Don't Jeopardize Your Portfolio: 2 Guiding Principles Successful Investors Follow

It’s a common cliché among investors that we are our own worst enemies.

While it’s true that some investors shoot themselves in the foot by jumping on a bandwagon that’s headed for a cliff, another cliché to keep in mind is to never put all your real estate investment eggs in one basket.

We tend to let our emotions guide us. Investment bubbles are said, for instance, to be the product of a certain kind of “euphoria” that manages to trump all caution and reason. Millions are lost and depression soon follows.

Such is the nature of mania.

The question then becomes: how do we, as investors, manage these emotions that seem to guide us down blind alleys?

Top investors follow two guiding principles:

#1 Successful Investors Don’t Chase Performance

Too many investors get caught up in the frenzy of recent strong performance. Take, for instance, the cryptocurrency rush. Millions of unskilled investors rushed to jump on a bandwagon that made major headlines all across the globe. True, many of them got rich. 

They got lucky.

There’s nothing necessarily wrong with investing in cryptocurrencies, but rushing into an investment simply because there’s been buzz around it is not likely to yield good results.

Here, the feeling that you’re missing out on something major (fear) is guiding the decision. But you can only know one thing for certain: you should have invested in Bitcoin when it was under $1,000. Once there’s a major buzz around it, it's time to sell to someone who is themselves chasing performance.

#2 Successful Investors Execute a Master Plan

Investors that go in without a plan are playing a dangerous game. Investment is not analogous to gambling merely because both involve risk. Risk can be managed intelligently in an investment portfolio. A wise investment plan should address the following:

The Bottom Line

Top investors successfully manage the highs and lows. They do not make choices based on emotions. They do not chase the latest trends. They are not caught up in investment frenzies. They do not become overconfident. Instead, they build a solid investment foundation from which they can take calculated risks. Interested in how solid your foundation is? Contact one of our professionals today.

Understanding Your Risk in a Joint Venture (JV) Partnership

Understanding Your Risk in a Joint Venture (JV) Partnership

Joint Ventures in real estate investing are pretty common.

Most of these partnerships are created by placing a property into an LLC and having the partners all own a portion of that LLC. If anyone wants to sue you or your partner they will not be able to go after the other person—the LLC makes that protection possible.

In the video above, Scott talks about how charging order against the LLC can make things messy and painful.

The best strategy to deal with this type of situation is to have both yourself and other partners enter into the Joint Venture LLC through your personal LLCs. This takes minimal effort to establish, but can prevent the messy and costly potential of dealing with a charging order.

How To Structure Your Partnership To Protect Your Assets

Say you and your friend that start a company together to invest in real estate.

Now say your friend gets sued, and next thing you know there's a charging order against the LLC. If you don't know what a charging order is, start with this article and come back.

The Cliff Notes version is this: If there's any money distributed from the LLC, it has to be used to pay off the creditors to the extent that your friend has an interest in the LLC.

This means you can't get any money out of the investments you and your partner made—even though he (or she) is the one being sued!

This is not the case if you guys both enter into a Joint Venture LLC. This means using your personal LLCs to become members of the LLC used for the Joint Venture agreement.

This will allow you to distribute money that you can now control without having to pay off those creditors and hurt your friend or your business partner. It keeps everything nice, smooth and amiable.

How Do I Get A Loan Against My Land Deed? 

Land has always held value in the United States, and if you have a clear deed to real estate property, you may be able to use it as collateral for a loan.

In this article, we'll examine the steps a borrower needs to take to obtain loans against a land deed.

There can be a lot of paperwork involved in land ownership. Your first step is to make sure your paperwork is in order and the property deed is in your name. You can find out through the County Recorder's office in the county where the property is located. Land deeds are a matter of public record, so anyone who wants this information can obtain it. 

A recorded deed provides notice to subsequent purchasers, lenders, and the general public about a parcel of real property. It also protects the owner of record in the event multiple parties claim ownership of the same land.  

When a property transfers from one owner to another, you must update the official documents. A failure to accurately record the required documents can invalidate the transfer.

After you've confirmed that your name is on the deed, your next step is to find a lender that will loan against a land deed. Land loans can be hard to find. Some lenders do not accept land as collateral at all, and others only consider land that is worth a certain amount. Most lenders will not loan on land that belongs to more than one person.

If you have bad credit, you'll have a tough time securing a land loan. When your credit is not a factor, your loan eligibility will depend on the type of property you own and its location. If you own prime land that is zoned for commercial use in a busy urban area, your loan has a good chance of being approved. If it's located right off the interstate, your chances are even better. 

loans against land deedHowever, if you own a few rural acres miles away from a city center, finding a lender may be challenging. The bank is looking at the land's profitability, meaning how easily it can be converted into cash if you default on your loan. In the case of rural property, you may have better luck with a small local bank than a larger institution. A local banker may better understand the value of your land. 

Once you have identified a lender and the lender has confirmed that the land is valuable enough to serve as collateral for your loan amount, you will be able to complete the loan process with the following steps:

If these steps are completed to the lender's satisfaction, the lender will then discuss the terms of the loan they are willing to offer. When you and the lender have agreed to the terms and the loan is issued, the lender will record a lien on your land title. 

Can I obtain a loan on vacant land? 

Lenders typically see vacant land as a riskier investment than land that is already in use. Buildings can be sold or rented out, while it can take a long time for vacant land to produce any cash flow. Once again, you may have better luck with a local bank than with a large one.

If you seek to use the vacant land as collateral for a loan to fund a construction project on the property, that's a different story. The lender will examine the financial strength of your project, and, if it likes what it finds out, it will disburse funds as you meet your construction milestones. 

Interested in learning more? Check out our article, Basics of Land Investing.

What about a loan against a land trust?

If you're seeking a loan against the assets of a land trust—called a land trust mortgage—you'll need to check the trust deed to make sure that the trust has the power to borrow money. 

Then, you'll need to ask the trustee to sign the mortgage or note. 

If the property is already in a land trust, and you want to borrow against the beneficial interest, then the lender will need to serve what is called a "Notice of Collateral Assignment" on your trustee. Your trustee will then need to write an "Acknowledgment of the Assignment" in response. Afterward, the trustee will not be able to transfer the title of any property held in the trust without the lender's written consent.

What happens if you default on a land loan?

Just as with any loan, you must pay back a land loan according to the terms of your loan contract. If you default on the loan, the lender can take possession of the land and sell it to pay for the amount you owe.

On the other hand, when you repay your land loan's full amount, the bank will cancel the lien on your deed. At this point, the lender has no further claim to the land.

How Landlords Can Get Maximum Value From A Rental Property Appraisal

A rental property appraisal will tell you exactly how much the property is worth to the average buyer or investor in the current market.

In part one of this article, we talked about why rental property owners need an appraisal, how much an appraisal typically costs, and what the appraiser looks for when they’re on your property.

In part two, we'll talk about how to handle a tenant who won't cooperate with an appraisal (due to coronavirus or some other reason). We'll also drop some helpful hints for landlords who want to get the maximum appraisal value for their property.

Let's get started!

Can a Tenant Reject an Appraisal?

What should you do if the tenant won’t let an appraiser inspect the property?

If the tenant refuses to let an appraiser come in and look at the property, review the lease agreement with them. Typically the lease agreement has a section specifically on what to do about this, but usually you only need to give the tenant 24 hours notice before you send in an appraiser. In that case, all you have to do is send them a “notice of intent to enter” and you’re all good.

Given that there’s currently a pandemic, though, you might not want to force outside contact on an at-risk tenant. You don’t want to create an unsafe scenario for either the tenant or the appraiser, and forcing contact without a lease provision and reasonable notice is begging for legal trouble.

Tell your lender about the scenario, and they’ll work out possible solutions with you. As we’ve mentioned before, there are appraisal options for some loan types that are exterior-only.

How to Get Maximum Value for Your Rental Property Appraisal: 4 Tips To Remember

And, finally, the section that could possibly help your bottom line the most: How do you get the highest possible appraisal for your property? Is there anything you can say or do that’s actually going to help the value? Or is it all out of your hands?

Here are our four best tips, in order from most-impactful to least-impactful on the value:

Provide the appraiser with a list of improvements

This is the biggest one. It’s not immediately clear to the naked eye where and when any improvements have taken place—particularly if the house is a bit of a mess, which we’ll talk about soon—but if the bathroom, kitchen, and roof have all been replaced in the past five years, you can expect that to seriously help your value.

On the other hand, if the appraiser doesn’t have any information on improvements, they might miss a couple, which could lower the quality and condition of your house, forcing the appraiser to pull up comparable sales that don’t reflect the renovations or remodels.

Fix up anything that’s in serious need of fixing up

If you’re working with a “well-lived-in” property, make sure that there aren’t any glaring maintenance issues. Again, you can use your common sense here: if you think it would bother a typical buyer, it’s probably something that the appraiser is going to note in the 1004.

Keep the property clean on the inside and out

The appraiser doesn’t care about whether or not there’s clutter around the house, and they don’t care about interior design. They likely see hundreds, if not thousands, of houses per year, so nothing is really all that surprising. However, if you want the best possible appraisal, you want to create the best possible environment for the appraiser. For the best possible appraisal, pretend you’re staging an open house.

Be on time to let the appraiser in to the property, and be respectful

This one should be a no-brainer, but do your best to be kind and respectful to the appraiser. This person, after all, is in charge of determining the value of your property, and oftentimes it can make or break your deal. If the appraiser knows that you need an appraisal completed by Thursday in order for a loan to clear, but you showed up 45 minutes late to the inspection, they might prioritize some other reports before finishing yours. If, on the other hand, you’re professional, helpful, and kind, they’re going to do everything they can to help you out.

Conclusion: Handling Appraisals the Right Way

In conclusion, let’s summarize all of the topics we listed in the beginning:

Why do you need an appraisal?

You need a rental property appraisal because 1) interest rates are incredibly low and it’s going to help your bottom line, and 2) it’s required by most major lenders, as well as the federal government.

How much does an appraisal cost?

The typical appraisal is going to cost anywhere from $300-500, but a good rule of thumb is about $400.

What do appraisers look for when they look at your property?

The floor plan (including overall square footage), building materials and surfaces, and the quality and condition.

What do you do if the tenant refuses the appraisal?

Review the lease agreement with your tenant. There’s typically a section about this exact situation. If they’re an at-risk member of the population during the pandemic, then review options with your lender.

How do you get the maximum value for your property?

Provide the appraiser with a list of improvements in as much detail as possible, fix up anything inside or outside the house that’s in dire need of fixing up, keep the property reasonably clean, and be kind and respectful during the appraisal.

Rental Property Appraisals: Refinancing Your Investment The Right Way

What are rental property appraisals and how do they affect your business?

A rental property appraisal is when a certified appraiser determines the exact market value of your rental property: how much the property is worth to the average buyer or investor in the current market.

In this article (and in part two, which you can find here), we’ll tell you everything you need to know about rental property appraisals, including:

Why Do You Need An Appraisal?

At the time of this writing, according to Freddie Mac, one of the biggest federally-backed home mortgage companies, mortgage rates are at an all-time low of 2.81% for a 30-year fixed-rate mortgage.

Naturally, that means appraisers are in high demand. Everyone is realizing that they can seriously lower their monthly bill (and, if you own rental property, maximizing your cash flow) by refinancing.

But why? Why can’t you just buy a house or refinance your mortgage without having an appraisal?

Because almost every major lender—as well as the federal government—demands that an appraisal is performed on the property prior to supplying a loan. Sometimes, in specific instances, these requirements are waived, but that doesn’t happen too often. Lenders need a way of verifying the house is actually worth what someone is willing to pay for it.

Rental Property Appraisals: Koi Ponds... Are Do They Add Value?The Difference Between Value and Price

For that reason, appraisers are hired to find the market value of a property: how much the typical consumer would pay in the current market, because the market value is different from the sale price, which is how much someone did pay for that property.

Since home-buying is such an individual and emotional process, these two numbers can be wildly different. A particular buyer, for instance, might be enamored with a koi pond in the backyard of a property. He or she may be willing to pay an extra $30k for the property (let's just say they really, really like fish) but he or she isn’t representative of the typical buyer, because the typical buyer doesn’t really care about a koi pond (assuming it’s in a market area where koi ponds are atypical, which is much of the United States). Or the price might have been driven up by a bidding war, causing untold inflation.

If you’re a lender, you wouldn’t want to give out a half a million-dollar loan on a property that’s only worth $180k, even if the buyer is able and willing to repay the money. Anything can happen: the buyer could lose his or her job or come down with a terminal illness, making it impossible for him or her to repay the loan. In those instances, the bank needs to be able to sell the home in order to recoup whatever’s left of the mortgage.

If the borrower only paid off $40k of a $500k mortgage and the bank sells the house for the much-more-realistic $180k, they’re down $300k after closing costs.

So, to answer the question, “Why do you need an appraisal?” the simple answer is: because you have to. The more complicated answer is because, at scale, it saves the bank a lot of money—and, if you’re the unlucky buyer who is willing to pay more for a property than it’s worth, an appraiser might just save you money, too.

How Much Does A Rental Property Appraisal Cost?

The cost of your rental property appraisal will depend on a few factors, including where you live, the current supply and demand of appraisals, and the type of appraisal you need (which depends on the type of loan you’re taking out).

To give you a ballpark idea, most appraisals will cost anywhere from $300-500. The vast majority of those will be the standard 1004 Uniform Residential Appraisal Report (and if you’re really bored, you can take a look at it here), but since the start of the pandemic, some lenders are clearing exterior-only appraisals, which appraisers can complete faster because they don’t have to perform an interior inspection. And, if you’re lucky, you might even be able to get an appraisal waiver—so that there doesn’t need to be an appraisal at all.

However, most of the time you’re going to spend roughly $400 on a 1004, and the appraiser is going to have to perform an interior inspection. What does that mean for you?

What Does the Appraiser Look For When They’re In Your Property?

Every appraiser is different, but typically the appraiser is noting a few different things:

Rental Property Appraisals: Floor PlanThe floor plan

The appraiser will draw a sketch of your house, noting the exact square footage of the property, and the number and locations of rooms, bedrooms, and bathrooms (and sometimes windows, fireplaces, staircases, and other details) so that they can confirm that it lines up with the research they’ve done on your property using the MLS and public records. Also, with the sketch, the bank has an easy reference for what the house looks like on the inside, and whether or not there is any functional obsolescence—which is a fancy term for anything inside a house that doesn’t fit the market area.

For example, if there’s an additional bedroom that is only accessible through another person’s bedroom, it won’t really count as a bedroom, and it’s the appraisers job to make sure that they find accurate comparable sales in the market that are actually similar to the subject property.

Building materials and surfaces

If you look at the 1004, in the “Improvements” section, there are entries for exterior and interior materials and their conditions. The appraiser is also going to look at those and jot them down.

Quality and condition of the property

If there’s dampness in the basement, evidence of infestation, holes in the walls or ceilings, or dysfunctional plumbing, that’s going to seriously affect the value of the property. Depending on the lender and loan type (like FHA), the appraiser may or may not be required to check the plumbing. It’s best to make doubly sure it’s working before the appraisal.

Generally, though, a good rule of thumb is to use your common sense. Ask yourself, “Would the average buyer be okay with this?” If they wouldn’t be, it’s likely going to negatively affect the quality and condition of your home, and therefore the value. 

To continue reading, check out part two of this article, How Landlords Can Get Maximum Value From A Rental Property Appraisal, which covers how to handle a tenant who won't cooperate with an appraisal and how to get the maximum appraisal value for your property.

Selling Property? Protect Yourself With A Robust ‘As-Is’ Clause

Issues regarding liability are common in real estate. There are several risks that can lead to a lawsuit. You can’t ever fully remove the possibility of legal action against you. But there are a few common-sense measures you can take to protect yourself from some of the most common claims, including

One measure you can take is an "as-is" clause. Real estate sellers will often insert an “as is” clause into purchase contracts to avoid liability.

Let's take a closer look.

as-is clauseWhat Is An 'As-Is' Clause?

 An as-is clause is included in a purchase agreement to force the buyer to rely on their own investigation to determine whether or not to purchase the property. Without an as-is clause, the seller’s representation of a property and its condition forms the basis of the buyer’s decision.

The clause protects you (the seller) from litigation stemming from a failure to disclose property defects that you are unaware of. In some cases, the seller will know of a defect but choose not to disclose it to the buyer. In this case, the seller is protected if the problem is discoverable by the buyer should they conduct a reasonable investigation of the property.

Potential Problems That an As-Is Clause May Cover

As-is clauses can protect property sellers from a slew of costly lawsuits. A property with undeclared flaws can land you in hot water for a variety of reasons, including:

#1 Breach Of Duty. It is an agent or broker’s duty to act in the best interest of their client. Dishonesty on the agent or broker’s part can come in a few forms, such as:

If a seller is willingly breaching, they may be guilty of a breach of duty. Of course, agents and brokers aren’t infallible. Honest mistakes happen, and property defects are sometimes hidden to all parties.

#2 Breach Of Contract. A breach of contract is a simple lawsuit. If the buyer feels the contract hasn’t been fulfilled, they may take legal action.

 #3 Negligence and Gross Negligence. Negligence implies that the defendant (in this case the seller) caused harm through inaction. However, negligence differs from other allegations through the lack of intent to cause harm. This means the seller failed to do their due diligence or or to handle problems promptly, causing bodily harm as a result.

Gross negligence, on the other hand, is defined as “the failure to exercise even the slightest amount of care" and often involves the deliberate disregard of another person’s safety.  A seller who is found guilty of gross negligence knows (or should have known) of the danger involved.

#4 Property Damage. This one is pretty self-explanatory.

 #5 Willful Concealment/Misleading Clients. A claim for misleading a client can stem from one of several issues. Normally, when the buyer believes that the seller intentionally hid property defects from them before the sale was complete. For example, sellers are expected to disclose known issues such as flooding before completing the sale.

What “As-Is” Does Not Cover

An as-is clause isn’t a universal get-out-of-jail-free card. It will not protect you from litigation from failing to disclose defects if:

An as-is clause won’t protect you from all allegations. But they offer you a strong layer of protection against a claim regarding an issue you can’t reasonably have been expected to know about.

selling real estate as isInterested in learning more? Check out our articles, Did You Know Selling Your Property ‘As Is’ Can Get You Sued? and Selling Real Estate ‘As Is’: Guide For Investors.

The Takeaway

Lawsuits are all-too-common in the U.S. If you’re dealing with enough real estate transactions, you’re bound to end up in a disagreement at some point.

In addition to using an as-is clause, documenting as many details as possible is always recommended. By staying on top of your property’s defects, you can avoid problems and have evidence of your reasonable efforts to provide a well-maintained property to buyers.

You shouldn’t have to suffer when you’ve already done what you can to ensure your property is in good condition. Honest oversights occur.

Consult a professional to make sure your contract provides maximum protection against claims of property fraud. And consider adding an as-is clause to your contracts before selling. It’s a simple, easy step that protects you in many situations where you would otherwise land in hot water.

 

image via reddit

REIT Investment Strategies: A Guide For The Everyday Investor 

Real estate investing has long been a proven strategy for people looking to accumulate wealth. Whether it's building equity in your own home or saving up enough money for a second property, real estate is often a tangible investment that typically moves up and to the right. 

For those who can pull together the capital needed to get started, there are some important elements that need to be considered before taking the leap. 

In case REIT investment strategies are unfamiliar to you, this article will highlight how they work, how they can benefit you and what strategies the everyday investor can implement to get started.

Real Estate Investment Trusts (REIT): What Are They?

Real Estate Investment Trusts (or REITs) are companies that own or finance income-producing properties across a range of sectors. These sectors can include:

REITs pool together the collective capital of investors and they invest that capital in various real estate sectors like the ones mentioned above. The profits of these investments are then distributed back to investors.

REIT Investment Strategies: A Guide For The Everyday Investor 

There are a number of requirements that must be met in order for a company to qualify as a REIT. One of the first requirements is fairly obvious: REITs must invest at least 75% of their capital in real estate related sources. REITs must also attain at least 75% of their income from real estate related sources. Most importantly, REITs are required by law to allocate at least 90% of their income back to their investors.

Depending on the REIT you are investing in, there may be a minimum investment requirement to get started. Even with that stipulation, REITs are a fairly simple way to invest in property that is typically out of reach for your average investor.

Interested in learning more? Check out our article How To Start Real Estate Investing In Your Thirties.

Benefits of Investing in a REIT

One of the biggest benefits of investing in a REIT is one that's already been hinted at. It's rare that an investor would have enough capital to single-handedly purchase an apartment complex or a large commercial property. REITs offer an easy on-ramp for everyday investors and often provide larger returns than an average stock and bond investment might.

REITs are often free of many of the hassles associated with direct ownership through your own LLC. The horror stories of direct ownership are seemingly endless. Unexpected property maintenance, difficult renters, not to mention all your capital tied up in a single asset. These realities don't have to be deal-breakers, but the benefit of a REIT is a diversified investment and efficient handling of all the behind-the-scenes details.

With all of this, real estate is known for how it appreciates in value over time. On top of the regular yields you receive through dividends, you also get a return on the appreciation of the asset you've invested in when you opt out.

Strategies for Investing in a REIT

How does one go about investing in a REIT? The good news is that many REITs are publicly traded on major stock exchanges. This represents a sense of validity and transparency in what you are investing in. That said, this path of investing in a REIT is also susceptible to the general ups and downs of the market as a whole.

Alternatively, there are exciting new crowdfunding platforms like Fundrise where the real estate investing market is entirely online and can even be managed from your phone. These online platforms often have a much lower initial investment requirement (as low as $500), making real estate investing more accessible for the average, everyday investor.

Finally, as mentioned above, the REIT market is incredibly diverse. Whether it's a residential home market, commercial market, healthcare or technology, the range of investment classes available to you is huge. Find something you are familiar with or passionate about, get connected and watch your money grow.

Interested in learning more? 7 Real Estate Investment Strategies That Made My Clients Wealthy.

Is A REIT Investment Strategy For You?

Whether you are considering investing in real estate for the first time or whether you have a few properties in your portfolio already, a REIT is worth looking into. Private ownership is a solid option if you are familiar with your local real estate market, and if you are financially savvy and able to deal with the renters and the inevitable repair and maintenance. But a REIT gives you the opportunity to remain hands-off while earning reasonable returns. Explore tapping into this proven strategy for wealth management and diversification.

How To Start Real Estate Investing In Your 30s

Real estate one of the more promising long-term investments. One reason is the real estate market is generally less susceptible to the volatile ups and downs of high-risk stocks or emerging strategies like cryptocurrency. 

That said, it can be a little intimidating to jump into owning land, becoming a landlord or flipping houses, especially if you are part of a generation saddled with student debt and a shaky economy.

By looking at the challenges you need to overcome and the investment options at your disposal, there's lots of opportunity to build your investment portfolio. 

If you're in your 30s, interested in real estate investing in your 30s and aren't quite sure how to begin, this article is for you. 

Overcoming The Challenges Millennials Face

There's a lot going on for people in their 20s, but people in their 30s are experiencing a lot of change too. Some of the challenges to overcome in your 30s include:

Reducing Student Loan Debt

You likely spent at least some time in your 20s attending college. In your 30s, all the money you borrowed to pay for that expense is due. Reducing your debt load is a good and important thing to be doing, but it takes time.

Getting Married/Starting a Family

Many people in their 30s choose to get married and start a family. These are wonderful things, but also come at a cost. Weddings can be expensive, medical bills can add up and the cost of raising kids isn't going down either. Putting aside extra money for investment purposes on top of these normal expenses can be a challenge.

Getting Financial Experience

For some people, it can take until their 30s (or later) to develop good habits and awareness around tracking income and expenses. Most financial planners suggest building an emergency fund to cover unexpected expenses or a loss of income. These things take time to develop, too.

People in their 30s should get started on estate planning, signing off on life insurance and the like. All of these are good and necessary things and are definitely recommended before venturing into the real estate investment world. So before you get started, make sure you have these things covered first.

Ways Young Investors Can Get Started In Real Estate

Once you have these bases covered, there are several ways to get into real estate investing. Some ways are easier than others, but let's explore a few options.

#1 Subletting Your Own Space

By the time you are 30, you might have saved up enough money to buy your own home. One of the easiest ways to get involved in real estate investing is to find a roommate or renter. 

Whether you're sharing your entire home with a roommate, renting out your basement or even just a bedroom, this is easy money that can offset your mortgage expense. An extra perk here is that you don't need to hire a property manager because you're already on site.

#2 Flipping Properties

Another way to get involved in real estate investing is through flipping properties. You've probably seen how it's done on HGTV, but be assured, it's NOT as easy as it looks!

Flipping properties requires a good understanding of the housing market so you can find a property that might be undervalued. Flipping also requires handyman skills or access to a contractor who can do a good job for a reasonable price.

If you're pursuing this path, time is a precious commodity, as you'll be making mortgage payments while you're renovating. Try and get it done quickly.

#3 Short-Term Rentals

Depending on where you live, short-term rental properties can be a great investment opportunity. Tourists and vacationers are often on the hunt for weekend getaway accommodations. Making $500 a weekend on condo rentals is a great way to go. With this route toward real estate investing, Airbnb or Vrbo can be your investing partner by finding the tenants and handling the booking.

#4 Real Estate Investment Trusts (REITs)

Finally, real estate investment trusts (REITs) are a solid option for young investors just getting started without a huge nest eg. REITs offer the benefit of investing in property without the weight and management responsibilities of private ownership. 

Whether it's a collection of residential properties, commercial warehouses, apartment complexes or even large data centers, buying into a REIT gives you access to returns you might not see as an individual investor.

Interested in learning more? Check out our article REIT Investment Strategies: A Guide For The Everyday Investor .

The Takeaway

In the end, there are a few obstacles and precautions to take when it comes to real estate investing in your 30s. On the flip side though, there are some great ways to make it happen if you're willing to start slow and build up some equity.

The longer you own an investment property, the better investment it becomes. If you can take care of eliminating debt and prepare yourself for a worst case scenario, definitely try and get in the game early and watch your money work for you.

Strategies to Lower Capital Gains Taxes

Capital gains taxes are the bane of investors everywhere.

There's no wonder they stoke a little resentment among real estate investors: Uncle Sam likely had little to do with the profitability of your property. But you’ve still got to pay up.

And of course you should, but not without knowing a few of the ways you can lower your capital gains taxes or make their payments more manageable. Here are some of our top practical tips you can really use to handle cap gains taxes.

Can You Get Rid of Capital Gains Taxes?

Not entirely, at least not usually. But that doesn’t mean that they cannot be managed. What we can absolutely do is look at creative ways to lower our tax rates, ways to pay our taxes that will work out to our advantage, and any circumstance that could cut us a break. So that’s exactly what we intend to do.

The following are a selection of the tactics investors like you can use to make capital gains taxes more manageable. You may find one, several, or even a completely alternative method works best for you. Think of these techniques like tools in an arsenal that you can get out at will. In some cases you may find you’re able to get your costs so low as to be almost negligible. At the very least, you should be able to cushion the blow. Let’s talk about deferment first, then move on to some methods for reducing your overall costs.

REN 8 | Solo 401(k)

How To Defer Your Capital Gains Taxes

Since we can’t simply abandon our capital gains tax obligations, we have to approach the problem with a bit more nuance and creativity. While we can’t make the taxes disappear, we can absolutely put off paying them by employing various tactics. Let’s talk about some fan favorite techniques for deferring these payments.

The Clever 1031 Tax Maneuver: Drop and Swap

You can also use a 1031 Exchange to delay the problem of capital gains taxes. Now, if you go about using this method, you’ll want to bone up on the requirements for 1031 exchanges. Essentially, the idea is that as long as you’re willing to sell your property and use the proceeds to purchase a similar one, you can defer paying the taxes for as long as you have the second property.

Where you go from there is totally up to you. In theory, you can drop, swap, and swap again until the end of time if you can meet the basic 1031 rules. You usually have 180 days from closing to reinvest, for instance. Properties must also meet certain legal requirements. Learn more about using the 1031 exchange for real estate success now.

Pour Your Capital Gains into Opportunity Zone Investments

The U.S. designated certain economically depressed areas ‘Opportunity Zones’ in 2017. To attract investors like us, capital gains reinvested into opportunity zones get a few preferential perks:

Some creative and hands-off investors take advantage of funds known as Opportunity Zone Funds, which are usually collections of properties pre-selected by a firm, fund, or financial institution. This method may appeal to someone wishing to take advantage of these tax opportunities but lacking the time or ability to do thorough due diligence alone. It’s also a way to test the waters on this strategy if you’re considering incorporating it into your long term plan.

Strategies to Lower Capital Gains Taxes

While we can defer capital gains with many tools, there are ways to also simply lower the number. But you’re definitely not going to like all of them. Yet you may find lower capital gains taxes to be a silver lining in a less-than-desirable financial situation or as an unexpected result of your circumstances.

Here are some ways to reduce the overall tax burden easily.

Sell When Your Income is Relatively Low

If you’ve had a “low income year,” that’s actually a good thing for your capital gains tax rate. After all, it’s directly linked to your tax bracket and therefore your income. If you’ve had a year where you’ve only earned passively or simply not earned for any reason, this can be an ideal time to sell your property. You’ll pay less in taxes than if you sell when you’re in a better position overall.

Know What Expenses to Track For Primary Residences

If you’re planning to sell your home, you may be able to deduct certain expenses from your cap gains taxable income. Chief among these are any costs you pay to improve or renovate the property and any expenses associated with the sale of the property. Such expenses might include fees paid for professionals, appraisals, inspections, and of course, any upgrade--no matter how small--is worth documenting. As long as you document the expense, you can later use it to your advantage.

Let Your Asset Protection Entity Ride to the Rescue

We’ve talked before about the critical role your business entity plays in your asset protection plan And while asset protection is a completely valid reason to set up these types of business structures, you can also enjoy tax benefits on top of your peace of mind.

Which tax benefits, of course, will depend on the type of entity, whether you’ve made certain choices regarding how the entity is taxed during formation, and of course, the rules we all have to play by to keep our friends at the IRS nice and happy. But let’s take a look at an example, shall we?

Edmund Green is a Texas-based investor who uses a Traditional LLC shell company and asset holding company to defend his real estate assets and other valuables. He’d heard through the grapevine that asset protection entities could be used for equity stripping. Never one to just take anyone’s word for matters affecting his finances, Edmund decided to bounce the idea off of his CPA and was able to save himself far more than if he’d continued operating as a sole proprietor. With the help of his attorney, he has established his asset protection plan and it essentially hums along in the background while he lives his life and runs his business. The last time we talked to Edmund, he didn’t have any complaints. And his strategies can work for others, too. That said, it’s crucial that you ensure your asset protection plan is tailored to your personal needs and goals.

If you’d like to follow Edmund’s example, you easily can. Take a look at the structures you’re considering using for asset protection and do a bit of very basic research. More importantly, make notes of any questions you come up with as you read and learn for your own experts.

Bottom Line: Capital Gains Can Be Managed, and Often With the Same Tools Protecting Your Assets

When you establish entities, trusts, and other asset protection structures, you almost always have a tax opportunity. Do all investors take advantage of all of their opportunities? Certainly not. But some will go further for you than others. However you choose to handle your capital gains taxes, simply being aware of the opportunities at your disposal puts you a cut ahead of the clueless investor waiting to be blindsided by the problem. As usual, proactivity will place you in a better position than procrastination.

Is a 1031 Exchange Investment Strategy Right For Me?

1031 Exchanges offer real estate investors tax benefits and access to unique deals. Making the decision about whether using this strategy is the right move for you can be difficult. It’s important to understand the 1031 exchange process and consider the value of its benefits in your own situation. We’ve broken down some of the points we think are most important for investors to know below.

Are 1031 Exchange Solutions Tax-Free?

Not exactly. 1031 exchanges are tax-deferred. Suppose you swap out your current duplex for another. When you sell the second duplex, you will pay taxes on it. Of course, there may be ways to minimize your tax burden, and you should absolutely run questions on the subject by your CPA. But the point is, yes, if you keep within the rules, you can accomplish a tax-free transition of property. But the piper will eventually be paid.

Types of 1031 Exchange

All 1031 exchanges must conform to some basic rules we’ve covered before. Properties must be investment or business-owned (not personal residences), and the property acquired must be of greater or equal net market value than the one sold. Finding deals that will fit these terms can be challenging, but in many cases, worth it.

Traditionally exchanges must be executed inside of 24 hours. These are known as simultaneous exchanges. The logistical difficulties of finding and coordinating such deals mean that many investors opt for deferred exchanges, which offer more leeway on the timeline.

When Should I Do a 1031 Exchange?

If you're new to real estate, you may not yet know about the capital gains tax. This tax kicks in any time you sell a property at a profit, and avoiding it is one of the primary benefits of the 1031 exchange strategy.

If you’re in the position of having a valuable property for sale, congratulations. But the downside to this good fortune is the tax burden. A 1031 will offer relief here, at least for the time the new property is owned. But just know that if you use this strategy, it isn’t a permanent way around the capital gains tax. What the 1031 Exchange will offer investors selling at a high profit level is time. The use of the exchange means your gains will be deferred until the acquired property is sold

At that point, you may use other perfectly legal tactics to diminish capital gains taxes or even exchange the property again. For the creative investor, especially with an equally innovative attorney by their side, 1031 exchanges may play a role in solving a broad range of real estate “problems.” But to really get the most out of them, you’ll need some appropriate professional guidance.

Get an Expert’s Opinion Before Jumping Into a 1031 Exchange Deal

Are you considering making your first, or even yet another routine 1031 exchange deal? It’s never a bad idea to have a lawyer take a look. The time to do that is before signing anything. Never fear. Our skilled real estate legal team can assist you with any kind of real estate deal. If you’re considering a 1031 exchange and need to protect the asset--or any other type of real property investment--don’t hesitate to schedule a consultation with one of our experts.

Why Millennials Aren't Buying Houses

Blaming millennials for everything has become a national pastime. One problem with cultural assumptions about entire demographics of people is these assumptions can water down or outright mislead our understanding of the real issues we're facing.

Like it or not, millennials’ habits will dictate real estate trends over the coming years. As real estate investors, we should be mindful of broader trends in the market and population. 

Millennials Are Record Low Home BuyersMillennials Set Record For Lowest Home Ownership

Folks born between 1981 and 1996 aren’t buying homes at the rate of generations before them, but not necessarily by choice. The real estate deck is stacked against first-time homeowners in a manner unprecedented in collective memory. America has become a much more difficult place to secure an affordable mortgage. “First homes” (single family homes, even multis under $250,000) make up less of the market than ever before.

The reasons come directly back to us investors. After the 2008 crash, we scooped up hot deals on these kinds of properties, enjoying a single-family budget property free-for-all. By now, most of us have upgraded these homes, up-sold them, or at least maintained them to be competitive. But that means the homes are worth more than appreciation alone would account for. Yet it’s the same asset we got cheap after the crash. Fast forward to the present day, and our prospective 18-35-year-old tenants? They’re the generation with the most people in crisis, struggling to transition from renters to buyers. 

Yesteryear’s Stats Don’t Apply: What REIs Need to Know About Millennials

Assuming people under 40 are still the  “home-buying age group” is foolish and inaccurate. Ask any 18-year-old how likely they are to own a home in the near future. Seriously. Any college student, even. Those who aren’t laughing uncontrollably may conservatively guess a decade. 

Millennials face a different world: student loans and debt are all but certain for those beginning 4-year college. This generation’s unique challenges include:

Millennials are also more likely to move in with their parents than any other generation. Many in their 20s move home under financial duress, while others lack that option and live with housing insecurity.

Taking these problems seriously shows how such factors are genuine barriers to home ownership. We haven’t even delved into this generation’s many cultural crises. Everything from later marriage age to the ongoing opioid crisis that continues to rage through mid-2019 can affect how this population rents and buys.

Why These Trends Matter for Real Estate Investors

Most investors count millennials among their tenants or desired demographic. Single-family investors and those starter home owners can stand to benefit in a seller’s market. Or, they can stand to lose if they command a rent that’s not practical for the area. 

If you own such an asset in an unfamiliar market, learning the employment situation can give you tons of insight into prospective tenants.  If you have a property worth under $250,000, you’re sitting on a high-demand property. Buyers are competing, and investors can play fair while profiting.

Millennials sometimes turn to REI to “escape” debt or employment barriers. All real estate investors could benefit from understanding the struggles their millennial tenants, partners, and fellow investors face. 

Real Estate Investing Fraud: Schemes to Know About 

Investing in real estate can be both a satisfying and lucrative way of building your portfolio. However, the complexity of buying and owning property can make you vulnerable to some unscrupulous characters.

From corrupt builders to phony appraisers, the real estate market can be tricky to navigate for investors of all experience levels. Unlike the typical tax scam or trustee fraud, real estate investment schemes can lure in even the savviest investor with promises of making a lot of money quickly with low risk. Many fraudsters are so good at what they do that it takes a careful eye to see them for what they really are.

Here are 13 real estate investing scams you should know about.

Buy and Bail

In this scam, the homeowner is up-to-date on their mortgage payments, but the home’s value has dropped below the amount owed on the loan. The homeowner applies for a mortgage on a similar home with a much lower price. After falsely saying that the first home will be rented out and securing the new loan, the homeowner allows the first home to go into foreclosure.

Builder Bailout

The builder artificially boosts the purchase price of newly constructed properties by offering false down payment assistance or by using straw buyers or shell affiliates. This scheme creates the impression that the builder is able to successfully sell units while also leaving the lender with loan exposure that exceeds the actual value of the property.

Chunking

Also known as a Ponzi scheme, this scam occurs when a third party convinces an investor to buy the property or a group of properties at artificially inflated prices with the promise of high returns and low risks. The third party, who is often an owner of the property, acts as the unsuspecting investor's agent.

joker cardDouble Selling

In this scheme, an unethical loan officer copies a borrower’s loan application and sends it to several different lenders, asking that they fund the loan. All of the closings are scheduled within a few days of each other, and the various lenders have competing loans against the same property.

Fake Loan

A mortgage broker uses a real person’s identity to create a phony loan application. The loan is funded, and the “seller” receives payment for a property that does not exist.

Flipping

This fraud occurs when two parties buy and sell the same property to one another and then obtain fraudulent appraisals as a way to inflate the property value.

Phony Appraisal

There are a few ways to accomplish this scheme. One way is to offer an appraiser a bribe to artificially inflate a property’s appraised value. A related scam involves a real estate investor providing the appraiser with falsified vacancy rates, rental rates, or expenses for a property.

Skimming

Here’s the scenario for a skimming scam. An investor uses a loan that covers 80% to 90% of a home’s purchase price. Then the investor pays a 10% down payment and rents the properties but does not make mortgage payments.

Modification and Refinance Fraud

A borrower understates income or gives false primary residence information in order to persuade the lender to accept loan terms that benefit the borrower.

Mortgage Servicing Fraud

This scheme involves a mortgage servicing company diverting principal, interest, or escrow funds from the underlying lender and retaining the funds for its own use.

Phantom Sale

A scammer files a false deed on an abandoned property and then transfers the property to another scammer. That scammer applies for a mortgage loan and pockets the loan proceeds.

Reverse Mortgage Fraud

In this scheme, a fraudulent person obtains title to a property and then deeds it to a fake individual who qualifies for a reverse mortgage. Then the fraudster gets the lump sum payment option on the reverse mortgage.

Short Sale Fraud

Short sale fraud can be conducted by either the homeowner, the lending institution, or an outside party. Generally, short sale fraud involves withholding facts or using false information to defraud the lender or induce a homeowner to sell a property for less than the mortgage debt owed.

How To Fight Real Estate Investing Fraud

How can you avoid these and other real estate investment frauds? Here are some key steps to stay safe.

Solid real estate investments take time and careful consideration. Before you make an investment, do your due diligence and consult someone you trust and who you know has your best interests in mind.

Image by Alexas_Fotos from Pixabay

Apartment Investing: Benefits & How To Get Started Now

Investing in apartments buildings takes a deeper level of involvement compared to managing single-family units. But investing in an apartment complex is a time-tested ways to build wealth. Multifamily property investing gives you cash flow, allows you to easily finance additional properties, and delivers fantastic tax benefits

To make an informed about whether a multifamily property is a good fit for your personal investment portfolio, read on.

Start Small, Buy Smart

New real estate investors might purchase a house with a basement apartment or a duplex as an easy way to get their feet wet. You might even live in one unit and rent out the other. Not everyone is comfortable living in the same building as their tenants, but you may bring in enough to cover the mortgage and all your expenses.

Be sure to choose high-quality locations for your apartment complexes, then advertise them properly. According to the apartment locating service UMoveFree, listing apartments online with pricing, floor plans, and detailed photos) gives you the best chance to attract quality tenants. 

When you become more experienced with the ins-and-outs, look for a larger property with higher income potential. It might seem overwhelming at first, but the more units you own, the easier it becomes. Before long it will be cost-effective to outsource the day-to-day management to a property manager.

Why Apartment Investing Is Ideal InvestmentBenefits of Apartment Investing

Some of these advantages take years to materialize. You'll reap the benefits of others within months after your first investment.

A Dependable Stream of Income

Apartment investing provides you with a regular income stream that pays for itself and stays valuable over the years. Unlike volatile and uncertain stocks, apartment investment profitability lasts a lifetime.

Tax Benefits

The US Tax Code is friendly to property owners. You'll get various tax benefits, no matter whether you decide to keep or sell your property later.

Asset Value Appreciation

Multifamily rental properties' appreciation meets and exceeds other investment types. Apartment complexes become more valuable as you increase rent and improve your assets by:

Employ respectable, qualified maintenance and groundskeepers to provide safe, clean housing. 

Quickly Build Your Portfolio

Multifamily apartment buildings are the way to go for building an extensive rental unit portfolio. It's much more manageable and less time-consuming to purchase and manage 20 apartments than 20 single-family homes. You'll bypass the headaches of separate purchases, loans, advertising, and leasing.

Consolidate Your Property Management

In most cases, investors who own single-family homes can't afford to contract an external property manager. As a result, much of the day-to-day management tasks are theirs to tackle. 

Once it's feasible, apartment investment produces more income each month. Outsourcing property management becomes a breeze.

Understand the Risks

Real estate is one of the most secure types of investment you can make. After all, there'll always be people looking for a place to live. With sufficient starter funds, apartments ensure that not all your eggs are in one basket, further boosting safety.

Still, there's no such thing as a risk-free investment. Keep this in mind from day one to ensure you're prepared for the inevitable issues that'll come up. You might face issues such as:

Common issues occur because your monthly costs after purchasing a complex are fixed, no matter the external circumstances. So, tame your excitement about a big purchase and don't rush into it.

Apartment ownership is challenging. Create a plan first and stick to it as you go, and you'll avoid the common pitfalls with much more ease. 

The Bottom Line

Overall, apartment investing comes with risks and rewards. Even if you're already deep in another investment, real estate gives you a fantastic opportunity to diversify your portfolio while minimizing risks and maximizing potential returns. 

You don't have to opt for one investment type only, but if you're looking for a place to begin or expand to, don't pass on apartments. It pays in the long run, leaving more room for those volatile, exciting stock market investments. 

 

11 Productivity Tips For Real Estate Investors

Real estate investors wear a lot of hats. The ones who do well must figure out how to manage their time. Making smarter investment decisions and seeing higher returns depend on it.

As a real estate investor, your success depends on how you use your time. You need to make every minute count. These productivity tips will help you stay focused on your goals and push your business in the right direction.

#1 Prioritize Tasks for the Next Day

Prioritizing tasks for the next day will ensure that you are prepared. Separate the next day's tasks into two categories. First category will be tasks that you will be handling on your own. The other category is tasks that you  assign to others. When you prioritize, you leave nothing to chance.

Prioritize tasks that must be done first due to a deadline or any other reason.

#2 Make a To-Do List

Each day should have more than 24 hours so you can finish everything, right? Until that happens, time management is the key to making sure that you don’t miss out on any task that needs to be completed on a given day. 

Prepare a to-do list that features all the tasks you face. This will help you stay on top of almost everything related to your projects.

productivity#3 Learn the Art of Delegation 

If you are a hardcore DIYer, you need to change a little to be more productive. It is figuratively impossible for you to complete all the work you have on a given day all by yourself. Learning to delegate can help you get more done in less time. 

Real estate investors are all over the map. In a given day, you may have to visit a new property. Prepare a listing on your own. Or plan a kitchen renovation. There will be other routine tasks to take care of as well. You can delegate many of these tasks one you find reliable people whom you can trust to do them correctly. And of course, that's the hard part.

#4 Take a Break 

Too many real estate investors believe that taking a break is a sin. Keeping your work hours crammed could negatively impact both your physical and mental health. Taking breaks every now and then will help you stay refreshed and enthusiastic throughout the day. So take a quick walk or grab a snack. Or you can take a power nap to recharge yourself. 

#5 Stop Multitasking 

Contrary to popular opinion, multitasking doesn’t improve your productivity. When you are handling more than one task at a time, it's hard to keep your focus. By not giving an important task the attention it requires, you may complete it with substandard quality.

Real estate investors should rarely multitask. When you try to perform more tasks than your body and mind can handle, you end up creating a mess. Don’t let anything distract you while you are doing tasks that are harder for you or that you don’t find too interesting.

Multitasking will do more harm to your productivity than good. So stop multitasking and start focusing on one task at a time to improve your productivity.

#6 Ditch The Meetings 

Even self-employed real estate investors have to meet clients, financial advisors and attorneys on a regular basis.  However, if you can reduce the number of meetings, you will be rewarded with improved productivity. A lot of meetings can be handled with an email exchange or a quick phone call. Get back the time you need to focus on tasks that can actually help you get more out of your investments. 

#7 Limit Social Media Time 

Social media is a big distraction. But you don’t need to stay off it completely because it is often the best place to get industry updates (speaking of which, check out our Tax, Legal, & Asset Protection Secrets For Real Estate Investors mastermind group if you aren't already a member).

What you need to do is be smart about the time you spend on social media. You can access your social media accounts during breaks or whenever you feel stuck on something. It is a great way to get your mind off something that you cannot get through and then start afresh. 

#8 Turn Big Projects Into Small Milestones 

The biggest reason you need to break a big project into smaller milestones is not to feel overwhelmed. By doing this, you will be better positioned to manage the smaller tasks or milestones, which will help you complete the entire project on time. 

This will also allow you to delegate a few of the smaller tasks to other people in your team, which will help take some of the burdens off your shoulders.

#9 Make Time for Networking

Networking gives you the opportunity to interact and communicate with others in your industry as well as those that could be your potential clients. So when you build a network, you establish professional associations with people and set the stage for business possibilities.

So it is very important for every real estate investor to make some time for networking in their daily schedule. Real estate investors thrive on relationships. No wonder networking is given so much importance. 

#10 Leverage Technology to Boost Productivity 

You need to make the most of the time and resources available to make your real estate investing business a success. One way of doing this is to leverage technology. There are tools that can help you do a lot more with your day than you end up doing. For example, using technology can help you avoid contract drafting mistakes in your real estate transactions.

Technology can help you with tracking listings, scheduling tasks, managing expenses, organizing documents, and screening prospects amongst other things. 

#11 Review Your Week on Friday 

Measuring your performance every week can help you improve your performance. Did you achieve the targets that you set at the start of the week? If you didn’t, where did you fall short? On the other hand, if you succeeded in achieving your targets, you will have the entire weekend to celebrate your success.  

Reviewing your week will also help you maintain workplace discipline. And you can figure out how differently you need to approach different tasks so that you don’t fall short going forward.

 

4 Property Investing Tips to Remember

When most people think of investing, stocks, bonds, and mutual funds often come to mind. For most Royal Legal clients (including members of our mastermind group), the investment avenue of choice is real estate.

Investing in property such as rentals, commercial office space and multi-family housing isn't everyone’s cup of tea, though because it can be challenging and risky. It also requires dedication, knowledge, and planning.

There is no shortage of online resources if you want to get your feet wet in this highly competitive industry like this one. Before you start taking notes about the basics of real estate, check out these four property investing tips that increase your chances of success.  

Property Investing: runner at starting lineTip #1: Make a Plan

Investing in real estate is no different than any business. If you intend to be a serious investor, you need a plan. Having a roadmap allows you to see the whole picture and focus on what’s critical instead of being distracted by unavoidable setbacks.

Start with deciding your goals. Are you looking for capital appreciation or yield? The answer will depend on how you view facing challenges. If you’re a risk-taker, you’ll buy properties based solely on their potential for growth and long-term returns. Or you might look at assets that offer rental income for instant profits.

Setting a timeframe for achieving results is another determinant of which investing method you’ll adopt. Deciding what you’ll do will enable you to formulate a specific plan instead of a shoot-and-miss approach.

Be sure to regularly review your strategy so you can take immediate action when needed to stay on course. No matter how well you prepare for the future, you’ll need to be able to deal with curveballs when they come at you.

Your knowledge of the market and keeping abreast with news will help you anticipate most events and make the right decisions.

Tip #2: Location Is All-Important

You’ve heard the saying, “location, location, location." Every real estate investor will tell you that the primary factor in buying landholdings is where they’re situated. 

Don’t buy based solely because the assets are low-priced. Do your research on the area so you’ll know the reason for its current value and the potential it offers. Not every inexpensive property can be profitable.

You should identify areas where the demand for buildings exceeds its supply. This shortage will ultimately push prices upwards. 

It’ll take due diligence on your part to check the neighborhood and what it offers in terms of return on investment. As part of your assessment, be sure to study the following: 

Tip #3: Get Advice From Property Investment Specialists

Before buying your first investment property, get professional help with your financial affairs. Taxation laws are complex, and you don’t want to get on the wrong side of the IRS and lose money to penalties and fines.

It’ll be beneficial for you to work with an accountant who’s well-versed with real estate when you plan your strategy. The ability to prepare cash flow projections is vital to providing you with valuable and timely fiscal information. With expert advice from a CPA and an attorney specializing in asset protection strategies, you can use legal structures tailored for property investment to save on your tax liability. Your advisors will also counsel you on whether to invest as an individual or corporate entity for risk management reasons.

Tip #4: Have an Exit Strategy

Knowing when to sell is just as important as when to buy. It’s all about timing. 

Be vigilant and continuously watch the market. If you need to cut your losses, do it and move on. There’ll always be other opportunities. Having a plan in mind at the onset makes it less stressful when it comes to disposing of your asset.

Property Investing Can Be Profitable

Any investment is risky, but as long as you exercise due diligence and prepare for the challenges, you can attain your investment in the long run.  Remember: any people have built their real estate empire by following fundamentals. If you do the same, you can be successful too.

 

 

Basics of Land Investing

Are you tired of all the inconveniences that come with real estate investing, like tenants and structural repairs? The landlord life is not for everyone, and it's getting old for you, it might be time to try something new.

Land investing provides a variety of profit opportunities. Whether you choose to invest in farmland or property for development, such as vacant lots and raw land, there is money to be made in land. Whether you want to develop an unoccupied property or purchase agricultural farmland, real property investments can create long-term and dependable revenue streams. 

Basics of Land Investing: overhead shotTips For Investing In Development Property

If you're interested in taking the development route, here are a few tips and tricks to follow when investing in your first tract of raw land.

Location, Location, Location

As a savvy real estate investor, I'm sure you know that it's all about location. Whether you're buying a new rental property, a home for your family, or a vacant lot, location is one of the most substantial contributing factors to a property's investment value. 

While you can usually improve or change the property itself, you're stuck with the neighborhood where it's located. For this reason, you should never forget that you aren't just investing in real property; you are investing in the location as well. When you have found a property you may want to purchase, check with a commercial real estate broker to learn more about the site and surrounding areas.

Zoning Laws

An unavoidable aspect of land development is local zoning laws, limiting the way you can use it. For instance, if you buy a property that's zoned for residential use only, you can't build a strip mall or a factory on it. It's nearly impossible to change the zoning for a tract of land, so you should always make sure the property's zoning corresponds with your development plan before you buy it. 

Environmental Site Assessment

In addition to zoning and the surrounding area's qualities, you should always investigate the land itself by conducting an Environmental Site Assessment (ESA). An ESA consists of four evaluation phases that will confirm whether the land can actually be developed according to your plan.

Utilities And Easements

You'll also need to check with the local utilities about the process for setting up the electric, water, and sewage. If you have to cross someone else's property to access the land, you'll need to obtain an easement before you can start developing the land.

Cost Analysis

While you are probably already familiar with the costs associated with real estate investment, it can be more expensive to get started when purchasing land. First, since banks consider vacant lots to be riskier investments than real estate, you'll likely see higher interest rates than you're used to with traditional mortgages. To save some dough on interest, it helps to put down as much cash as you can. 

Here are a few other back-end expenses to consider: 

farmland agricultural landTips For Investing In Farmland

The American economic system was built on agriculture, and farmland remains an integral part of our economy and cultural heritage today. As one of the least volatile types of real estate, farmland is also a stable and relatively low-risk investment method. 

The primary reason that farmland is such a low-volatility investment is simple: humans need food. As long as we rely on farmers to grow our food, there will be money to be made investing in agricultural land. Additionally, farmland will always retain value because it is a limited resource: there is a finite amount of land suited for agriculture. For this reason, farmland is rising in popularity among real estate investors looking for long-term and steady gains.

Returns from Farmland

Strategic farmland investors can see dependable returns from both the appreciation of the land value and the income made from agricultural activities on the farmland itself. While agricultural land may appreciate more slowly than typical real estate investments, you can realize short-term returns through direct income, either by renting to a farmer or operating the farm yourself.

Tax Advantages

Agricultural properties come with a variety of tax advantages that make them an even more attractive investment. Here are a few ways the tax laws can work in your favor when purchasing farmland:

Funding Options

You don't need to have piles of cash to invest in farmland. Here are a few creative ways to finance an agricultural land purchase if you're not rolling in dough:

Do Your Research

Whether you want to check out development land or farmland, it's essential to do your due diligence before diving in. If you do your research to make smart property choices, land can be an excellent investment and an exciting diversion from standard real estate. 

 

Real Estate Contingency Clause Examples: How Buyers Avoid Getting Burned

Real estate is more than just about selling and buying. It's also about signing contracts that say exactly what you want them to say. You may or may not enjoy doing the "backend" paperwork, but it's just as important as all the other work involved when it comes to buying and selling properties.

Which brings us to contingency clauses. Contingency clauses are some of the most important parts of a real estate purchase contract, and can provide significant protections to buyers of real estate.

Whether you're buying or selling real estate, it's essential that you know how to cover your rear with the correct contract language. To that end, let's look at a few real estate contingency clause examples.

Land Trust with Multiple BeneficiariesReal Estate Contingency Clauses 101

Let's say you want to buy a rental property. A contingency clause often states that your offer to buy property is contingent upon X,Y, & Z. For example, the contingency clause may state, “The buyer’s obligation to purchase the real property is contingent upon the property appraising for a price at or above the contract purchase price.”

Under this contingency, you're relieved from the obligation to buy the property if the you obtain an appraisal that falls below the purchase price. Because contingency clauses provide you with a way to back out of a contract, they can be great tools for real estate investors who make offers on properties.

Interested in learning more? Check out our articles Real Estate Contingencies: A Guide For Buyers and What Is A Bump Clause In Real Estate?

Common Contingency Clause Examples

Here are three contingency clauses to consider in your real estate purchase contract.

Appraised Contingency

An appraisal contingency protects buyers of real estate and is used to guarantee that a property is valued at a specific amount. If the appraisal comes in lower than the amount, the contract can be terminated. Another perk to this contingency is that you'll probably get your earnest money back as well.

Financing Contingency

A financing contingency might say, “Buyer’s obligation to purchase the property is contingent upon buyer obtaining financing to purchase the property on terms acceptable to Buyer in Buyer’s sole opinion.”

Some financing contingency clauses are not well drafted and will provide clauses that say simply, “Buyer’s obligation to purchase the property is contingent upon the buyer obtaining financing.”

A clause such as this can cause problems as the buyer may obtain financing under a high rate and may decide not to purchase the property. However, because the contingency only specified whether financing is obtained or not (and not whether the terms are acceptable to buyer), the clause can be unhelpful to a buyer deciding not to purchase the property.

Some financing clauses are more specific and will say that the financing to be obtained must be at a rate of no more than 7% on a 30-year term. They'll add that if the buyer does not obtain financing at a rate of 7% or lower then the buyer may exercise the contingency and back out of the contract.

Inspection Contingency

An inspection contingency clause might state, “Buyer’s obligation to purchase is contingent upon buyer’s inspection and approval of the condition of the property.”

Another variation states that the buyer may hire a home inspector to inspect the property and that the seller must fix any issues found by the inspector. If the seller does not fix the items specified by the inspector then the buyer may cancel the contract. Inspection clauses help guarantee that the buyer is obtaining a valuable asset and not a money pit.

Details In The Fine Print Of A Contingency Clause

The devil of contingency clauses is in the details, which of course, often come in small print. Due to the nature of contingency clauses, you want to make sure you pay attention to certain key terms and phrases. All it takes is one sentence to either win or lose you a dispute over one of the following issues.

Earnest Money

One thing that's usually vague in real estate purchase contracts when it shouldn't be is what happens to the buyer’s earnest money when the buyer exercises a contingency.

Does the buyer receive a full return of the earnest money? Does the seller keep the earnest money? If the contract is silent and if you as the buyer exercise a contingency, don't bet on getting your money back. It's likely you'd lose even more money!

Make sure your contract clearly states something like, “If buyer exercises any contingency, Buyer shall receive a full return of any earnest money deposit or payment to seller.”

Contingency Deadlines

You don't want to miss one of those!  Most contingency clauses have deadlines well before closing. Those dates being typically somewhere from 2 weeks to 2 months from the date of the contract, depending on the purchase and seller disclosure items and the type of property being purchased.

For example, single family homes will typically have a shorter window as financing and inspection can occur more quickly than would occur under a contract to purchase an apartment building.

Whatever the deadline is, make sure that the deadline is set so that you can complete your contingency tasks. You need to make sure you have enough time to obtain adequate financing commitments, to properly inspect the property, and that you have enough time to review the seller’s disclosure documents.

Setting a two-week deadline is sometimes done. But two weeks is usually not enough time to complete financing commitments, inspection, and due diligence activities. All of which are necessary to determine whether you will or won't purchase a property.

If contingency deadlines are fast approaching and you need more time, then ask the seller for an extension before the deadline arrives. If your seller refuses an extension, point to your contingency and tell them to read it and weep.

Exercise your contingency in writing. Yes, even in the digital age, the pen and paper still go a long way as far as contracts are concerned. If you do exercise a contingency and decide to back out of the purchase of the property, make sure you do it in writing.

Don’t count on telephone calls or even emails (unless the contract permits emails as notice). Make sure that the reason for the contingency and that the date of the contingency are put in writing and are sent to the seller in a method where the date can be tracked.

For example, if your contract requires a contingency to be noticed by fax or hand delivery, don’t rely on an email to your seller or your seller’s agent. That won't invoke the contingency, and you may end up unhappy to say the least.

The Importance of Contingencies for Real Estate Investors

Let's say you're the buyer again. Once the deadline to exercise a contingency has passed, you're obligated to purchase the property and may be forced to buy the property. Or at the least you will lose your entire earnest money deposit.

Contingency clauses are your best defense against a bad deal and should always be used by real estate buyers. Hopefully by now you've realized that your purchase contracts are only as good as the contingency clauses behind them.

If these kind of details make your head spin, don't worry. That's what us real estate attorneys are here for. Schedule your consultation now to never fall victim to the "fine print" again.

Are Real Estate Contracts Binding in the Era of Coronavirus?

It’s been a few months since a worldwide pandemic took hold of this country, leaving a multitude of questions and complicated legal situations in its wake. Whether you are a real estate investor, a home seller, a Realtor, a landlord, a property manager, or a tenant, you likely have questions about the real estate contracts you’re part of right now, in the age of COVID-19.

 

 “I’ve never seen anything like this,” says Jim Goldman, a partner with the firm Miller Barondess in Los Angeles. Goldman, whose practice is focused on litigating complex commercial real estate, financing and professional liability, was referring to the new world of complicated legal issues that have arisen following the worldwide COVID-19 pandemic. He participated in this Q&A to help provide some clarity.

Q: What are the most common issues you’re seeing right now?

 

A: Right now, we’re mainly seeing a lot of landlord/tenant issues, because with rent due, often at the first of the month, that is something pressing that is happening right now. Our commercial tenants started contacting me in large numbers in mid-March, asking what kind of contractual provisions and governmental requirements might relate to mandatory business shutdowns and how they might relate to paying rent or a mortgage.

 [See also: How COVID-19 Affects Foreclosures]

Q: With so many questions from homebuyers and investors in residential real estate regarding deals in progress, are you seeing flexibility in contract deadlines to handle the delays?

 

A: True, there are a lot of delays. For instance, shelter-in-place orders have prevented property inspectors and appraisers from doing their jobs. So, buyers can’t complete their due diligence in the time allotted and lenders may not have what they need to approve financing. It puts closings at a standstill. Not to mention getting documents recorded. We are in uncharted waters right now and kind of at a standstill with extensions of contracts.

 

Q: Buyers who started the process before the outbreak and widespread stay-at-home orders have likely seen their financial situation change, or may feel like they’re now overpaying for their house. Are buyers able to get out of contracts?

 

A: Even though we are in unprecedented times, in general you cannot just walk away from a contract because your situation has changed – even if it was because of an event beyond your control. Unless some sort of provision was written in the contract allowing a cancellation for this type of unforeseen event, you may still be legally obligated – for now. It’s hard to say what will be allowed when this is over, because no one knows how long this pandemic will last, or how any new laws and ordinances will affect everyone’s rights. And since we’ve never had what is close to a nationwide shutdown of the economy, there is no legal precedent for this situation.

 

Q: Does a global or national pandemic not fall under a “Force Majeure” provision for forces beyond your control?

 

A: It depends. Many “Force Majeure” provisions are merely designed to protect one or both parties from being liable for damages as a result of not being able to perform. But there are other legal theories that one party or the other might be able to rely on in not performing or delaying performance.

 

For instance, say the Coronavirus has prevented a builder from receiving shipping materials on time from China, so he or she won’t be able to finish the project on time. The builder might not be entitled to scrap the project, but they might be entitled to extend the time it takes to complete it. 

 

Q: How did the H1N1 Swine Flu epidemic from 10 years ago change contracts and provisions and does that affect this situation?

 

A: Some leasing contracts and insurance policies were re-written with provisions that prevent liability due to pandemics. But the economic fallout from that crisis wasn’t nearly as severe as what we have now, so such provisions don’t necessarily cover the current situation.

 

Q: So what can current homebuyers and investors do to protect themselves? Is now a good time to buy while prices and interest rates are low?

 

A: Honestly, right now I wouldn’t advise buying!  If you absolutely want to put yourself out there, I would say you have to write in good loan contingencies if you need financing, and as long of a due diligence and closing period as you can get.

 

Q: Do you think this pandemic will affect the way future contracts are written?

 

A: Yes. Anyone preparing a contract is going to have to consider the circumstances we have now and who bears the risk. I suspect insurance policies will also be revised to make it clear what is covered or not covered related to a similar outbreak. There’s probably a way for a Rider to cover it, but it’s got to be addressed. Leases and purchase agreements may also include provisions to address pandemic-related issues.

 

Q: Are you seeing a lot of lawsuits filed over these contractual issues?

 

A: Not yet. They will no doubt come, but there’s now there’s too much uncertainty. Also, the courthouses are generally closed except for true emergencies. The only filings we’re doing are for existing cases. For right now we have to see how this all plays out. It’s pretty much wait and see.

Which Housing Markets Are Most Vulnerable To Coronavirus Impact?

A recent analysis of housing markets all over the country has shown that more than half of the 50 housing markets most vulnerable to collapse due to the coronavirus pandemic are centered in the Northeast and Florida. 

The largest northeastern cluster is in New Jersey and includes 14 of their 21 counties, including five in the New York City suburbs, with four surrounding counties in New York state and three in Connecticut. Another 10 were in Florida, but the only west coast area at risk was a single county in California.

A few of their findings:

 

 

These findings correlate with previous predictions for good cash flow markets being largely found in Texas and the Midwest.

ATTOM Data Solutions came to these conclusions after analyzing risk based on the number of foreclosure notices received in Q4 2019, the percentage of homes underwater in Q4 2019 and the percentage of local wages needed to pay the expenses associated with home ownership. Using a sample size of 483 counties who reported the data, they then ranked the counties from lowest to highest in each category and combined those rankings.

“It’s too early to tell how much effect the xoronavirus fallout will have on different housing markets around the country. But the impact is likely to be significant from region to region and county to county,” said Todd Teta, chief product officer with ATTOM Data Solutions. 

“What we’ve done is spotlight areas that appear to be more or less at risk based on several important factors. From that analysis, it looks like the Northeast is more at risk than other areas. As we head into the home buying season, the next few months will reveal how severe the impact will be.”

Diamonds in the Rough: The Keys to Finding Your Ideal Investors

 

In real estate syndication, no decision is ever made in a vacuum. When an investor decides to close on a given property, for example, they are not just choosing to buy that property—they are choosing to buy that property instead of buying one of the many other similar properties that are currently available. All decisions are made, at least to some extent, with opportunity costs front of mind.

 

Deciding to invest or partner in a specific syndication is no different. There is a finite number of investors who hope to work with some sponsor, even if they are not entirely sure who this sponsor might be. When they do make a final decision and direct their finite capital resources towards a specific project, they are simultaneously rejecting many other alternatives.

 

While many people aspire to enter the lucrative syndication market, there are only some investors that are actually in a position to act. Conditions are likely even more competitive now that COVID-19 has affected our economy and has caused many wealthy individuals to become extremely risk-averse with their investments.

 

Knowing that quality investors are scarce, it becomes absolutely crucial for real estate sponsors to continue the search for the proverbial “diamond in the rough.” Without a continuous, data-driven, and targeted campaign, it is quite likely that your firm will end up losing opportunities to the countless alternatives.

 

Generating an Accurate Profile

In order to find the ideal investor, you will first need to begin by generating a detailed understanding of who, exactly, that person might be. What is this person’s current career and financial situation? What motivates them to make an investment? What are their fears, concerns, and challenges? What is this person’s background and where can you effectively communicate with them?

 

Answering these questions about your prospective investor can be challenging because, frankly, you have never actually met them. But generating a detailed profile – your ideal investor avatar – such as this can help you begin shrinking the pool of possibilities and narrow your search to individuals that are authentically qualified. Generating this profile needs to occur during the preliminary portions of your campaign because, ultimately, it will affect every decision you make along the way.

 

The decisions you make when generating a digital marketing campaign aren’t for you—they’re for your potential investors. While it can be very tempting to “fall in love with your business” and center the campaign on your personal tastes, it is important to remember that you are not marketing to yourself, but marketing to others. Every component of the campaign—the articles, the social media content, the e-mails, etc.—needs to be written with your end goal (convincing a targeted party to take a specific action) in mind.

 

Adjusting Your Message

Reading the room is something that anyone can do to improve the ways they communicate. Whether your relationships with prospective investors began online or in-person, you will only have one chance to make a first impression. Trust is one of the most difficult things to build in the syndication industry, which is why it is so crucial to know as much as you can about your immediate audience and speak to them in a specific way. Not only is trust extremely difficult to build, but trust is something that is also easily lost.

 

Projecting your message in a way that makes your firm seem professional, experienced, and trustworthy will help you begin earning the attention of just about any target audience. But from there, your message will need to be adjusted even further. Knowing which changes and tweaks need to be made will involve having a thorough understanding of the audience, along with a thorough understanding of what your business has to offer.

 

You know your target audience is concerned about maintaining revenue flows during a recession. Your messaging should all be crafted with this in mind.

 

You know the audience has a high net-worth but is unfamiliar with the broader syndication market. Again, this is something that your messaging needs to directly reflect.

 

The best way to answer questions from prospect investors is to answer them before they even need to be asked. You are not going to be able to simply attract investors without scrutiny; you are fighting an uphill battle, a race for capital with many other racers. With effective targeting and coordinated messaging, you will be able to remain ahead of these competitors and continue moving forward.

 

Ultimately, there are a finite number of tools that a firm seeking an investor will have at their disposal. Sure, they could also invest in better data or better tech, but the possible paths to success still remain finite. Information is, and will remain, your most powerful tool. To succeed, you must use the information at your disposal, generate an accurate profile, and tailor your campaign to address that specific profile.

 

While there will still be work that needs to be done, these initial steps will remain absolutely crucial.

 

 

Adam Gower Ph.D. is an authority in content marketing and online communications for the real estate industry. He has more than 30 years and $1.5 billion of transactional experience in commercial real estate finance and investment. Over the last five years he has built a digital marketing agency at GowerCrowd.com and advises clients on how to raise capital during good times and bad. To learn how to raise capital from high net worth investors online, watch Dr. Gower’s whiteboard workshop by clicking here.

 

How COVID-19 Affects Foreclosures

COVID-19 rightfully has a lot of homeowners (and real estate investors)nervous about the risk of foreclosure. Though a lender has to wait 180 days to initiate a foreclosure, both the private and business mortgage sectors are wondering what will happen to the economy and timely mortgage payments in the aftermath of this worldwide pandemic.

Foreclosure Auctions

If you’re looking for a steal of a deal on a home, now is the perfect opportunity to mask up and head to the county courthouse. As of this writing, foreclosure auctions are still active in many states if you’re willing to brave a trip to the courthouse. Texas currently has half a dozen homes still listed, so now may be the perfect time to snatch up that 3 bedroom investment property in El Paso you’ve been daydreaming about for an incredible price of $30,000 and minimal bid competition.

Nearly 2,000 foreclosure auctions were cancelled in the past month in Texas, but those will need to be relisted again someday. Keep an eye on foreclosure auction listings in your target investment area and you may just get lucky.

Commercial Loan Relief

In late March, Freddie Mac and Fannie Mae announced a relief plan for owners and renters of multifamily apartment complexes. To reduce the financial burden from the COVID-19 outbreak, they offered 90 days of deferred payments on commercial mortgages financed through the mega-funders, which provided relief to both landlords and tenants. In the wake of that announcement, the federal government also went big.The 'Cares' Act

Three days after Fannie and Freddie’s announcement, the President signed the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) into law. Specific to foreclosures, the bill offered up to 180 days of forbearance to any borrower with a “federally backed mortgage loan” who was experiencing financial hardships due to the national emergency. A second forbearance period of an additional 180 days may be requested following the first, regardless of delinquency status.

The bill also included protections against foreclosures, preventing servicers of a federally backed mortgage from initiating of any judicial or non-judicial foreclosure, moving for a foreclosure judgement or order of sale, or executing a foreclosure-related eviction or foreclosure sale for not less than the 60-day period beginning on March 18, 2020.

Evictions & Covid Relief

Borrowers for multifamily properties were also granted a 30-day forbearance on their federally backed multifamily mortgage loans provided they were current on their payments as of February 1, 2020. These property owners who participate are barred from evicting tenants “based solely on non-payment of rent during the forbearance period.” This, combined with the $1,200 stimulus check provided by the federal government, is intended to keep tenants in their homes during this global crisis.

“Renters should not have to worry about being evicted from their home, and property owners should not have to worry about losing their building, due to the coronavirus,” says FHFA Director Mark Calabria. “The multifamily forbearance and eviction suspension offered by the Enterprises should bring peace of mind to millions of families during this uncertain and difficult time.”

 

Pandemic Foreclosures = Opportunity For Real Estate Investors

COVID-19 rightfully has a lot of homeowners (and real estate investors) nervous about the risk of foreclosure. Though a lender has to wait 180 days to initiate a foreclosure, both the private and business mortgage sectors are wondering what will happen to the economy and timely mortgage payments in the aftermath of this worldwide pandemic.

Foreclosure Auctions In A Pandemic

If you’re looking for a steal of a deal on a home, now is the perfect opportunity to mask up and head to the county courthouse. As of this writing, foreclosure auctions are still active in many states if you’re willing to brave a trip to the courthouse.

Texas currently has half a dozen homes still listed, so now may be the perfect time to snatch up that 3 bedroom investment property in Austin you’ve been daydreaming about for an incredible price of $30,000 and minimal bid competition.

Texas canceled nearly 2,000 foreclosure auctions in the past month, but those will need to be relisted again someday. Keep an eye on foreclosure auction listings in your target investment area and you may just get lucky.

Commercial Loan Relief Protects Landlords

In late March, Freddie Mac and Fannie Mae announced a relief plan for owners and renters of multifamily apartment complexes. To reduce the financial burden from the COVID-19 outbreak, they offered 90 days of deferred payments on commercial mortgages financed through the mega-funders, which provided relief to both landlords and tenants. In the wake of that announcement, the federal government also went big.The 'Cares' Act

Three days after Fannie and Freddie’s announcement, the President signed the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) into law. Specific to foreclosures, the bill offered up to 180 days of forbearance to any borrower with a “federally backed mortgage loan” who was experiencing financial hardships due to the national emergency. Borrowers may also request a second forbearance period of an additional 180 days, regardless of delinquency status.

The bill also included protections against foreclosures, preventing servicers of a federally backed mortgage from initiating of any judicial or non-judicial foreclosure, moving for a foreclosure judgement or order of sale, or executing a foreclosure-related eviction or foreclosure sale for not less than the 60-day period beginning on March 18, 2020.

Evictions & Forbearance Periods

Borrowers for multifamily properties who were current on their payments as of February 1, 2020 were also granted a 30-day forbearance on their federally backed multifamily mortgage loans. Property owners who participate are barred from evicting tenants “based solely on non-payment of rent during the forbearance period.” This, combined with the $1,200 stimulus check provided by the federal government, is intended to keep tenants in their homes during this global crisis.

“Renters should not have to worry about being evicted from their home, and property owners should not have to worry about losing their building, due to the coronavirus,” says FHFA Director Mark Calabria. “The multifamily forbearance and eviction suspension offered by the Enterprises should bring peace of mind to millions of families during this uncertain and difficult time.”

 

Interested in learning more? Check out our article 3 Things Landlords Should Do As The Eviction Moratorium Comes To An End.

Real Estate Markets & Coronavirus: Construction & Home Buying In a Post-Pandemic World

It’s not an exaggeration to say that nearly everything has changed in the past month due to the coronavirus—and real estate markets are no exception. Almost every single sector of the economy is facing unprecedented challenges, but especially the construction industry.

Starting with supply chain interruptions from China when that country was facing the worst of the pandemic, there have been slowdowns at nearly every turn. Now that the US is dealing with the virus, projects are taking longer and longer to complete as appraisers and inspectors can’t get into homes while families shelter in place there. While this isn’t their fault, many homebuilders feel completely at a loss.

“We’re reacting to news and dealing with it accordingly,” says Joe Fowler, president of the Home Builders Association of Greater Austin. “This is so fluid and things keep changing based on whatever is happening on any given day.”

Ripple Effect Hits US Real Estate Markets

A significant percentage of building materials, estimated at 30% by Richard Branch, chief economist for Dodge Data & Analytics, is exported from China. These exports can be everything from copper and steel to cabinetry and fixtures. With factories in China closed or at reduced capacity in response to the virus, production slowed or even halted entirely. The impact of this was delayed for American homebuilders, but we are finally feeling the effects of this. Toll Brothers, one of the country’s largest homebuilders, recently announced that shortages of lighting fixtures and small appliances will delay the sale of some of their new homes in California. While some builders have been able to find alternative suppliers here at home, it hasn’t been easy.

“In construction, everything comes down to time and money. With the coronavirus, we don’t know how big it’s going to be, how long it will last, and what its full impact is going to be,” says attorney Steve Lesser, a past chairman of the American Bar Association’s Forum on Construction Law. 

Economic Uncertainty Makes Home Buyers Timid

In January of this year, Fannie Mae economists forecasted a stellar 2020 for the housing industry. Thanks to low unemployment, solid wage growth and low mortgage rates, housing starts were predicted to jump from 1% per year to 10% in 2020, which would have made it one of the best years since the last housing boom in 2007. Now, with unemployment at record levels and climbing daily combined with unstable financial markets, buyers and commercial developers have all but disappeared.

Home builders are still building new homes, though sales centers and Realtors with open houses are seeing a marked drop in foot traffic -- likely due to both social distancing and economic insecurity. Similarly, online real estate portals like Zillow and RedFin have seen a significant drop in both web traffic and new listings since the outbreak began in the States.

The National Association of Realtors released a survey that found nearly half of agents agreed that home buying interest had declined due to COVID-19. Home buyers who are still actively seeking to purchase are opting to minimize risk with virtual home tours or having their Realtor give them a video chat walkthrough.

Construction Delays Lead to Unanswerable Questions

 

Even for buyers ready to make a purchase, the process is unavoidably delayed by things out of anyone’s control. Appraisers and home inspectors aren’t able to do their jobs as long as the current homeowner is sheltering in place there. Planning and zoning departments are taking longer to approve permits due to limited access to historical records and blueprints while they work from home. These backups can cause delays for lenders, who are already facing a tidal wave of refinance applications as well. This chain of setbacks can leave homeowners, home buyers and Realtors scrutinizing their contracts and insurance policies to see who may be liable for increased costs or delays.

“There are many terms that will be relevant to those discussions, including the various contractual terms relating to the contractor’s schedules, substantial completion, delays, liquidated damages and other contractual provisions,” said Michael Keester, a partner at law firm Hall Estill in Tulsa, OK.

How Does This Affect Real Estate Investors?

There’s a glimmer of hope in all of this if you’re an investor. As many learned after 2008, an economic downturn or recession is fertile ground for investment real estate. Because of forbearances and temporary forgiveness, it may be a few months before foreclosures hit the market en masse, but there are still sellers who need to sell now. Due to the current economic climate and the increasing lack of demand, the market will likely quickly become a buyer’s market.

Between that and current financing rates at record lows, now is a great time to form your Series LLC and buy because while the home buying market may fall, experts say the outlook for the home rental market looks good. Landlords who can provide single family housing with a yard or the ability to accommodate multiple family members working from home will be a very valuable thing in the coming months. Epidemiologists say we may be facing up to 18 months of varying levels of social distancing, so renters will be looking for housing that can make this new normal more viable.