt, and how debt can put the asset in precarious situations, potentially forcing the sponsor to sell at inopportune times to prevent foreclosure, distributions being lowered and/or being stopped altogether.

Upon the sale of the property, James only had $250,000 of his original $500,000 invested after paying off the debt. The unfortunate problem is that James now needs to conduct another 1031 exchange into $750,000 in total property value (per the IRS 1031 exchange rule of purchasing equal or greater value in replacement property as you had in the property you sold) in order to prevent a taxable event and pay taxes out of pocket.

James at this point found himself in a precarious situation of needing to exchange into properties that had at least a 67% loan to value in order for him to complete his 1031 exchange, which higher loan to value properties are difficult to find in today’s market, unless he wanted to add cash to the exchange or purchase an interest into a DST with 80%+ Loan to Value called a Zero Coupon DST (zero coupon DST properties have no cash flow to the investors as 100% of the income from the tenant is paid to the lender).

James now with the help and guidance of his financial advisor, receives potentially no cash flow on a portion of his equity that had to go into the Zero Coupon DST, has half of the amount of equity he had originally and went from an all cash debt free 1031 exchange situation to a 67% loan to value 1031 exchange situation.

Investors should be careful if a financial advisor recommends that they purchase DST investments with debt on them if they have already paid off their properties and own them free and clear.  The risks of debt are very real and can potentially be exasperated if things don’t go as planned with the DST property. Although almost all real estate backed investments contain risk and have no guarantees, James’ outcome may have been more positive for him if his advisor had recommended the All-Cash/Debt-Free DST offering.  If that had been James’ choice, the DST may not have sold the property at an inopportune time.  The DST could have chosen to hold the property, since there was no loan at maturity forcing a sale or refinance; and the DST could in that case, continue to distribute any available cash flow as defined in its trust agreement.

If you are interested in a list of All-Cash/Debt-Free DST options, contact Kay Properties & Investments at www.kpi1031.com. Please visit www.kpi1031.com for more details, call us at 1.855.466.5927 or email info@kpi1031.com

This is hypothetical example and may not be representative of future situations. Past performance does not guarantee or indicate the likelihood of future results.  There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) properties and real estate securities including illiquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. There is a risk of loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, potential returns and potential appreciation are not guaranteed. For an investor to qualify for any type of investment, there are both financial requirements and suitability requirements that must match specific objectives, goals and risk tolerances.

Diversification does not guarantee returns and does not protect against loss. This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please be aware that this material cannot and does not replace the Memorandum and is qualified in its entirety by the Memorandum.

This material is not intended as tax or legal advice so please do speak with your attorney and CPA prior to considering an investment. This material contains information that has been obtained from sources believed to be reliable. However, Kay Properties and Investments, LLC, WealthForge Securities, LLC and their representatives do not guarantee the accuracy and validity of the information herein. Investors should perform their own investigations before considering any investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) and 1031 Exchange properties. These include, but are not limited to, tenant vacancies, declining market values, potential loss of entire investment principal.

Past performance is not a guarantee of future results: potential cash flow, potential returns, and potential appreciation are not guaranteed in any way and adverse tax consequences can take effect. Real estate is typically an illiquid investment. Please read carefully the Memorandum and/or investment prospectus in its entirety before making an investment decision. Please pay careful attention to the “Risk” section of the PPM/Prospectus. All photos are representative of the types of properties that Kay Properties has worked with in the past. Investors will not be purchasing an interest in any of the properties depicted unless otherwise noted.

IRC Section 1031, IRC Section 1033, and IRC Section 721 are complex tax codes; therefore, you should consult your tax and legal professional for details regarding your situation. Securities offered through registered representatives of WealthForge Securities, LLC, Member FINRA / SIPC. Kay Properties and Investments, LLC and WealthForge Securities, LLC are separate entities.

DST 1031 properties are only available to accredited investors (generally described as having a net worth of over one million dollars exclusive of primary residence) and accredited entities only (generally described as an entity owned entirely by accredited individuals and/or an entity with gross assets of greater than five million dollars). If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney prior to considering an investment. You may be required to verify your status as an accredited investor.

By Daniel Bornstein, Esq.

There’s a lot to fall in love with the New Year. A clean slate and a fresh start, the feeling that everything is possible, and of course, the best parties.

For the rental housing industry, however, the exuberance over new beginnings should be tempered with the reality there are a new set of laws to obey.

As we look into the back mirror of an eventful year, one of the highlights has been the defeat of efforts to repeal the Costa Hawkins Rental Housing Act. Our fraternity’s successful outcome in the epic battle against Proposition 10, however, has obscured less prominent initiatives that were successfully passed and we summarize some of them here.

Widget’s Way featuring Patti “Widget”

Your tenant has vacated the property and now you have 21 days to account for the security deposit. The law allows landlords to deduct portions of the security deposit to cover the cost of damages caused by a tenant. Landlords cannot deduct normal wear and tear, or the expected depreciation of a property. E.g. If carpeting has been destroyed and it is 8 years old, perhaps no allowance is appropriate as the floor coverings were due for replacement. Similarly, destruction of a brand new carpet may result in full replacement cost to be deducted from the deposit.

by Michael Trainotti

It is very typical for couples who do not have a common family trust to have title in their name as joint tenants when acquiring real property. If one of them die the surviving joint tenant is the 100% owner without having to probate the deceased spouse’s 50% interest. Title is transferred by operation of the law.

By Christopher Miller, MBA
Specialized Wealth Management

Happy New Year!  We are currently in a hot real estate market where properties are selling well.  Why not take advantage of this market to sell some of your less desirable properties?  If you could sell the “dogs of your portfolio” quickly today, why risk waiting until the market turns when they could sit on the market for a long time?  And remember that price cuts often come from sitting on the market for a long time.

By: Steve Haskell, Vice President, Kay Properties and Investments, LLC

A CPA in San Diego contacted Kay Properties & Investments on behalf of his client, Peggy. Peggy owned an apartment building in East San Diego that she and her husband purchased together 50 years ago. Unfortunately, Peggy’s husband passed away five years ago and the maintenance, tenants, and looming threat of rent control had become overwhelming. She had an agent list her building and was pleased to receive the full asking price of $1.4 million the very next day. However, her excitement quickly vanished after her CPA informed her the capital gains tax and depreciation recapture will result in over 35% of her property value and prevent her from maintaining her current lifestyle. They concluded that a 1031 exchange into a passive property was critical.