Posts Tagged ‘Real Estate’

What’s so Great About a Real-Estate Fund?

Written by Landlord Property Management Magazine on . Posted in Blog

By Kathy Fettke | RealWealthNetwork.com

You had a tough time getting to sleep. Then, the phone rings. You think it’s the doorbell as you stumble out of bed, in your dreams, and suddenly realize your cell phone is doing it’s ringtone vibrating dance on the nightstand.

“Hello? … The heater. … Right now? … Your kids are crying? … Let me call you back in five.”

Okay, that’s one possible scenario in the life of a landlord, if you manage your own properties. Or, you could have a property manager. In that case, the phone call would come the next day telling you of a difficult night with tenants, and requesting permission to spend a certain amount of money to remedy the situation. 

Option number two is a whole lot easier than option number one. But there’s an option number three that’s even easier. In this case, you would invest in a real estate fund created by a group of investors who pool their money to buy multiple rental properties. 

It’s like a mutual fund only it’s tied to hard assets instead of the whim of Wall Street investors. The fund itself is professionally managed along with the properties. You get returns and tax benefits on your investment but you don’t have any of the typical landlord responsibilities.

Direct Ownership vs. Real Estate Fund

There are big benefits to any kind of real estate ownership. When you have direct ownership of a rental property, you have complete control of how that rental is used and the flexibility to make changes. You also have big tax benefits, and you get all the profit.

A real estate fund can provide other benefits that may be better suited for someone who is too busy to manage properties or even a property manager. It’s also great for people who are new to real estate and don’t want to take the time to learn about the nitty gritty details.

When you put your money into a real estate fund, the first thing you are getting is “diversification”. You are pooling your money with other investors to buy multiple properties and getting the diversity without spending the time or money it takes to do that yourself. The fund may have 150 properties of different assets classes in different locations. That gives the fund strength if some of those properties, or markets, flounder.

With a fund, you don’t have to qualify individually for financing. That’s a really important part of the deal. Positive leverage is one reason we are in this business. That happens when you borrow money to decrease the amount of the initial investment and bring in higher returns than the cost of the loan. So if you are tapped out on financing, have bad credit, or don’t want to go through the hassle of getting a loan, a fund will take care of that for you.

Another big benefit of owning income-producing real estate is the tax savings. Most funds are set up as a pass through entity such as an LLC so any of the tax benefits you get from “direct ownership” are also available for fund investors. And, that structure is professionally managed so you don’t have to deal with a lot of paperwork or bookkeeping. You will get periodic statements that are often sent quarterly, along with your paycheck.

The icing on the cake — fund investors will typically get a “preferred rate of return”. That means that investors get paid first from the profit pool. Fund managers get paid after that. So whatever percentage you agree on as your rate of return, you will get that money first. This is a great benefit. It puts the investor “first”.

Other advantages of a fund include the buying power of a big team. The people putting the properties together for the fund will having relationships with industry insiders. They will have expertise at recognizing great deals quickly and the ability to buy those properties before they disappear. And, they will be able to negotiate lower prices if they are buying in volume.

The Role of a Fund Investor

First of all, any tips offered in this article are not to be construed as advice. The first rule of thumb for any investment is to speak with your accountant and get your advice there. This article only attempts to help explain the idea of a real estate fund so you are better informed to find one that works for you.

Preliminary research and follow-up are always important for any great investment. Here’s a checklist:

1 – Research fund managers & their investment history/track record
2 – Understand the fund’s return structure, timeline & exit strategy
3 – Read the offering documents & run it by your CPA and attorney
4 – Don’t be afraid to ask lots of questions
5 – Find out how and when you will receive updates & distribution statements

The background and experience of the managers is the most important factor. It’s better to turn down a great opportunity with inexperienced managers, than become a part of their learning curve. Experienced managers know how to choose the right investments and navigate through challenges that are certain to pop up along the way.

Understanding the timeline or the “life of the fund” is also very important, including when you are allowed to exit the fund. If the fund requires a 5-year investment obligation, you should know that ahead of time, and what it requires to remove your money from the fund when that timeframe expires.

Beware of a fund with no “end date”. There’s more of a chance the fund could turn into a Ponzi scheme if it’s open-ended. A closed fund, with a specific timeframe, is usually safer.

Accredited Investors Need Only Apply

Most funds require that investors are “accredited”, meaning that you must earn a certain amount of money or possess a certain “net worth”. To be accredited, you  must have an income of $200,000 a year for two straight years, or $300,000 if you are a couple. Or, you must have a net worth of one million dollars, excluding the equity in your primary residence.

You’ll see lots of buy & hold rental funds on crowdfunding sites these days. In most cases, you must be an accredited investor to participate in those. However, if a private company only reaches out to people with whom they have a prior existing relationship, 35 non-accredited or “sophisticated investors” may participate.

According to Investopedia: “A sophisticated investor is a type of investor who is deemed to have sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity.”  Sophisticated investors (or accredited, for that matter) should never invest more than 10% of their net worth into any one fund or investment. Diversification is key.

A prior existing relationship requires “three touches” with the organization or three different ways that you’ve had contact with that company. It’s not well-defined, and is basically up to the fund managers to determine if that criteria has been met, but it could mean a combination of phone conversations, in-person meetings, email correspondence, or event attendance.

To find out more about buy & hold rental funds, private lending, and direct investment in cash-flowing turnkey rentals, join our network at www.RealWealthNetwork.com. It’s free and will give you access to quality investor education from real estate attorneys, CPA’s, property managers, insurance agents, and much more. 

BEWARE. Fed Rate Hike Could Burst Bubbles

Written by Landlord Property Management Magazine on . Posted in Blog

By Kathy Fettke | RealWealthNetwork.com

FedRateHike

The Federal Reserve followed through on its latest promise to raise interest rates. Fed Chief Janet Yellen announced a quarter point hike in the federal funds rate Wednesday. But the increase has little to do with the ripple effect on mortgages and consumer loans, and more to do with a message from the Fed about the economy.

This is the first rate hike of 2017 and the third since December of 2015 when the cycle of monetary tightening began after the Great Recession. The first rate hike brought the overnight lending rate a quarter percent off zero. The second rate hike three months ago, raised it another quarter point. The latest increase brought it to a range of 0.75% to 1%, which is still quite low historically.

Consumer loans may notch up a bit because of the rate hike but economists say with so much talk about the increase, many lenders have already priced it in. And some economists say the hike has more to do with Yellen’s desire to portray the economy as “healthy” than it does with monetary policy.

She said during a press briefing: “We have confidence in the robustness of the economy and its resilience to shocks.” And that: “It’s performed well over the past several years. We’ve created, since the trough in employment after the financial crisis, around 16 million jobs.”

Raising the Fed Fund rate is supposed to correspond with a robust economy. Increases are meant to keep inflation in check. If economic growth and inflation are rising too quickly, a rate hike helps slow them down as it tightens the money supply.

Core inflation is about 1.9% right now. Up slightly from the previous forecast and right in the 2% range that the Federal Reserve has been targeting.

But there are big questions about U.S. economic growth.

If you focus on the stock market, you might think the economy has been advancing rapidly. Wall Street has been on a bull run since President Trump was elected with the Dow hitting over 21,000 for the first time ever.

There’s also been a steady increase in jobs with unemployment dropping from the double digits during the recession to under 4.7% right now. That’s giving consumers confidence about the economy, despite flat wages. The February report on consumer confidence says it hit a 15-year-high of 114.8.

But what some economists are pointing out is the troubling lack of economic growth. Chief investment strategist at Clarity Financial, Lance Roberts, wrote in a blog, that: “Outside of inflated asset prices, there is little evidence of real economic growth.” And that’s one thing that Janet Yellen said a rate hike would be tied to — economic growth.

The gross domestic product, or GDP, is our economic report card. And the Atlanta Fed just downgraded the first-quarter GDP to just .8%. That’s well off the 2% that Janet Yellen said is needed for a rate hike, leaving some economists wondering why the central bank went ahead and approved the increase.

Just weeks ago, the GDP was closer to the central banks rate hike comfort zone, at 2.3%. It also increased to 3.4% briefly last month after positive news about manufacturing and construction spending. But when disappointing data on retail sales and consumer prices came out a few days ago, the Atlanta Fed lowered its estimate to the .8% level.

Roberts says that charts show a rate hike at a time like this could actually push us into another recession. He told Market Watch that raising interest rates from ultra low levels at a time of slow economic growth could impact spending and that charts show this type of situation has lead to recessions in the past within three to nine months.

Nobel Prize-winning economist Robert Schiller is also warning people that Wall Street exuberance has gone overboard. He told Bloomberg that traders are captivated by President Trump’s bold plans to slash regulations, cut taxes, and “turbo-charge” the economy with an infrastructure building-boom.

He warns that when situations like this have happened in the past, it hasn’t ended well for the investors. Think dot-com bust and housing meltdown. Both experienced sharp drops in the stock market.

Schiller says investors are shoveling money into the market with the hope that President Trump will make good on his campaign promises. But they are also ignoring the enormous amount of uncertainty associated with getting those new policies through Congress and the legal system.

The Trump Administration is proposing some extreme budget cuts that may not sit well with some of his own constituents. A preliminary budget was introduced that slashes $54 billion from most federal agencies including the EPA, HUD, and Health & Human Services. That money will then be spent on defense. There’s also the affect of the Obamacare repeal. Depending on how many people lost their healthcare coverage, there could be a lot of unhappy voters. And if this political turmoil jostles the stock market, we could see a reversal that could happen quickly, and without mercy.

There has never been a slow letting out of air from a bubble. It usually bursts.

Kendrick Wakeman, the CEO of financial technology and investment analytics firm FinMason, told CNBC that investors are in for a rude awakening. He says no one knows when the stock market correction is coming. But, he says on average, the stock market crashes every eight to 10 years. And when it does, the average loss is about 42%.

He told CNBC that stock market investors need to ask themselves: “Would you hang yourself in the closet if the market crashed and you lost 35 percent?”

I have been warning investors for over a year now that a recession is coming. I’m sure some people think I’m crazy since the stock market has made significant gains since I gave this warning.

But remember, the same thing happened before the Great Recession and the Great Depression. In January of 2008, Ben Bernanke, the Chairman of the Fed said, “The Federal Reserve is not currently forecasting a recession.” 9 months laterin September of 2008, Lehman Brothers collapsed and the financial markets worldwide came tumbling down.

The Federal Reserve is supposed to be in charge of regulating the economy. It’s terrifying that they couldn’t see that recession coming… and even more frightening that they may have seen it coming, but didn’t warn us.

Be extremely defensive in your investing strategies today. Make financial decisions as if it were 2006. People who were prepared fared very well during the subsequent recession.

Rising interest rates can be the exact prick needed to pop the stock market bubble. That may be the very reason the Fed is raising rates – to slow down the irrational exuberance that taking the bubble to new heights.

A slowdown could turn into a meltdown, depending on how big that bubble has become.

How would a slow down in stocks affect real estate?

1. Cities that are more dependent on stock market fluctuations would be more affected by a stock market crash (SF, NY, Seattle).

2. Mortgage interest rates would decline if there were a correction in the stock market as more investors flock to the safety of bonds – which are more tied to the 10 year Treasury bond market.

3. Commercial real estate would get hammered while landlords could fare well as more people are forced to rent, driving rents up.

Now would be a very good time to “cash out” and sell your high priced assets while the market is hot. You can exchange those properties for low-priced, high cash flow properties in recession-proof markets.

If you have concerns about your portfolio or would like to speak with one of our investment counselors about how to find out which markets are best for investing today, visit www.RealWealthNetwork.com.

Kathy is an active real estate investor, licensed Realtor, certified coach, and former mortgage broker. She specializes in helping people build multi-million dollar real estate portfolios through creative finance and planning. With a passion for researching and sharing the most important facts on real estate and economics, Kathy is a frequent guest expert on such media as CNN, CNBC, Fox News, NPR, CBS MarketWatch and the Wall Street Journal. She is the author of the #1 best seller, Retire Rich with Rentals, and is host of The Real Wealth Show – which is a featured podcast on iTunes with listeners in 27 different countries.

Home flipping reached 10-year high: Can you say froth?

Written by Landlord Property Management Magazine on . Posted in Blog

house flipping
Rising home prices are bringing more house flippers out of the woodwork, and that may be a sign of an overheating housing market. The number of active home flippers last year was the highest in nearly a decade, and it is only growing.

Nearly 180,000 family homes and condos were flipped in 2015, according to RealtyTrac. A flip is defined as a home that is bought and sold again within the same 12 months. Flips made up 5.5 percent of all sales last year, and that is the first increase in the flip share after four years of shrinking. Flipping increased in 75 percent of U.S. markets, and the profits are growing as well.

“As confidence in the housing recovery spreads, more real estate investors and would-be real estate investors are hopping on the home flipping bandwagon,” said Daren Blomquist, senior vice president at RealtyTrac. “Not only is the share of home flips on the rise again, but we also see the flipping trend trickling down to smaller investors who are completing fewer flips per year.”

Jim Pinson works with investors to flip houses on the south side of Chicago and does two or three flips of his own each year in the Oak Lawn area. Home prices in Chicago have not soared as much as in other parts of the nation, but there are still a lot of distressed homes available for sale, and plenty of investor demand.

“Oh my God, there are multiple offers on almost every decent margin profit house that pops on the market,” said Pinson.

The concern now is that prices are rising too fast, not because buyers can afford to pay more but because of extremely short supply of homes for sale, especially on the lower end of the market. Home prices in January were 6.9 percent higher than the January 2015, according to CoreLogic, a higher annual gain than in December. Home flipping can push prices artificially higher, especially in markets with the tightest inventory.

“When home flipping numbers go up, it is usually an indication that the housing market is in trouble,” said Matthew Gardner, chief economist at Windermere Real Estate in Seattle, who was quoted in the RealtyTrac report.

That was the case during the housing boom in the mid-2000s, but at that time flippers were putting next to no money into their investments, instead using cheap credit. That credit no longer exists. They have to put significant money into their flips, even when using investor loans.

“More inexperienced home flippers with a smaller financial cushion could be a sign of an over-speculative market, but the data indicate that flippers in 2015 continued to operate within relatively conservative margins,” said Blomquist. “Homes flipped in 2015 were on average purchased at a 26 percent discount below estimated market value and resold by the flipper at a 5 percent premium above estimated market value.”

Still, affordability for that end-user, the owner occupant looking to buy perhaps a first home, is weakening. First-time home buyers are still a much lower share of home buyers today than they are historically. The risk of another home price bubble could push them even further away.

As home prices rise, even in Chicago, investors have to put more money down and put money into renovating the homes, which are often in severe disrepair. Investors have to be careful to make sure they’re buying the right house in the right place, otherwise they won’t find buyers ready to move in.

“Demand is block by block, and you’ll have people running out and making offers, but it depends on what block you’re in,” added Pinson.

Just after the housing crash, large institutional investors moved in and bought thousands of distressed properties and turned the vast majority of them into rental homes. They are now buying fewer homes, leaving the field open for smaller investors who would rather flip than hold the homes. The total number of investors who completed at least one flip in 2015 was at the highest level since 2007, and the number of flips per investor was at the lowest level since 2008, according to RealtyTrac.

Flippers are watching home prices rise, and in turn seeing returns rise. Homes flipped in 2015 yielded an average gross profit of $55,000 nationwide, the highest for flips nationally since 2005, according to RealtyTrac. The return on investment was close to 46 percent, up from 44 percent in 2014 and up from 35 percent in 2005. 2005 was when flipping was rampant, thanks to super easy credit. Back then, over 8 percent of all sales were flips.

Today flippers are seeing the best returns in Pittsburgh, New Orleans, Philadelphia, Cincinnati and New Haven, Connecticut. The biggest dollar returns are in California and New York, but investors there must put bigger dollars down for those flips.

Source: cnbc.com

– See more at: http://www.american-apartment-owners-association.org/property-management/latest-news/home-flipping-reached-10-year-high-can-say-froth/#sthash.xVe1M5ty.dpuf

4 Reasons NOT to Wait for Your K-1

Written by Landlord Property Management Magazine on . Posted in Blog

by Thomas F. Scanlon, CPA, CFP®

CorpTaxForm

Subchapter S corporations (“Sub S”), partnerships, limited liability companies (“LLC’s”) and estates and trusts issue form K-1′s. This form documents the stockholders, partners, members or beneficiaries share of their profit or loss from the entity. Don’t wait for this form to get started on your income tax return.

1) K-1′s Aren’t Due Until April 15th

All form K-1′s except for Sub S corporations are not due until April 15th. Sub S corporation K-1′s are due on March 15th. If the Sub S corporation files an extension however, then the K-1 does not have to be issued until September 15th. This April 15th due date makes it very challenging for taxpayers. Their individual income tax return is due the same day. You can’t file your individual income tax return without your K-1′s.

2) We Are Seeing More Amended K-1′s

Investing in limited partnerships, particularly oil and gas that issue K-1′s has become popular again. Just like amended 1099 forms, we have seen an uptick in the amount of amended K-1′s last year. The changes on the amended K-1 may or may not be material. Either way, your CPA will need to review the amended K-1.

3) Let Your CPA Get Started on Your Tax Return

This is key. Get all of your other tax material you have to your CPA. Let them get started. They can rough out the return. This will give you a sense of where you are at. Get the heavy lifting done up front. If you are timely your CPA should have the return good to go. Just add the information from the K-1 and the return should be complete.

4) You May Have to Go on Extension

The 2013 individual income tax return, Form 1040, is due on April 15, 2014. If you can’t file on time because you did not receive your K-1 timely, you will need to file an extension. This is done on Form 2848, Application for Automatic Extension of Time to File U.S. Income Tax Return. A properly filed extension request will extend the due date to file until October 15, 2014. The extension only extends the time to file the return. It does not extend the time to pay any tax due. Any tax due needs to be paid by April 15th. Failure to pay the tax then will result in interest and penalty.

Thomas F. Scanlon, CPA, CFP® is with Borgida & Company, P.C., Certified Public Accountants in Manchester, Connecticut, celebrating 44 years of tax, advisory and accounting services. Please call (860) 646-2465 or email toms@borgidacpas.comif you would like more information.


logo_aaoa American Apartment Owners Association | Company Website Rental property management can be very demanding. Our job is to make this day-to-day property management process smoother. AAOA provides a host of services ranging from tenant screening to landlord rental application forms and contractor directory to apartment financing. 
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