Mobile Home Investing: 4 Things To Know Before Getting Started

Have you ever considered investing in mobile home parks? 

If not, why? 

Mobile home investing is largely overlooked by real estate investors. We tend to prefer single-family homes, multifamily units or other kinds of commercial real estate. But mobile home (aka manufactured housing) parks can be profitable assets—in part BECAUSE they are often overlooked by others.

In this article we will answer three common questions about mobile home investing:

We’ll also give you four key points you need to know before jumping into this exciting opportunity. 

Soon, you’ll see how mobile homes can add value to your portfolio—even though they may not be the most glamorous asset class. And as always, take our quick investor quiz if you need more info, and we’ll help you take that next step.

Is Mobile Home Investing Profitable?

Mobile home investing comes with risks, just like any other investment, but it has a lot of potential to be very profitable. 

As mentioned, a lot of investors simply don’t think about trailer home parks. They simply don’t want to get involved.

Their loss, your gain! The relative lack of competition can benefit you in the following ways:

Mobile home investors often own the land and not the units themselves, making mobile home parks among the lowest-cost investments (per unit) in real estate. That low start-up cost means that yes, there’s lots of room for profit.

Aside from the relatively low barrier to entry, mobile home park owners have little (or no) maintenance costs compared to other real estate asset classes. This us because mobile homeowners (not the landlord) are responsible for:  

To put it another way, a mobile home park represents much less money spent on upkeep than apartment buildings, townhouses, or single-family dwellings. 

Finally, there is plenty of potential for your investment to grow over time. In general, mobile home parks appreciate because:

How Do People Become Wealthy Investing in Mobile Home Parks?

Tenants need affordable places to live, and increasingly mobile homes are fulfilling that role. With mobile home investing, you have an opportunity to meet an ever-growing demand for affordable housing and build your wealth.

There are several ways investors can become wealthy by investing in mobile home parks: 

Cash flow

Since the 2009 housing crash, mobile home park investors have seen an enormous return.

Recession resistance

Mobile homes are recession-resistant because they’re the most affordable type of housing available in the market. When a recession strikes, tenants who used to live in single-family homes look for more affordable options. This causes the demand for mobile homes to increase. Because of this, a mobile home park performs better in a recession than other real estate assets.

Lot rent

Most mobile home lots are leased for 12 or 24 months. It's standard to see lot rents increase anywhere from 10 to 15 percent annually to match the market. 

Tenant stability

Mobile home parks are in the “affordable housing” sector. Tenants living in mobile home parks do not have the financial resources to move. They stay in mobile home parks longer than they do in apartment buildings. Additionally, once a mobile home gets into a park, it stays there. Even if they own the trailer itself, when a tenant needs to move, they typically sell the mobile home to another tenant. The mobile home itself stays in the park. 

The Warren Buffett Effect

In 2002, Warren Buffet acquired Clayton Homes, the largest builder of manufactured housing and modular homes. Berkshire Hathaway then teamed up with 21st Mortgage to introduce the "CASH" program, which helped mobile home investors get new mobile homes onto their lots with little upfront cash. In exchange for the homes, park owners send prescreened tenants to 21st Mortgage. 

Investors benefit from having new homes to attract preferred tenants.  Clayton Homes and 21st Mortgage benefit from prescreened applicants. And the tenants get a home. Everyone wins!

Low risk/high reward appreciation

Using the "CASH" program (similar programs exist from other lenders), mobile home park owners can fill their lots with attractive homes. Then, they fill those homes with tenants and increase the value of the mobile home park. 

Tax and Financing Benefits

You can use IRS tax code Section 1031 to avoid paying tax when buying and selling “like-kind” assets. A 1031 exchange investment strategy enables you to: 

How Does Mobile Home Investing Work?

For a case study on how trailer park investing really works (and how you can get started), refer to our interview with Frank Rolfe about mobile home park investing and how he built a profitable empire. 

The short version is something like this:

To achieve success, Frank focused on offering lower rental rates than his competitors. The low rents appealed to potential tenants, and as a result he maintained full occupancy in his parks. The result? His $400,000 initial investment turned into a $1.5 million sale.

Let’s look at two types of mobile home investors. 

Owner type 1 owns:

In this type of ownership, the tenant owns the home and pays rent for the land plus the use of amenities. 

Owner type 2 owns: 

In this type of ownership, the tenant pays rent for the trailer and the land it’s on.

4 Things You Should Know About Mobile Home Investing

Now that we’ve covered the reasons you should consider investing in trailer parks, you’re ready to take the next step. But first ...Here are the four major things to know about mobile home investing before you take the big dive:

#1 Mobile home investing is a largely untapped resource. That’s why there’s huge opportunity here.

#2 Because this asset class has a proven track record, favorable financing options are available. That makes getting started easy.

#3 Section 8 vouchers to purchase a mobile home are driving demand for affordable housing. 

#4 Market cap rate compression means investors are seeing a solid return on investments—and will continue to do so for the foreseeable future.

Mobile homes are going to be in higher demand as economic uncertainty and a lack of traditional affordable housing lead people to look for affordable housing. So it may be the right time to make the leap. 

 

Do Canadians Need An E-2 Visa To Invest In The United States?

If you're a Canadian citizen interested in investing in property or other business ventures in the U.S., an E-2 visa is not the only way you can do so. However, there are advantages to obtaining an E-2 visa if you can qualify. 

The E-2 visa allows people from other countries (including Canada), to enter legally if they are investing substantial capital into the U.S. economy. For Canadian investors who can meet specific qualifications, the E-2 visa has many benefits, including allowing them to freely travel between countries without restrictions on the length or frequency of trips. 

e-2 visa: simpsons border crossingWhat Is A Treaty Investor (E-2) Visa?

An E-2 treaty investor visa enables citizens of countries with which the United States maintains treaties of commerce to buy or start businesses in the U.S. For Canadians, an E-2 visa will be valid for five years and can be renewed for as long as the business remains in operation.

So Do I Have To Move To The U.S.?

So you’re a Canadian who wants to get in on the super-hot U.S. real estate market. Does that mean you have to move to the States?

No way! Getting a treaty investor visa does not require you to move to the U.S.! You can remain a Canadian taxpayer and resident while managing your business. Getting an E-2 visa is more about giving you options and simplifying business travel to and from the U.S.

canadian investment storyHow Do I Qualify For An E-2 Visa?

For you to qualify for an E-2 visa as a Canadian citizen, you must have “invested” a “substantial amount of capital” in a “bona fide enterprise” in the United States or be actively in the process of making such an investment. 

*All of the terms in quotes have a special legal meaning in immigration law, so we’ll define and discuss each of them below. 

You also must show that you are only seeking to enter the U.S. to develop and direct the business by proving you own at least 50% of the enterprise or have operational control over the business.

“Invested”

In this context, the term “invested” is defined as placing capital, such as funds or other assets, “at risk” with the goal of earning profit. This means that the capital must already be subject to partial or total loss if the enterprise fails. You can’t qualify for an E-2 if you have only planned to make an investment; you must have already done it. 

great white north“Substantial Amount Of Capital”

The law does not set a specific monetary threshold that must be met for your investment to qualify as a “substantial amount of capital.” Instead, it establishes guidelines that look at the proportionality of your investment compared to the entire cost of establishing or purchasing and operating the business. Your investment must also be of a sufficient amount to prove your financial commitment to the business’s success. 

“Bona Fide Enterprise”

A “bona fide enterprise” is defined as a real, active, and operating business that produces services or goods for profit. The condition that businesses be “active” is often the trickiest part for real estate investors. Ordinary buy-and-hold real estate investing won’t meet the qualifications for an E-2 visa, and a simple real estate flipping business probably won’t either. Investment plans involving managing multiple rental properties or consistently buying, selling, renovating, and renting properties are more likely to satisfy this requirement.

Justin Trudeau invests in American Real Estate? Shouldn't you? Just kidding ... we have no idea if he does or notHow Do I Know If I Should Get An E-2 Visa?

So to sum things up, Canadians don’t need an E-2 visa to invest in the U.S., but it can be a valuable thing to have if you plan on running an active real estate investment business in the States. However, it will not be a feasible option if you just want to passively invest in U.S. real estate. 

If you want to know the best course of action for your situation, ask a real estate investment attorney for their advice. Even if an E-2 visa does not work for your investment business, there are other options you can pursue that better meet your needs. An experienced professional can help you make the right decision for your investment plan.

You may also be interested in the following resources:

Why You Should Know Your Property’s Internal Rate of Return (IRR)

Internal rate of return (IRR) and return on investment (ROI) are two critical performance metrics for real estate investors.

But do you understand the difference?

They both offer ways of quantifying how well your investment is doing, but IRR is the one that is often under-appreciated and misunderstood. In this article, we’ll show you why overemphasizing ROI and ignoring IRR is a serious mistake if you’re a sophisticated real estate investor.

We’ll tell you what IRR is and how it differs from ROI, how to calculate it, and what it does (and doesn’t) tell you about your rental property.

Internal Rate of Return: IRR: bored baby gifWhat is IRR / Internal Rate of Return?

Let’s get this out of the way: IRR sounds boring. 

It sounds like one of those metrics that online real estate gurus dug up from some decades-old finance textbook so that they could sell courses.

It sounds like something you don’t actually need to know to make money in real estate, even though it might come in handy every once in a while.

To be honest, by and large, those guesses are not too far from the truth.

But rest assured you can use IRR for every rental property you’re thinking about investing in. Its utility as a key metric in real estate investing is massively underrated, and you can use it to show your friends and colleagues that not all investments are as good as they appear.

Two Things to Know About IRR

The first—and arguably most important—thing to know about IRR is that it takes the time value of money into account. The time value of money, or TMV, is a popular and widely accepted notion in finance that a dollar today is worth more than a dollar tomorrow.

Most economists and financial advisors believe that this is true for a myriad of reasons: every day inflation eats away at the purchasing power of your money, you could miss out on certain opportunities if you don’t have any cash on hand, you can’t cover emergency expenses without reserves (and borrowing that money could incur massive interest over time), among others.

However, when you use IRR to measure your investment, it takes this enormously important factor into account by setting the net present value to zero. This way, later distributions carry less weight.

Also, IRR is an annualized figure, which means it measures year-over-year performance. In the next section on the difference between IRR and ROI, we’ll show you an example of how ROI can mislead investors into believing that an investment performed better than it really did.

As a quick recap:

Internal Rate of Return: IRR: tennis playerHow Does IRR Differ from ROI?

If one of your friends told you that he earned a 170% ROI upon the sale of his investment property, your first inclination would be to think, “That’s a great investment,” right? 

What if you learned that he bought the rental property in 1990 and sold it in 2020?

Not as great sounding, now, is it?

Over the course of 30 years, that 170% return isn't as impressive as it sounded at first. Assuming he actually factored his maintenance, taxes, and closing costs into account, your friend fell short of beating even the most basic and easily accessible stock market index. In that same 30-year period, the S&P 500 delivered an 864% ROI (with dividends reinvested: 1692%). He underperformed ten-fold.

However, if he bought the property in 2019 and sold it in 2020, anyone would be in awe of those 170% returns.

Exact same ROI, totally different investment performance. Why? Because ROI doesn’t take time into account. That’s one of the key ways in which IRR differs from ROI. You can use IRR to compare your investment properties to the expected returns of other assets you might be interested in buying, like REITs, ETFs, commodities, and more. You can’t do that with ROI (at least not to the same extent.

Internal Rate of Return: IRR: money spiralHow to Calculate IRR

Before Excel spreadsheets and financial calculators, IRR wasn’t very popular. The formula isn’t easily understood, so we recommend you simply plug the numbers into an existing online IRR calculator.

With that said, we’re going to give you a quick overview of what IRR might look like for an average $300,000 rental property that you plan on owning for 10 years before you sell. To make things easy, we’ll assume you buy it in cash.

Let’s say it’s a duplex and each side rents for about $800 and increases to $1000 over your timeframe.

Initial Investment: $300,000

Then, you earned $100k after selling your rental property for $400k. All in all, you earned $311,200. That’s more than a 200% ROI. Your IRR ends up being 9.09%.

You can play around with the numbers above to see how IRR accounts not only for how much money you earn but also when you earn that money. If for some reason, you expected to charge higher rent for the first few years and lower rent for the last few years, the metric would drastically change to reflect that.

Internal Rate of Return: IRR: tennis player womanConclusion: Why You Should Know Your Property’s Internal Rate of Return

A property’s IRR is important because it takes into account the time value of money in an annualized way. A 200% ROI sounds good until you learn it took place over the course of 40 years, and there are tons of other investments that would’ve outperformed it by a mile.

By calculating your rental property’s IRR (or its assumed IRR), you can accurately compare the investment to those in other asset classes, like commodities or ETFs.

 

‘Subject-To’ Mortgage Investing: Buying Homes in the Post-COVID Market

“Subject-To” mortgages are going to be a defining feature of the post-COVID real estate market, and here’s why…

As of April, roughly 2.5 million homes are in forbearance, according to the Mortgage Bankers Association. That means that they’ve entered an agreement with their lender to delay foreclosure.

Due to restrictions set up during COVID to limit the spread of the virus, lenders couldn’t officially evict homeowners who weren’t paying down their mortgages. With those restrictions being lifted, lenders are going to start to foreclose on the homes that are in forbearance.

That means many people are looking to get out from underneath their mortgages, and that means that the housing market might experience a boom in the supply of certain properties.

For the savvy investor, this is the opportunity of a lifetime.

subject to mortgage: give me your mortgage

Give me your mortgage ...

What is a ‘Subject-To?’ How Will It Affect the Market?

"Subject-To" is a way of purchasing real estate where the real estate investor takes title to the property but the existing loan stays in the name of the seller. In other words, their interest is “subject to” the existing financing. The investor now controls the property and makes the mortgage payments on the seller's existing mortgage.

If, for example, the seller locked in a $200k mortgage at a 3.8% interest rate, instead of getting another lender to come up with a new loan (and therefore racking up a bunch of costs associated with that process, including inspection, appraisal, broker fees, etc), the investor just pays the ~$1150 mortgage and the home is theirs.

So here's the Cliff Notes version:

How Do You Find ‘Subject-To’s?’ Why Do You Want Them?

What makes subject-to mortgage investing so great? There are a few reasons…

#1 You Never Have to Qualify

"Subject-To" is a great way to build a portfolio. The loans are not in your name and you never have to qualify. The seller already qualified for the loan; all you’re doing is making their payments and putting your name on the title.

In order to qualify for a conventional loan, you have to provide proof of income, a solid credit score, a low debt-to-income ratio, and more. However, when you’re buying properties “subject-to,” those same requirements don’t exist. This makes it that much easier to rack up a bunch of rental properties.

subject to mortgage: cat reading book#2 Lower Fees

Fees can completely ruin a real estate transaction. A 3% broker fee every time you buy and sell real estate can kill many deals—even if there are potentially tens of thousands of dollars to be made. If it all ends up going into the realtor’s pocket (and their brokerage’s pockets), then what’s the point?

When you take over an existing mortgage, though, you don’t have to worry about brokerage fees, along with many others. You can become exposed to the real estate market in a low-cost way, completely changing the dynamics of the deal.

Even if the seller has a backlog of three months of missed mortgage payments, it’s a drop in the bucket compared to the costs that are typically associated with buying a home in the first place. 

#3 Easier to Rack Up a Portfolio with Little Money Down

This ties in with both of the points that we made above, but it’s a big one: when you don’t have to qualify (and re-qualify) for mortgages and you can avoid closing costs (along with many other fees), it becomes much easier to rack up a decently sized portfolio with less money.

Furthermore, many people who qualified for these mortgages simply suffered some form of financial hardship at the worst possible time: a once-in-a-century global pandemic. The loans don’t always have poor interest rates and the sellers were sometimes able to put down a sizable amount of cash for the down payment.

So, there are good mortgages out there just waiting for someone else to take them over. And, finally, that brings us to our last point:

#4 Unprecedented Opportunity

During the 2008 meltdown, roughly twice as many homes were in forbearance, so why is the COVID-19 pandemic any different? How could it possibly be an “unprecedented” (admittedly an overused word these past couple of years) opportunity? 

Unlike today, in 2008, many average investors didn’t know that a possible crash was looming. With the pandemic being such a global and ever-present phenomenon over the past year and a half, we have hard data on exactly how many people aren’t paying down their loans and we have a rough idea of when the restrictions might be lifted.

In this case, though, there’s time to prepare for the surge of these types of properties. Sure, they’ll be in demand—but there will also be an incredible supply.

subject to mortgage: owl faceConclusion: ‘Subject-To’ Mortgage Investing: Buying Homes in the Post-COVID Market

A record number of homes are in forbearance. According to the Mortgage Bankers Association, it’s about 2.5 million. With COVID restrictions being lifted across the US, lenders are going to start cracking down on those mortgages, which means many people will be looking for a way out.

Savvy real estate investors can offer them a way out: through “subject-to” mortgage investing. The investor will add his name to the title and make mortgage payments in place of the seller. It can be a great way for the investor to make a low-fee deal and for the seller to get out from underneath a mortgage that he or she can no longer afford.

Scott Smith's Advice For Canadians Investing in U.S. Real Estate

How will you accomplish financial freedom through real estate investing? 

Start by thinking where in the U.S. you’ll be investing, what type of asset you want to hold, and how you’ll form the relationships you need to make foreign investments.

Once you’re ready to make your first real estate investment in the U.S. the question is: Where should you look? Real estate markets are constantly changing, but Scott Smith, head attorney at Royal Legal Solutions, has a few tips especially for Canadian investors. Scott gave this tips on a recent appearance on the The REITE (Real Estate Investing Training and Education) Club podcast, which you can check out below.

In a hurry? Keep reading to get the high-level overview of everything covered on the show ...

Scott has all the answers!Where Should Canadians Invest In the U.S.?

Canadians looking for a good deal in real estate should keep a few specifics in mind. What kind of investment makes sense to you?

Our last article had lots of tips for Canadian real estate investors (go check it out if you haven’t already), but we’d like to look a little more at the “location, location, location” aspect in this article.

“I’m hot on the Midwest now, inside the Rust Belt,” Scott says. “I’m liking some of the deals I’m seeing in Florida. And Tennessee has some interesting deals coming through, as well as San Antonio in Texas. This is where I’m seeing people buy those single-family homes, or one to four-unit properties. Those are the areas where people are buying $90,000-150,000 properties and can scale from there. 

“I talk a lot about those properties because that’s where you get really great financing instead of personal financing. For most Canadian investors, that’s where you’re going to start.”

If you’re investing in an area that you don’t know anything about and can’t even visit, you are building more risk into the proposition. If you CAN scope out the property in questions, do your due diligence. Walk the neighborhood or ride a bike—you’ll see a lot more than you will just driving around the block. Get a feel for the neighborhood. 

What Tenants Do You Want To Rent To?

Research will give you insight into what kind of tenants you can expect to attract. For example, you should research the income range for your neighborhood. Government agencies have a lot of this economic data available for the taking.

“There are some key things you want to stay on top of regarding what makes a good deal in the U.S.,” Scott says. “You want the median income for the area to be above $40,000 per year. Look for job stability and job security as well. That’s why I like investing where the employers are the government, big corporations and universities.”

What about crime statistics? A lot of Canadian investors think about crime in the areas where they are considering an investment. But Scott says you shouldn’t focus on it too much.

“Almost invariably in the U.S., crime follows job stability and economic depression. So as long as wages are high enough, and we have job stability, crime won’t be a factor for you. I don’t even pay attention to crime reports at all, really. They don’t give you the best source of information for an area.”

What Prices Should Canadian Investors Expect To Pay?

Scott says you shouldn’t necessarily let high prices scare you away. It’s important to watch the macroeconomic trends of a given area or market. That’s more important than historic information based on what people think the prices “should be.” As long as an area has long-term population growth, big price tags shouldn’t frighten the investor away.

“If I have a lot of people moving into a city over time, I am not so price sensitive. I know the demand will push prices up over time. This is exactly what happened in Austin. Four or five years ago in Austin, nobody wanted to buy property at $200 per square foot, because just a few years earlier it was $150 per square foot. That was insane, we thought. But the demand to move to Austin and the tech industry there was so strong, now it’s $400 per square foot.”

canadian investor - patriotic usa image

Buying and Financing Real Estate

You may acquire property directly in the name of the Limited Partnership. However, some of Scott’s Canadian clients get better financing rates when they purchase property in their personal name first. It just takes a Land Trust to do it right.

The Land Trust will let you own the property anonymously. It also allows us to avoid something called the due on sale clause.

“This means you can actually buy the asset in your personal name, then transfer it into the Land Trust,” Scott says.

Next, you’ll create a warranty deed to transfer the asset into the Land Trust so it's now held by the Limited Partnership. This is a huge cost saving measure for Canadian investors.

No matter what type of financing or what type of asset you’re working with, the Limited Partnership/Land Trust structure lets you hold that asset anonymously, in a way that's protected. You're also going to be able to always be able to take advantage of the best possible financing and have the best possible tax advantages.

what types of properties should you invest in?How To Get Started With Your 'US Team'

You’re a first-time Canadian investor in the U.S. It may be tough to know where to start, especially if you can’t fly out to a property and visit it in person. 

Royal Legal gives you access to a network of coaching, preferred vendors, and connections to people who can help you with your U.S. investments. In addition, you'll have access to other investors and to turnkey professionals, including tax and accounting specialists who are used to working with Canadians. 

When you partner with Royal Legal Solutions, you will have some of the industry’s finest attorneys and CPAs on your personal real estate dream team. We’ll help you break down the numbers you need to hit to reach financial freedom. 

We’ll even help you develop acquisition strategies. What do you see as your vision moving forward? Once you answer that question, you can set up the appropriate legal structures to get lending, estate planning, and all the other components needed to put your plan in place.

What’s your target ROI? Let’s analyze your full capital stack. What’s your target return over time to hit your retirement goals? Start with our investor quiz and we’ll help you. A coach will help you clarify your situation. Goals and tactics from books and websites are great, but you need to know something beyond “I want to invest in apartment complexes.”

It may take a couple of sessions to get all the numbers, but knowing the answers to these questions can help you know exactly what kind of ROI you need to hit your goals. From there, you'll work backward, using your current income to pinpoint the asset classes you should be targeting.

 

 

 

8 Tips For Canadians Investing In U.S. Real Estate 

Are you a Canadian investor with an eye on the red-hot U.S. real estate markets? 

If you are, break out the Tylenol, because complicated legal and tax issues can give you a headache before you’ve even started!

Our lead attorney, Scott Smith, recently met with Canadian real estate investing coach David Dubeau to discuss the issues Canadian investors face when investing in the land of the Yanks. Scott has a lot of advice in another article, [[LINK]]] but in this article we’re going to look at the “investment checklist” Lauren A. Cohen introduced during the meeting.

You can check out the talk between Lauren, Scott and David below, or keep reading to get a free download of Lauren’s Eight Steps to Successful Real Estate Investment Across Borders.

Lauren’s Investment Checklist

Lauren’s checklist is designed to ensure success when you're investing across borders. These elements are interconnected. That means you shouldn’t focus on one and ignore the others. 

Here are her tips for Canadian investors looking to make a play in the U.S.

Tip #1 Study The Local Market

Real estate is always about “location, location, location,” right? You’ve heard that one a million times, as have we all. But you need to truly understand the reasons to select a particular location over another.

Where in the U.S. should you invest? Are you looking at one city or region or multiple areas? Why?

Just as in Canada, there are hot areas and not-so-hot areas. You’ll need to look into state and city tax and zoning considerations before making your play.

Your coach/mentor (see the last tip) will help you find your way so you don’t waste time looking at properties in areas where you’re likely to fail.

Need tax help? See our article How Are Canadians Taxed If They Invest Or Do Business in The United States.

Tip #2 Define Your Investing Goals

Lay out your goals in the beginning. Where do you want to be in three months? What about in three years?

If your short-term goals do not match your long-term goals or if you don't consider your long-term goals at the beginning of your journey, you're going to end up in a world of hurt.

Here’s an example of what we mean: If you invest in your personal name because you found a good deal and want to act fast, you may very well realize down the road that you should have set up the appropriate asset protection structures first (often a limited partnership for Canadian investors). Then you may have to go back to square one and fix everything. 

A failure to plan is a plan to fail!

what types of properties should you invest in?Tip  #3 Know Which Property Types To Target

What types of properties should a Canadian investor look at and why? 

You have a lot of options to consider: Vacant lots. Residential. Multifamily. Commercial. Industrial. Mobile Homes. Retail. Real Estate Investment Trusts (REITS). All of these could potentially qualify you for immigration status (though REITS have to be set up very carefully to qualify).

Refer back to your short and long-term goals. Here again, your coach should be able to offer guidance, as there aren’t really any one-size-fits-all solutions.

“As soon as you're investing in multi-family properties with five or more units, you could be ready to invest in a commercial building, and commercial financing is a little easier to come by because it's not only based on your credit score,” Lauren says.

“In the U.S., unlike in Canada, your credit score dictates everything. It’s like the be-all and end-all. And when you're dealing with a commercial property it's also based on the returns on that property. You're going to show tax returns—kind of like buying a business. So it's all about how creative you can be when it comes to financing.”

Tip #4 Choose the Right Legal Entity

Do you need an LLC, a corporation, or a partnership? 

“From a pure asset protection standpoint, it doesn't matter what's happening on the Canadian side of things,” Scott says. “So if you already have a Canadian tax treatment that you like, the Limited Partnership structure is going to be the right structure on the U.S. side of things for you to then channel into whatever Canadian asset holding company you have.”

#5 Decide Whether To Invest Alone Or With Partners

A lot of Canadians like to joint venture with other Canadians who already have properties in the U.S.—especially if their partners already have access to financing. 

Maybe you want to create a real estate fund. Maybe you already have partners that want to invest with you. You may need to bring in a securities attorney, but there is a way forward that is right for you. 

Can’t find the way forward? Then you need to … wait for it … Discuss your needs with your mentor. You may also visit DavidDubeau.com if you need help finding other capital sources. 

#6 Learn How To Purchase Properties in the U.S.

Canadian investors can apply for a mortgage with an American bank or with Canadian financial institutions with operations in the U.S. You’ll probably have to show your passport, international credit report, employment history, residency verification, tax submissions, and proof of down payment.

Generally, dealing directly with Canadian banks means better mortgage rates. Think about it: Canadian lenders are naturally more comfortable lending to Canadians. A Canadian bank with U.S. operations will often approve your financing quickly and relatively painlessly. These would include Royal Bank of Canada (RBC) and Bank of Montreal (BMO).

What about your investing strategy? There are a lot of different strategies: the BRRRR Method, flipping, the buy and hold method, wholesaling … Some of these qualify for visas and some of them don't. Again, that's why your short and long-term goals are so important. Do you want to buy properties outright? Do you want to buy them “subject to”?

Side note: Everybody wants to buy “subject to" mortgages and they're going to be available in a big way in the next year. Why? Because forbearance is going to come due. Forbearance was implemented in the U.S. so mortgage holders could flip payments to the back end of their payment schedule. Any COVID-related pause on mortgage payments is ending and some property owners are simply not going to be able to pay their mortgages.

#7 Know The Immigration Considerations

Do you need a visa to invest in the U.S.? Does getting one mean you have to spend a lot of time in the U.S.?

Getting a visa is often about giving you options. Just because you get a visa does not mean you have to move to the U.S.! 

That's why Lauren loves Treaty Investor (E-2) visas, which are for citizens of countries with which the United States maintains treaties of commerce.

The Treaty Investor visa is based on a substantial investment in a non-marginal business. It gives you, the private investor, the flexibility you need. With this visa you're never going to have a problem coming and going across the border. 

But again, you don't have to move. You can remain a Canadian taxpayer and resident. Or you can be a resident of another country and stay in the U.S. on an E-2 visa from Canada.

You have to have an “active” business to qualify for a visa. You have to figure out how to turn what's usually considered a passive investment (real estate investing) into an active business.

You need to be at least 50 percent owner in the company making the investments.  You have to show that you have boots on the ground if all you're doing is becoming an equity partner in the company.

tips for investing: download

See below to get your free copy

#8 Partner With Professionals (And Find A Mentor!)

Lauren says her favorite words are, “Stay in your lane.” 

Don’t try to play realtor, lawyer and accountant. Put together a team that can guide you, help with due diligence, analyze the price comparisons, and perform deal analysis. It's important when you're working with people on cross-border deals that it's not their first rodeo. 

You may be an experienced real estate investor, but it’s important that you (and your tax and legal advisors) know the differences. Dealing with Americans is different than dealing with Canadians. Not getting the right advice is going to end up costing you more than you will pay to get the guidance you need.

Make sure your team members are vetted and reliable. You need to think about immigration and securities. You need Canadian counsel to make sure that your estate in Canada is protected. Someone will have to help you with taxes on the CRA side and the IRS side.

This can be overwhelming if you don’t have help. That’s why you need a coach.You need somebody that understands everything on both sides of the border. You need somebody that has been down this path, someone who can guide you. Otherwise you’ll invest haphazardly and without a strategy.

Start with our investor quiz and we’ll help you put together the right team for your goals—a team that will evolve as your needs change.

“Without a professional team, investors will get set up right for what's going on at a specific time and point in their life. They don’t think that anything might change ... because they don't know what triggers different considerations,” Scott says. 

“If you have a limited budget, that's fine. Just budget out an hour per quarter to meet with your team. It will only cost a few hundred dollars or whatever the case may be, and it is going to potentially save you tens of thousands of dollars.”

In other words, as Scott says, you should avoid tripping over pennies on your way to dollars and you’ll be set up for long-term success.

Get Lauren’s Guide

Before you get a coach, you can get a guide. This article is a very basic overview of Lauren's popular guide called Eight Steps to Successful Real Estate Investment

Across Borders. It will help you figure out your next step. 

It’s a $47 value, but if you use the special code for Royal Legal Solutions readers, you get it for free. The code is REI4FREE.

About Lauren

Lauren, originally from Toronto, is founder and president of e-Council Global and is a cross-border strategist experienced in both law and real estate. She hosts a podcast, Investing Across Borders and works with us to help Canadians looking to invest in U.S. real estate. 

 

 

 

 

Selling Real Estate 'As Is': Guide For Investors

What are the benefits of selling real estate “as-is”?

If you’re a real estate investor, you need to know what “as-is,” means. Having an “as-is” clause in a real estate contract could potentially save you from many litigation issues down the line. What are the benefits of this type of real estate deal? What are the drawbacks?

In this article, we’ll go over all of that and more, including:

selling real estate as is buster keatonWhat Does It Mean When a Property is Sold As-Is?

If you’ve ever shopped for homes online, chances are you’ve run into a property description that included the phrase “as-is.” Chances are that the house was significantly cheaper than the other houses in the area. Why is that? What does it mean when the owner is selling the property “as-is?”

Selling real estate "as-is" means that it’s being sold in its present condition, without any stipulations that the seller fix this or that. It doesn’t matter if the roof is caving in and the water isn’t running. As long as the seller follows the disclosure laws in his or her respective state, he or she doesn’t have to make any repairs to the home to get it in livable condition. It comes exactly as you see it, or “as-is.”

Here are some quick things you should know about buying and selling real estate as-is:

How does that differ from the traditional real estate sales process?

selling real estate as is old house

Selling Real Estate The Usual Way Goes Like This ...

Many traditional real estate contracts include inspection and appraisal contingencies. Since the deal isn’t 100% in cash, the bank wants to make sure it’s granting a loan on a reasonable investment. These contingencies can also give the buyer the right to back out of the contract if something unexpected pops up, or if the appraiser comes in at a value that’s higher than the sale price.

The biggest differences between selling real estate as-is and selling real estate on the retail market are:

Now that you have a general overview of what that means, let’s dive into who buys and sells these types of properties.

selling real estate as isWhy Would You Sell a House or Rental Property As-Is?

There are plenty of reasons why someone would sell a house or rental property as-is, but they all have one common denominator: they aren’t willing (and/or able) to make repairs to the property before closing.

With that said, here are some common reasons people sell properties as-is:

So, whether it’s through neglect, inheritance from a loved one, or some other reason, the seller doesn’t have the time, interest, or money to fix it up and list it to people who are looking to move in immediately.

Pros and Cons of Selling Real Estate As-Is

Let’s look at the pros and cons of selling real estate as-is.

Pros

Cons

What You Need to Know if You’re Buying or Selling Real Estate As-Is

If you’re an investor, what are the big takeaways from this article? If you’re selling real estate as-is, then you can avoid a slew of potential litigation issues, particularly in the case of rental property, and you can close deals at a much quicker pace. However, in exchange, you’re sacrificing a higher sales price. Houses that are sold in a more traditional manner might have more fees, but they also typically sell at higher prices.

 

 

 

 

 

 

Photo by Webdexter Apeldoorn from Pexels

 

What Is A Bump Clause In Real Estate?

When you are selling real estate, you want to get the best possible price. 

Duh.

In a red-hot seller’s market, that’s usually not a problem. But what about when the market starts to cool down?

A bump clause is a way a seller can continue to market a property until the buyer satisfies a specific contingency, such as selling their current house first. With this type of transaction, a seller can “bump” the original buyer if a better offer comes in.

In this article, we’ll examine how a bump clause works and its advantages for both buyers and sellers.

bump clause mario

How a Bump Clause Works

Unless it is their first home, most buyers need to sell their current home before purchasing a new one. In these cases, the buyer makes an offer with a contingency that they sell the other home first.

If the seller accepts the bid and enters into a contract without a bump clause, the seller has to take the home off the market. No other bids will be accepted during the contingency period. A typical contingency period typically lasts between 30 and 60 days.

With a bump clause, however, the home remains on the market. If another buyer makes a better offer, the seller must notify the original buyer. Then that buyer has only a few days to waive their contingency or increase their offer.

Otherwise, the original contract becomes void. The seller returns the earnest money to the original buyer and proceeds with the new offer.

bump clause in real estateWhat’s the best timing for a bump clause?

In a hot real estate market, homes often sell without contingencies. For example, in the pandemic-fueled housing market of 2020 and 2021, many homes across the country sold above their asking prices with no contingencies other than the home inspection.

However, hot markets eventually start to cool down. Bump clauses allow sellers to accept an offer that may be below their expectations along with a way out if a better deal comes along.

On the other hand, a buyer can present an offer with bump clauses as a way to encourage a seller to accept a bid with a contingency.

Typically there are two different time frames for real estate bump clauses: the 72-hour bump clause and the 48-hour bump clause. Sellers and their agents use the set time periods as a negotiating tool to encourage buyers to act quickly.

The 72-hour bump clause. With this clause, the seller will keep the property on the market, providing the original buyer with a 72-hour first-right-of-refusal notice if a better offer comes in.

The 48-hour bump clause. This clause allows the original buyer a period of 48 hours to waive the contingency or increase their bid on the property.

If the buyer does not meet the time frame stated on the contract, the seller is free to move on to a second offer.

Interested in learning more? Check out our article Real Estate Contingency Clause Examples: How Buyers Avoid Getting Burned.

bump clause two guys fistbumping

Other bump clause terminology you need to know

Here are some other terms you need to know when dealing with bump clauses in real estate transactions.

The no-bump bump offer -- A no-bump contract is just like it sounds. If the seller accepts an agreement with this wording, they cannot back out if a better offer comes along. The seller must take the home off the market and proceed with the sale.

The active offer with bump – This wording on a property listing means that the seller has accepted an offer and has the right to accept another offer.

CTG – You also might see the abbreviation “CTG” for “Contingent” in a property listing. This status means that the property is on the market until the seller learns that buyer has either waived or satisfied a contingency.

Advantages of bump clauses for sellers

Many real estate experts describe a bump clause as a kind of security blanket for home sellers. The main advantage of a bump clause is that it allows a seller to continue listing the home throughout the contingency period. The seller may get a cash offer or one without any contingencies.

However, in a cooling housing market, a better bid may not materialize. So, a bump clause protects the seller from losing out on a perfectly good offer. 

Advantages of bump clauses for buyers

Most home buyers cannot secure financing for a second home prior to selling their current one. But waiting to shop for a new home until your current one sells can be awkward at best. The bump clause is a good solution in a cool seller’s market.

Also, a bump clause may help convince a seller with an unrealistic home listing price to accept a reasonable offer.

Are there any downsides to bump clauses?

Sellers with bump clauses should be careful about jumping into a second “better” offer. After all, bigger isn’t always better. Ensure that the second buyer has good credit and mortgage pre-approval, or else you could be bumping a solid buyer for a less-qualified one.

Another potential problem is that some qualified buyers will stay away from contracts with bump clauses. They may prefer not to take the risk of getting bumped when their current home is about to sell.

It’s always a good idea to evaluate your local real estate market, weighing the pros and cons carefully before including a bump clause.

 

 

 

Photo by Andrey Storn on Unsplash

 

3 Things Landlords Should Do As The Eviction Moratorium Comes To An End

The national eviction moratorium is set to end this month.

Are you ready? Because when it does, courts will be flooded with evictions.

And if you know anything about bureaucracy, you know that clogged courts mean evictions will take much longer to process. Pending evictions will be backlogged. New evictions will be delayed as well.

We could be talking years, guys.

There will be billions of dollars' worth in back rent owed to landlords. It's a no-brainer to say this will impact investors. You have to decide whether to charge the full back rent immediately, offer payment plans, or forgive all or a portion.

Last September, the Center for Disease Control (CDC) issued the Eviction Moratorium, halting residential evictions in response to the coronavirus pandemic. Texas and other states have already stopped enforcing it, but the moratorium takes effect nationwide June 30.

Eviction MoratoriumThings Landlords Should Do As the Moratorium Comes To An End

Making A Plan

It's so important to make sure the right legal structure is in place now.  The Royal Legal Solutions team can help you with this process. Take our quiz to get started!

 

Image by lannyboy89 from Pixabay

How Are Canadians Taxed If They Invest Or Do Business in The United States?

A growing number of Canadians are getting into the U.S. real estate investment game.

According to the National Association of Realtors, Canadian buyers spent $9.5 billion on U.S. residential property purchases during the 12-month period between April 2019 and March 2020. This means that Canada only trails China in the worldwide rankings of foreign investments in U.S. real estate by country.

As more and more Canadians look to acquire U.S. properties, investors must keep in mind the tax implications of purchasing real estate in one country while living in another.

In this article, we’ll explain the ins and outs of how Canadians are taxed if they invest or do business in the States and how you can avoid double taxation. 

How Are Canadians Taxed If They Invest Or Do Business in The United States?

If You’re Canadian, Don’t Use A U.S. LLC

We usually recommend that our clients in the States use a Limited Liability Company (LLC) to manage their real estate investments. Not only do LLCs protect investors from personal liability, but they also offer tax advantages compared to a corporation, allowing owners to avoid double taxation on their business’ profits. 

Under U.S. law, corporations are taxed on their profits, and then employees and shareholders are taxed personally on the income they receive from the business. This means that every dollar the business makes is taxed twice. With LLCs, the business is not taxed separately. Instead, all of the business’s profits are reported as individual income of the LLC’s owners. This is known as pass-through or flow-through taxation.

Unfortunately, both single and multi-member U.S. LLCs are recognized as foreign corporations under Canadian tax law. So, if a Canadian invests through a U.S. LLC, the LLC distributions would be considered foreign income that is not subject to a Canadian dividend tax credit or a foreign tax credit. Rather, LLC income will be subjected to double taxation, eliminating the benefits of pass-through taxation that make LLCs ideal for investors in the states. 

U.S. LLLPs And LLPs Are No Longer The Go-To

For this reason, Canadian investors had traditionally relied on U.S. limited liability limited partnerships (LLLPs) and U.S. limited liability partnerships (LLPs) when investing in the States. Historically, these structures had been viewed as partnerships for Canadian tax purposes and therefore allowed investors to avoid double taxation.

However, in 2016, the Canada Revenue Agency (CRA) announced that going forward, U.S. LLLPs and LLPs would be classified as corporations rather than partnerships. This may mean double taxation for Canadian investors who manage their U.S. investments through LLLPs or LLPs. 

Limited Partnerships Are The Way To Go

Now that LLLPs and LLPs are treated as corporations, the ideal structure for Canadian investors is a U.S. Limited Partnership (LP) structure. Similar to how LLCs work for American investors, LP income is not taxed at the corporate level; it’s passed through and reported on its owners’ personal income tax returns.

Plus, LPs offer Canadian limited partners comparable personal liability protections to LLCs without the double taxation that comes with investing in a U.S. LLC. It’s a win-win!

Avoiding Double Taxation

As you can see, intercountry taxation issues can be messy and complicated. In order to enjoy the tax advantages available through U.S. LPs, Canadians must ensure that the required documentation is drafted and filed correctly. Mistakes could result in substantial tax penalties, forfeiting your liability protections, or even losing your right to do business in the U.S. 

For this reason, Canadians who are thinking about purchasing properties in the States should consult with a  U.S.-based business attorney with experience in real estate investments before making any purchases. A U.S. lawyer can help you minimize your taxes and maximize your profits.

 

 

 

 

 Image by Allange from Pixabay

Are You Ready For 2021's 'Real Estate Gold Rush'?

Have you heard about the real estate Gold Rush that's about to happen?

If not, let me fill you in. Even though the COVID-19 pandemic created a global economic recession, real estate values have skyrocketed. In fact, between September 2019 and September 2020, it’s estimated that property owners gained $1 trillion of equity in their homes due to the increased demand and low supply of available housing.

People Have Been Saving—Now They're Ready to Act

Not everyone spent their stimulus money. Look at all of the economic data and you'll see the savings rates are up. Part of the Gold Rush will come from money hitting the market from all of these pent-up savings. 

As Americans start to emerge from their COVID-19 hibernations, they are ready to spend the money they’ve saved during the pandemic. Stimulus checks and higher wages are also contributing to the desire to spend and start getting life back to normal. This means that people who were thinking about buying a house before the pandemic have decided to take the plunge, which means more demand and higher prices.

Are You Ready For 2021's "Real Estate Gold Rush"?Price Spikes Are Coming

The pandemic led to a sharp increase in remote work, with many high-paid employees working from home for the first time. As people started spending more time at home, many started to desire more space. Many of the benefits of living in an urban environment (such as proximity to restaurants and cultural venues) became moot during COVID closures. Families swarmed the suburbs for the extra square footage, driving the housing demand in these areas even higher.

As COVID vaccines roll out, people are going back to work. Daily life is looking a little more like it used to. Once people start to see this they will start to feel more secure.

Security means they're going to start spending money. When that happens it's going to cause asset prices to spike. Count on it.

Fill out my quick quiz so I can help you on your path to financial freedom. Someone on my advisory team will contact you to find out what you want to achieve and how we can help you get to that next step in building your own Freedom Temple.

Home Values Will See Massive Increases

I'm calling this a "Real Estate Gold Rush" because you can take on a ton of debt right now to finance a single-family home or other property. The value of your investment will increase dramatically once the money starts to flood into the market. You'll get the appreciation and all of the debt will be easy to pay off because (thanks to inflation) you can pay off your debt with cheaper dollars.

In fact, housing prices are already shooting up. Between November 2019 and November 2020, housing prices rose 9.5%. The average home value at the end of 2019 was $245K; by 2021, that number had risen to $266K. That’s a lot of extra Ks in a very short time, and prices will continue to rise as demand increases. 

Rents Are Going Up

As the housing market becomes more competitive, prospective homebuyers may choose to rent instead. Given the overall housing shortage across the country, as the demand for rental properties increases, market rents will also rise.

Since people are getting back to work and the economy is revving up, rents are going to get higher. You can leverage a bank loan to finance a property, you get all the appreciation AND you're practically guaranteed more rental income in the near future.

GOLD RUSH! This is the time to buy as many rental properties as you can. 

This Is a Gold Rush, Not a Real Estate Bubble 

Let me guess. You have heard this unprecedented rise in prices called a "real estate bubble," right? In reality, it's absolutely not a bubble.  It's a new reality—a new baseline—the new normal.

Don't believe me? The professional investor communities at the highest level are leveraging all of their assets to the tilt to buy as many assets as they possibly can because they know the Gold Rush is going to keep going at this rate or an accelerated rate for at least the next year or two years. 

Right now most real estate investors are wondering "What should I do to get there as soon as possible?" Now is the time to buy, but if you’re unsure of what steps you should take, consulting with a real estate investment attorney should be your first step.

Partnering with an experienced professional can help you ensure that you don’t miss out on the 2021 Real Estate Gold Rush. 

 

 

 

Photo by Jingming Pan on Unsplash

Diversifying Your Real Estate Investments: How Important Is It?

Any experienced investor knows that diversifying real estate investments is key to long-term success.

Many real estate investors get started with single-family homes (SFH) because the market is more accessible than commercial real estate or multi-family properties. This is a natural first step, but it shouldn’t be the last.

Expanding your portfolio to include different asset types lowers your overall risk. 

Not only should you buy different assets, but also spread those investments out across different markets. Any number of factors could wipe out home or real estate values in an area -- and you want to guard against that volatility as much as you possibly can.

However, diversifying beyond single-family homes will not guarantee profits -- nor will it fully ensure you won’t have losses. But for high-net-worth investors, it’s definitely the best route to take. 

In this article, we explain why.

The Benefits of Investing in Single-Family Homes (SFHs)

First, there are a variety of benefits to investing in single-family homes versus multi-family homes and other properties:

All in all, these points fall under the same general category: Easier accessibility. It’s simply easier to get started with a SFH than any other real estate asset type. That’s why so many real estate investors begin with SFHs.

As with any investing approach, it’s smart to start small and work your way to bigger properties. Buying one SFH is less daunting for new real estate investors than buying a multi-family property. After all, taking care of one tenant (or one family) is much easier than taking care of two or more. 

series LLC investment

Most Royal Legal Solutions clients initially invest in SFHs and eventually branch out into industrial real estate, multi-family housing, retail, medical, and self-storage. Why? Because they begin to realize that all of their eggs shouldn’t be in one basket.

Different assets have different risk factors -- and sometimes, in real estate, different properties are complementary. If the demand for SFHs collapses and property values plummet across the nation, then the slack has to be picked up by apartment and multi-family properties (because people have to live somewhere, after all).

In addition to diversifying across asset types, it’s just as important to diversify across markets.

Locations, Locations, Locations: Don’t Get Tied Down in One Area

There are advantages to having your investment property near where you live. If anything goes wrong—say, your tenant gets locked out of the building or the power goes out—you can be there to offer hands-on assistance.

But spreading out your investments across different real estate markets is also important.

Concentrating your holdings in a particular city or area makes your entire portfolio subject to the fluctuations of local supply and demand. Even in the best areas, there are a number of factors that could seriously hurt real estate market values:

Even if you own a variety of real estate asset types in a single location, you still aren’t as diversified as you could be. If you lived and invested in New Orleans in 2005, it didn’t matter if you owned a single-family home, a condo, a four-plex, a self-storage facility, and a corner convenience store—Hurricane Katrina would’ve dealt a massive blow to your portfolio (unless you were amply insured and looking to cash out).

Experienced real estate investors avoid over-concentrating in one particular asset class or location. If, instead, your assets were spread out across the entire continental United States, your portfolio wouldn’t have been affected quite as much.

High-net-worth investors know that a real estate portfolio with a range of asset types, spread out across different locations, puts them in a better position to withstand economic downturns and events like the COVID-19 pandemic and natural disasters.

Why Different Asset Types are Key to Diversifying Your Investment Portfolio

Dwight Kay, founder of Kay Properties and Investments, a national 1031 exchange investment firm, outlined an example of how a hypothetical investor can diversify a $500,000 investment portfolio across commercial and multifamily real estate with the potential for income and appreciation. The funds would be equally spread among these assets:

Kay says this hypothetical investor “has diversified her portfolio by both asset type and geography.”

The hypothetical investor has also avoided highly cyclical and volatile markets, like senior housing and buildings involved in oil and gas production.

Conclusion: Diversifying Your Real Estate Investments

When it comes to real estate investing, it’s easiest to get started with a single-family home. The cost is lower, the financing options are plentiful, and the tenants typically care more about general upkeep than a multi-family or apartment building. Naturally, that’s where many investors start.

However, as time goes on, it’s smart to diversify across different asset types. That includes:

Not only is it a good idea to invest in different asset types, it’s also a good idea to spread those investments out across different markets. A number of factors could wipe out real estate values in any given market, and they aren’t always within your control (nor are all of them easily insured against).

Avoid cyclical, highly volatile asset classes, including senior housing and long-term senior care facilities, hotels, and real estate used in the production of oil and gas.  

Focus on diversifying your portfolio by buying different assets in different markets. Don’t get too caught up in solely buyings single-family homes in one market. Remember: the demand could disappear in just a few short years.

 

 

 

 

Photo by Anete Lusina from Pexels

Renting To Tenants With Dogs: What Landlords Need To Know About Liability

We’ve all heard of horror stories about the dog owner who had to go to court because his/her dog bit a child at the park or snapped at the pizza delivery guy.

These cases can often elicit strong emotions. Dog lovers can empathize with the dog owner, whose otherwise gentle furry friend is maligned as a dangerous threat.

However, anyone who's seen an obviously untrained dog run wild as the irresponsible owner stands idly by can emphasize with the victim.

As a landlord, you may consider yourself the uninvolved bystander when a biting incident occurs. However, this is not always the case.

In this article, we’ll review your responsibilities as a landlord when it comes to renting to tenants with dogs. Our four legged friends can come with some unexpected liability issues, so read on.

Interested in learning more? Read Pet Ownership Laws & How They Can Bite You In The Assets.

renting to tenants with dogs: dog in teacupPower to Remove a Dangerous Dog

One of the most important things to keep in mind is that landlord liability is rare when it comes to incidents involving a tenant’s dog. You can read more about dog bite liability here. There are only two scenarios in which a landlord can be held accountable.

The first scenario is when a landlord has previous knowledge of a dangerous dog and also has the power to remove that dog. Both conditions should be met in order for the landlord to be held accountable. For instance, David is the new landlord of a building where the old owner, according to a one year lease agreement, allowed one tenant to own a dog. David knows of this dog’s history of biting both guest and other tenants. In this case, David wouldn’t be liable if a biting incident occurred because the dog’s owner had a prior agreement with the previous landlord.

Although David met the condition of knowing about the dangerous dog, he didn’t have the power to remove the dog. In this case, it’s still wise and responsible for David to manage the situation. He can attempt to remove the dog through eviction, request the dog be kept indoors or erect a fence to prevent further incidents.

Previous Knowledge of a Dangerous Dog

Knowledge of a dangerous dog isn’t as cut and dry as it seems. For instance, Ron who is the landlord of a property with a dog who barks and growls at everyone who passes by may have an intuition that the dog could be dangerous. The entire building and neighborhood may be irritated with this dog’s constant barking and mean demeanor. However, this doesn’t mean Ron has actual previous knowledge of the dog being a danger to others. The key word here is “actual knowledge.”

Actual knowledge means Ron knows of a past attack, such as a biting incident or threat made by the dog. Since determining what constitutes a threat can vary greatly depending on how individuals interpret a dog’s actions, it’s important to study past cases. Both Colorado and New York had cases where landlords were found liable for attacks because they ignored overwhelming evidence of potential danger by a dog. In the Colorado case, overwhelming evidence included a previous threat towards the landlord’s own grandchild.

what is a reverse mortgage dog wearing glassesHarboring a Dangerous Dog Can Lead to Liability

The second scenario in which a landlord can be held liable for an incident involving a tenant’s dog is if the landlord also harbored or carried out control over the dog beyond simply just renting out property to the dog’s owner. A good rule of thumb to remember here is that if a landlord in any way manages or cares for a dog, he/she will hold the same accountability as the dog’s owner.

Caring for the dog can include bathing, walking or feeding the dog. In a 2004 Wisconsin case, the courts ruled a landlord not liable for an attack involving his tenant’s dog. The dog was kept in an area adjacent to both the tenant’s and landlord’s dwellings. However, the landlord was not found to “harbor” the dog since he didn’t manage or otherwise care for the dog. He simply allowed the dog in the wooded area adjacent his residence.

Liability for Dog Attacks Off the Rental Property

Landlord liability for incidents that occur outside the landlord’s property can be as equally confusing and require a good asset protection lawyer. Based on past cases, landlords can be held liable for attacks that happen off property. Thus, if you know that a tenant’s dog poses a threat, don’t let it roam around freely and excuse it as the owner’s liability. A court might not agree and instead deem you as the landlord liable. Speak to the tenant about safeguarding his/her pet.

pit bull with kissesRental Property Liability Protection

As you can see, determining liability when it comes to incidents involving a tenant’s dog can be complicated. In general, it’s rare for courts to deem landlords liable. However, this doesn’t mean that landlords should take their chances. Rental property liability protection may not be the most exciting aspect of real estate investing, but it is a requirement.

While we can’t do a background check on every dog on your property, we can help you come up with a liability protection plan that can safeguard you against animal attack lawsuits and other often overlooked liabilities. Contact our experienced legal professionals today.

What Are Workout Agreements In Real Estate Investing?

Declining property values and the travel and business shut-downs during the pandemic have played havoc with the balance sheets of many real estate investors.

When faced with red ink, some individuals opt to liquidate their assets, while others prefer to negotiate with their creditors. One way to negotiate a debt obligation is with a workout agreement.

A workout agreement (also called a settlement agreement) is a contract made between you and a creditor that allows you to “work out” or renegotiate the terms of a loan. A real estate workout is not a repayment of a real estate secured loan nor a resolution achieved by way of a foreclosure. Instead, it is a negotiated settlement that establishes a new agreement between the two parties.

This article will explain the benefits of a workout agreement and what you need to know before entering into one.

workout agreements: No, not THAT kind of workout, you goofballWho needs a real estate workout agreement?

The idea behind a workout agreement is that it should be mutually beneficial to both parties. A borrower who is in default avoids foreclosure, and a lender gains a greater chance of recouping the loan principal and interest without having to foreclose. The lender also avoids the expenses of any debt recovery efforts.

Not every lender will agree to a workout agreement, and those who do can vary widely in the terms they accept. Typical workout agreements involve extending the terms of the loan or rescheduling the payments.

The right solution depends on the following factors:

Types of real estate workout agreements

Workout agreements can be used for any type of loan, with the exception of government-backed student loans. Here are some of the different types of real estate workout agreements.

Modification – Changing the terms of an existing mortgage (usually temporarily).

Deed change – Granting the deed to the creditor instead of a foreclosure

“Friendly” foreclosure – Selling the property back to the debtor (or another party) with a clean title after foreclosure.

Short sale –Selling the property to a third party in exchange for debt forgiveness.

Short refinance – Refinancing the property for a loan amount less than the original amount.

Repayment plan – Making a down-payment on the balance and promising to pay the balance over time.

Repurchase after foreclosure – Buying back the property after foreclosure.

Forbearance –Discontinuing legal action in exchange for the borrower’s promise to take action (such as listing the property with a real estate agent).

Conversion – Changing an amortizing loan to an interest-only loan

Preparing for a workout agreement

Both the borrower and the lender should carefully consider the terms of the agreement before signing a new loan document. Here are some factors to consider:

NotificationThe borrower should give the lender as much advance notice as possible of an inability to meet debt obligations. Most of the time, lenders are more likely to agree to a workout agreement if they have been notified of a possible default on the loan. Giving advance notice shows that the borrower is someone the lender can trust.

HonestyA lender is not obligated to amend the terms of a loan, so the borrower helps their case by being as flexible as possible in accepting terms set by the lender. However, it is in the lender’s best interest to help the borrower as much as possible.

Tax implicationsAlthough a workout agreement won’t damage a borrower’s credit score as much as a foreclosure, it will have a negative impact. Also, the IRS views any loan reduction or loan cancellation as taxable income. That means the borrower could end up owing more taxes for the year the workout agreement is signed.

Due diligenceBoth parties must perform due diligence on issues surrounding the troubled loan. A pre-workout agreement is an important step for discussing specific problems with the loan, the goals of a workout agreement, and the terms of the contract.

When a loan is in arrears, it’s a bad situation for both the borrower and the lender. Just as both parties have something to lose in a foreclosure, both have something to gain with a workout agreement. Working together on a mutually beneficial solution beats the alternative every time.

How Does A Reverse Mortgage Work?

Actor Tom Selleck (Magnum, P.I.) is the latest celebrity shilling for them on television.

Maybe you have an older family member or neighbor who has gotten a phone call from a financial institution offering them.

But what are reverse mortgages and how do they work?

If you are a senior homeowner with most of your net worth tied up in your home, these loans can sound pretty appealing. If you're a real estate investor, you may be wondering if you can use a reverse mortgage to your advantage.

In this article, we'll explain what a reverse mortgage is, the pros and cons this cashflow option can offer to some older Americans, and how you can decide if it's right for your financial strategy now or in the future.

what is a reverse mortgage hand holding coffeeWHAT IS A REVERSE MORTGAGE?

 A reverse mortgage is a type of federally insured loan available to Americans age 62 and over. It gets its name because it works in the opposite way as a standard home loan.

With a regular mortgage, the bank gives you a lump sum that you pay back with interest over a set period of time.

With a reverse mortgage, the lender makes payments to YOU based on the equity you have built in your home. You have the option of receiving monthly payments, a lump sum, a line of credit, or a combination of the different options.

 Over time, the amount you owe in interest and fees on the loan grows while your home equity declines. You retain the title to your home, and the balance isn't due until you or your heirs sell your home. 

WHO QUALIFIES FOR A REVERSE MORTGAGE?

Reverse mortgages are only available to a specific set of homeowners. In order to qualify for a reverse mortgage, you must: 

Reverse mortgage loan values may be influenced by the home's value, how much equity is in the house, and other factors. And older borrowers are eligible for greater total loan amounts because age directly correlates with limits. 

what is a reverse mortgage dog wearing glassesWHAT ARE THE ADVANTAGES OF A REVERSE MORTGAGE?

With life expectancy in the U.S. growing closer to 80 years, many Americans are outliving their personal retirement savings. As a result, they may be unprepared for the rising cost of living and the mounting medical expenses that often accompany aging.

Reverse mortgages are ideal for older homeowners who may not have much in the way of savings or investments but who have built up wealth in their homes. In other words, this type of loan allows you to turn an otherwise illiquid asset into a liquid asset without having to move out of your home.

Whether they're living with the results of an investment gone awry or the difficulties of a fixed income, any senior with cash flow issues may want to consider a reverse mortgage.

Here are some of the other attractive features of these home loans.

 FLEXIBLE LENDING OPTIONS

 This type of loan offers flexible disbursement options, meaning you can borrow only the amount you need. Investors may choose to accept the loan as a single lump sum, in monthly installments, or even as a line of credit. This amount of control the borrower has in this regard is greater than most loans.

 If your need is more about your long-term budget, try to put a number on what you need for, say, one year. This amount will help you and anyone helping with your financial planning determine what a conservative loan amount for you might be.

 MORE CASH ON HAND

 For some cash-strapped retirees, a reverse mortgage allows them to remain in their long-time homes without having to downsize. Some borrowers even use the proceeds of a reverse mortgage to pay off their existing home loan.

You can use the money from your reverse mortgage for any purpose, including:

 We'll discuss below why you'll need to account for reverse mortgages in your estate plan. However, if you just want to live out your golden years comfortably, you can do so and even plan to pay off your mortgage at the same time.

Lock In the Value Of Your Home

If we've learned anything about the economy in recent years, it's that anything can happen. If for whatever reason, the value of your home ends up being less than the amount owed on the reverse mortgage, you are protected. In practical terms, that means, if home prices fall in your area, you or your heirs won't have to worry about paying the balance. 

INTEREST LIMITS

 The reverse mortgage has an interesting set of rules regarding interest. On the plus side, you're not charged interest while you continue to live in the reverse-mortgaged home as your primary residence. Interest is also capped on the first $100,000 worth of debt.

NO TAX LIABILITY

 The IRS considers the funds you receive from a reverse mortgage as a loan advance rather than income. That distinction means the money is not taxed, unlike other retirement income from distributions from a 401(k) or an IRA.

what is a reverse mortgage chess setWHAT ARE THE DISADVANTAGES OF REVERSE MORTGAGES?

A reverse mortgage isn't for everyone. There are some risks to this type of loan that you should carefully consider.

Here are some of the potential downsides of taking out a reverse mortgage.

DECEPTIVE OR INFLEXIBLE TERMS

 Although we have come a long way since the unscrupulous practices by some lenders in the 1990s and early 2000s, not all reverse mortgage providers are ethical. Some will assume you won't do your due diligence and will take advantage of you.

 Carefully vet a financial company before considering a loan, and have someone you trust to read the fine print. This person could be a CPA, financial planner, family member working in the industry, or even another investor you know who's successfully used a reverse mortgage and knows what to look for in a loan agreement.

 You're examining the documents for any terms that the sales reps haven't disclosed. Any added terms should serve as red flags that you need to shop around with other lenders.

 Also, be on the lookout for inflexibilities. For instance, reverse mortgages are often challenging to refinance. Ask your salesperson about your refinancing options, and then be sure to see how these claims compare with the written agreement. Any time a salesperson's word vastly differs from a written offer, it may be time to walk away.

Here are some tips for avoiding reverse mortgage scams from the FBI and the U.S. Department of Housing and Urban Development (HUD):

 REVERSE MORTGAGES ARE NOT FREE

 Some of the unscrupulous ads of the past have promoted reverse mortgages as a means to get free access to your own money. These loans do have the following costs associated with them: 

You may have the option of rolling some or all of these fees into your loan balance, but, of course, if you choose to do that, you'll receive less money.

YOUR LOAN MAY BECOME YOUR FAMILY'S DEBT

If you fail to make an estate plan or somehow account for a way to pay your debt after your death, your reverse mortgage may be subject to probate. Probate can take time and cost money, and in the meantime, your heirs do not have access to your estate.

If you die with debt, the debt gets passed on, just like your assets and earnings do. You can offset this downside of a reverse mortgage in two ways:

Our suggestion is to take care of this critical detail immediately after seeking the loan. You may pay it off during your lifetime or pre-arrange for your estate to make payments. However, interest is likely to increase if you delay, and your beneficiaries must pay off the debt.

ASSETS ENCUMBERED BY DEBT CAN'T PASS TO HEIRS

Let's say you take out a substantial loan against your home's equity. If you pass away before making payment or fail to update your estate plan, your heirs may be unable to inherit the home until the loan is paid off in full. If you lack the funds in your estate, that could mean one less asset for your heirs. 

Also, it's important to remember that a reverse mortgage diminishes the equity you have in your home. By the time the loan needs to be paid off, there may much equity left for your heirs to inherit. 

Difficulty SECURING OTHER LOANS

A reverse mortgage is relatively easy to obtain if you meet the qualifications, but it doesn't necessarily "look good" to traditional hard lenders. Some seniors who take out reverse mortgages may find it difficult to secure additional lending elsewhere. This factor can be problematic for investors who rely on good terms to make their deals profitable. 

This type of loan also could limit your ability to qualify for other need-based government programs such as Medicaid or Supplemental Security Income (SSI).  

SHOULD YOU GET A REVERSE MORTGAGE?

If, after weighing the pros and cons of a reverse mortgage, you're still unsure if it is right for you, here are some factors to consider. A reverse mortgage could be a good option for you if:

As with taking on any form of debt, you should take your time deciding on a reverse mortgage. Although it is a relatively easy way to boost your cash flow in the short term, it could put your finances at risk down the road.

Make sure you fully understand the pros and cons of reverse mortgages and enlist the help of professionals to help you make the judgment call. Even a close network of fellow homeowners and savvy borrowers with experience in reverse mortgages can be a valuable source of information.

Learn everything you can about these financial tools, shop smart for a lender, read the written loan terms carefully, and be sure to ask plenty of questions. If a reverse mortgage doesn't feel like it's for you, you can always explore other financial options.

 

 

How to Calculate Cash-on-Cash Return (And When To Ignore It)

In this article, we’ll teach you how to calculate cash-on-cash return—and why it’s one of the most important calculations for real estate investors.

Much of the real estate industry, including investors and agents, use this formula (sometimes called the equity dividend rate) as a quick way to analyze an investment’s cash flow.

More specifically, it calculates a percentage value based on how much money you’re making (or going to make) divided by how much money it takes to acquire the property.

We’ll go over what the metric tells you, as well as what it doesn’t tell you. It’s just as important to know when not to use this metric, because you don’t want it to influence you to make a deal that, upon more extensive review, actually isn’t that great. And, the next time a realtor tries to sell you on a property that has a “fantastic” cash-on-cash return, you’ll be better equipped to determine whether or not it’s as good as it sounds.

This should be one tool in a toolbox of other important metrics and formulas that you consider when looking at a deal. It shouldn’t be the only tool.

With that said, let’s get started.

cash on cash return: rocket shipHow to Calculate Cash-on-Cash Return

Cash-on-cash is a simple formula: income earned divided by cash invested. It’s a pre-tax figure that takes place over the course of a year.

The easiest way to explain it is probably through an example. 

Let’s say you buy a single-family rental property for $300,000. You put $60,000 down and the seller covers closing costs. The property has a tenant inside who’s renting the place for $2550/month. After factoring in all of your expenses (mortgage, maintenance, insurance, etc), you find out the property generates about $300 per month in positive cash flow. 

You also need to factor in vacancies and subtract that from the total cash flow. For the purposes of this short example, let’s assume that this property is located in an in-demand area and the tenant has no plans on leaving any time soon. For reference, though, the average vacancy rate is about 6.8%. It’s up to you to know what it is in your market area. 

So, to find out the cash-on-cash return, you’d take the income earned, $3600* and divide it by the cash invested, $60,000.

The result is 0.06, or 6%. You could also use a cash-on-cash return calculator, to make it easy.

All in all, the formula (or formulas, for each variable)  looks like this: Annual Pre-Tax Cash Flow / Total Cash Invested

Annual Pre-Tax Cash Flow = (Gross Rent + Other Income (think parking spaces, pet fees)) - (Expenses + Vacancies + Mortgage Payments)

*It’s a yearly figure. The property generates $300/month, so you multiply $300 by 12 to get $3600.

What Does Cash-on-Cash Return Tell You?

So, what does 6% even mean, then? Is it good or bad? Should you invest or skip out?

Compare Different Investments

Cash-on-cash returns give you a fairly easy way to compare different investments, as long as you know how much income they generate and how much they cost to maintain. For example, let’s say you find another tenant-occupied property that’s selling for $190,000 and generates $205/month in cash flow. On the surface, it doesn’t seem like it would be very easy to compare the two. Your gut might tell you that the less expensive property is the better investment, or your gut might tell you that the property that generates the most income is the best investment.

What’s worse is that, in the real world, there are more than just two properties that look like this (and a lot of them don’t cash flow).

So, let’s calculate the return of the second property. In order to purchase the rental, you put 20% down. In this case, that’s $38,000. After closing costs, you end up paying $42,000.

The result is .058, or 5.8%. That means this property, according to this formula, is a slightly worse investment than our first example.

Play Around with Leverage

But what if you only had to put 10% down? And let’s imagine you get a good deal on private mortgage insurance so it only costs $50/month. Your annual pre-tax cash flow is $155/month or $1,860/year. After closing costs, you spend $23,000 to acquire the property.

So, annual pre-tax cash flow ($1,860) divided by total cash invested ($23,000) gives you 0.08, or 8%. Using leverage, you completely changed the numbers.

This way, you can easily compare different investments -- even if changing one factor might change a lot of factors. Maybe you’re looking at investing in a REIT that’s projected to grow at 10% annually -- you might skip out on the rental property entirely.

What Does Cash-on-Cash Return NOT Tell You?

No Equity

One thing you may have noticed, though, is that in our examples above, the tenant covered 100% of the mortgage payments. This formula ignores the fact that every time you make a mortgage payment you’re building equity. Instead, we’re only looking at how much money you have in your hands at the end of twelve months.

If we go back to our first example, with the tenant paying off a $300k property, the equity alone is desirable for many real estate investors.

No Taxes

Furthermore, taxes can completely throw off a deal. What if the taxes for the $300k property are the same as the taxes for the $190k property? If you’re just looking at this one metric, you’ll completely ignore that important variable.

No Risk Adjustment (Leverage Looks Great)

Finally, what if you could buy a $200k property that generates $1,000 in annual cash flow by only putting 3.5% down (with the seller covering closing costs)? Total cash invested is a whopping $7,000, and your cash-on-cash return is 14.2%.

Buy, buy, buy! Right?

What if you got such a great deal on that property because it’s a waterfront that’s expected to be literally underwater in five years?

This formula makes leverage look fantastic. You might as well go out and scoop up as many rental properties as you can for as little money down as possible—but anyone who has watched some investors’ entire fortunes get wiped away by a downturn or some other unexpected event knows otherwise.

Conclusion

Cash-on-cash return, or equity dividend rate, is pre-tax cash flow divided by total cash invested. It tells you how much money you have in your hands at the end of the year.

It’s an easy way to compare different investments, particularly different rental properties and commercial real estate investments—and even stocks and bonds.

It isn’t perfect, though. The formula ignores equity, doesn’t take taxes into account, and makes leverage look greater than it is.

Make sure that, when you’re using this formula, it isn’t the only formula you’re relying upon.

Selling a Rental Property: 3 Things You Need to Know

Thinking about selling a rental property? There are a few things you should know before you do. 

For one, the capital gains tax on a rental property is much steeper than it is on a primary residence. 

Also, when it comes to a tenant-occupied property, the process is a little more complicated. Your tenant, after all, still has leasehold rights. 

Finally, "as-is" clauses can protect you from a slew of costly lawsuits.

Now that you've gotten the "tldr" version, let's take a deeper dive ...

Capital Gains Tax: What to Expect

When you sell your property for a profit, you owe capital gains tax. The 2020 capital gains tax rates are as follows:

So, most of the time, you’ll end up paying at least 15-20% for capital gains tax. You’ll also have to pay capital gains tax on the amount that you claimed in depreciation over the course of your ownership of the property. If you claimed over $25,000 in depreciation, and you sold the house for $75,000 more than what you bought it for, then you’ll have $100,000 of total taxable capital gains.

If you just want the money, you’re going to have to pay the tax-man. However, if you’re looking to re-invest, there’s a strategy to avoid the capital gains tax.

Invest in Like-Kind Property

One way to get around the tax bill is to immediately re-invest the money into like-kind property, also known as a 1031 exchange. As long as you choose a new property in 45 days and close the sale within 6 months, the IRS allows you to keep the money you made in escrow, deferring capital gains, until you put that money into a new property.

You could do 1031 exchange after 1031 exchange, never having to pay for capital gains, as long as you hold the properties for longer than 2 years to avoid triggering “dealer status,” according to the IRS.

However, if you realize that you don’t want to be a landlord or you’re trying to raise money for another venture, you’re just going to have to pay the taxman.

Incorporate Your Real Estate Investments

Another way to avoid a sizable tax bill (albeit not entirely, of course) is to incorporate. You might have less access to the gains, but the savings on your tax bill will likely make this a desirable option regardless. There are some serious tax benefits to using an LLC structure. You might want to discuss the details with a qualified CPA.

Incorporating also helps you protect your assets from any liability issues, as well as protecting your anonymity.

How to Sell a Rental Property with Tenants Still Living There

What if you’re selling a rental property but there’s still a tenant living on premises?

The exact laws might depend upon your state, so check the Landlord-Tenant laws wherever the property resides, but you generally have a few options:

The easiest option, by far, is to wait for the lease to expire. You might want to check the lease for an early termination clause. That way, if you can prove that you absolutely need to sell, you might be able to break the lease.

Additionally, you could try to incentivize your tenant to move by offering them cash to cover the cost of moving. This is only a good option if you know that your property is going to sell for much more than you bought it for. If you’re cutting it close, you don’t want to cut it even closer by having to pay to get a tenant to move.

And, finally, you could try to find another real estate investor interested in buying a tenant-occupied property. The downside here is that your property is much less marketable. There’s a wider swathe of possible buyers for single-family homes, but a much narrower market for rentals.

As-Is Clauses Can Protect You From Costly Lawsuits

What is an as-is clause? An as-is clause is a condition clause: the buyer is purchasing the property “as-is.”

It typically states that “the buyer accepts the item for sale in its presently existing condition without modification or repair.” Without it, the buyer is relying upon the seller’s representation of the property. In some cases, that gives the buyer solid footing for a lawsuit.

Now, that doesn’t mean that the seller can engage in any knowingly misleading behavior, or attempt to hide a defect in the property, but it does provide additional coverage in case there are any disagreements. Sometimes there are issues with the property that the seller doesn’t even know about, but that won’t stop some buyers from filing a lawsuit.

To avoid the worst-case scenario, include an “as-is clause” in the sales contract when you’re selling your rental property.

Conclusion: What To Know When Selling A Rental Property

When it comes to selling a rental property, there are three things you need to know: 

1) The capital gains tax for rental properties is not the same as for primary residences, and it can take a serious chunk out of your potential profits. You might be able to avoid capital gains tax (or minimize it) in one of two ways. First, you could do a 1031 exchange. Next, you could incorporate to see if you can take advantage of certain tax benefits.

2) Selling a property with tenants still there is not an easy task.

3) When you do sell your property, make sure to include an “as-is clause” to avoid the potential for certain lawsuits. Interested in learning more? Read our article “The Rental Property Asset Protection Checklist.”

 

Forecasting Rental Cash Flow Returns The Right Way

One of the best ways to build wealth is with rental properties. And one of the first things new real estate investors need to learn about is how to calculate rental property cash flow. Running a profitable investing business depends on it.

In fact, I can spot a new investor a mile away. These guys think cash flow is simply “income after expenses.”

They'll say something like "My mortgage is $1,500 per month and the rent is $1,100, so I'm going to be making $400 every month.” 

Sadly, this investor is about to lose money. There are a lot of unforeseen expenses they aren’t thinking about.

Let’s take a closer look.

What is Cash Flow, Exactly?

Cash flow is used to figure out just how much income rental real estate such as apartments, duplexes, or commercial buildings can generate. A property can have either positive cash flow or negative cash flow. Positive cash flow, in case you haven’t guessed, comes with more income than expenses. That’s what we want.

Boosting the cash flow of a property could make your business sustainable in the long term. You want a strong return on investment (ROI), but is that the same thing? Not really: Cash flow measures how much cash an investment property will actually generate, whereas ROI measures total value over time.

Ok. So why do so many investors get the cash flow forecasts for their properties wrong?

4 Factors That Make Up The Flow

Long-term expenses make up the true cash flow return, and these expenses differ based on the property type. They aren’t the same every week and every month and every year. That’s why it’s important that you can calculate the average.

To calculate what it will cost your company to maintain a specific property, you need an accurate, long-term record of what has been spent on repairs, vacancy rates, property management services, and property insurance.

Repairs. In one month you may not have any repair costs. Does that mean your repair costs over three years will be zero? Of course not. You have to budget for those inevitable nuisances like broken circuit breakers or crappy old toilets. 

cash flow

Don't go "low flow" with your "cash flow."

Vacancy Rates. What’s the worst thing about a great tenant? They can’t live there forever, that’s what! When they vacate your rental, you need to make some changes to keep it attractive for new tenants. It may take time for you to market the property for prospective new renters. This process includes making repairs, screening tenants, and getting them signed. For a normal market, your vacancy rate can sit at 8 percent.

 

Property Management. Even if you claim to be a jack of all trades, managing your property all by yourself may be difficult. Budget for property management. Property managers charge for screening and signing a lease agreement with new tenants. However, you should pay yourself if you insist on managing your property yourself. Saving money is an admirable goal, but remember—this job is a lot harder than looks.

Property Insurance. Connect with an insurance company to rates for properties in your market. There are all kinds of ways to insure your rental units; for example, "rent default insurance” is used to protect against late rent. If your tenant stops, insurance pays for it. That’s a great example of optional insurance that will affect your cash flow forecast.

Using the “50 Percent Rule.” The “50 Percent Rule” says that landlords should expect operating expenses to be 50 percent of gross income. This rule can help you figure out how profitable your rental property will be. NOTE: Mortgage or loan payments are not part of these expenses; they come out of the other half. (See how you can get in trouble by not estimating your costs up front?) 

Get Organized!

Learn how to accurately forecast both your expenses and your revenue before you get into the rentals game and you'll save yourself a lot of headaches. The best way to monitor cash flow is to prepare a cash flow report. 

With this report, you are able to see the cash you received and cash paid out at the end of every month. Tracking on a weekly or daily basis may be a good idea depending on the size of your portfolio (assuming you have a knack for spreadsheets!). If you’re buying a property, try to get this information—in as much detail as possible—from the previous owner.

In fact, if they CAN’T provide it, that’s a red flag.

Proper cash flow forecasting matters for every rental property investor. You should know how to measure the rate of return for your property. Investing in properties with positive cash flow is the key to your success as an investor.

 

Ready to learn more? Check out The Rental Property Asset Protection Checklist.

Real Estate Sponsorships: How To Get Started

Anyone who is interested in commercial real estate investing should have at least a rudimentary understanding of how the real estate sponsorship process works. Before you invest in a development project, it’s vital that you properly vet the sponsor to make sure they have the necessary experience to lead a successful commercial real estate project.

Fortunately for the rookie real estate investor, we’ve put together a crash course on getting started with real estate sponsorships. While we can’t make you an expert with one article, we can explain the basics and give you some valuable tips on how to decide if a sponsorship opportunity is a good investment. 

What Is A Real Estate Sponsor?

In commercial real estate jargon, the term “sponsor” refers to the person or business that essentially runs the show on a commercial real estate project. 

A sponsor manages every aspect of the transaction from conception through completion, which usually includes taking on the following responsibilities:

Real Estate Sponsorships: excited woman sitting at desk

General and Limited Partners

The sponsor is often referred to as the syndicator or the General Partner (GP), while the other equity investors are called Limited Partners or LPs. LPs usually have a more hands-off role in the management of the real estate project, so you might also hear an LP referred to as a “passive” or “silent” partner. 

Because of their limited involvement, silent partners also have limited liability. This means that if the project goes belly up, LPs can’t lose more than the amount they’ve invested. 

Check out our article, How Real Estate Syndicators Protect Assets & Avoid Taxes.

How To Vet A Sponsor

As a novice real estate investor, you might think you have to take whatever sponsorship you can get. However, nothing could be further from the truth. Savvy investors know they can’t afford to throw away their hard-earned money on failed projects, and getting a return on your investments is particularly crucial if you’re just getting started in the commercial real estate game. Since some sponsors have much stronger qualifications than others, you need to find a sponsor you can trust. 

Here are a few things you should consider when evaluating a real estate sponsor for a potential investment:

The Sponsor’s Successes

You should evaluate the sponsor’s prior success— not just with real estate developments in general, but in the particular location and asset class of the potential investment. For example, you probably don’t want to partner with a sponsor who has only worked on apartment buildings on a retail property development project. Instead, look for a sponsor with experience working with the type of asset involved in the investment project.

The Sponsor’s Failures

The sponsor’s track record when it comes to failures is just as important— if not more important—  than their successes. While most experienced sponsors will have a few black marks on their record, it’s essential that you understand what went wrong and how the sponsor handled it. It’s a major red flag if a sponsor has a history of keeping silent partners in the dark when things get tricky.

The Proposed Payout Structure

Obviously, getting paid is the reason you’re looking for a sponsorship in the first place. With that in mind, make sure you review the payout structure and understand how you and the sponsor will make money from the investment. Be wary of structures that are overly favorable to the sponsor, and make sure the proposed payout aligns with everyone’s interests. 

Project Management And Investment Strategy

Make sure to thoroughly evaluate the systems and processes the sponsor uses to make sure the project is appropriately managed. Look for a sponsor that has a coherent and consistent plan in place. The sponsor should also be able to confidently articulate a clear investment strategy for the project and explain how it will make income.

Don’t Settle For A Bad Sponsor

Just because you’re a new real estate investor doesn’t mean you have to settle for a sub-par sponsor. Investing in a commercial real estate development project with a sponsor you can’t trust to manage it well will not only cost you a lot of headaches, but more likely than not, it will also cost you cold hard cash. 

Whether you’re a brand new investor or you’ve been doing this for years, you should never forget that you always have the power to walk away from a bad sponsor. If you can exercise the patience and wisdom to wait for the right deal, you’ll end up with a much better investment opportunity. 

7 Real Estate Investment Strategies

One of my favorite things about real estate investing is that there are so many different ways you can do it.

As one of the most accessible types of investments for the average Joe (or Jolene), real estate investing offers a variety of exciting strategies to explore. If you take the time to learn about your options, you can find a strategy that suits your financial situation, the level of risk you can tolerate and the amount of time you have to spend nurturing your investments.

To help you along on your real estate investing journey, we’ve put together a list of seven common real estate investment strategies that everyday people can use to make real money from real estate. This list is just a starting point, but it will give you some background information on some of the most popular types of real estate investments.

Strategy #1 — Buy And Hold

The buy-and-hold strategy is one of the most common types of real estate investing, and it is also one of the simplest. Essentially, you purchase a property and rent it out for a period of time. Depending on the deal you got at purchase, you can make income from the rent, or you can simply use the rent to cover the mortgage and let the property appreciate. There are many variations on the buy-and-hold method to explore, but the key to successfully investing using this strategy is to understand property valuation and find good deals. 

Strategy #2 — Invest In Rental Properties

Investing in rental properties can make you money in the same ways that the buy-and-hold strategy does— income from rent and appreciation in the value of the property. While dealing with tenants may not be everyone’s cup of tea, investing in apartment complexes or other multi-unit rental properties can generate substantial cash flow, particularly with market rental prices rising in many cities across the country. 

 

Strategy  #3 — Flip Houses

House flipping is one of the most well-known real estate investment strategies, and it continues to grow in popularity thanks to the handful of TV shows that spotlight house flippers. For those of you who haven’t seen these shows, flipping houses involves buying a property at a discount, remodeling, repairing and improving it and selling it for a profit. 

While there is a fair amount of risk associated with flipping houses, especially for new investors who don’t have the best grasp of the costs associated with repairs, many flippers learn from their mistakes and develop the skills they need to make substantial profits in a short period of time. 

Strategy #4 — Real Estate Investment Trusts 

Real Estate Investment Trusts (REITs) are companies that own, manage or finance real estate investment projects. REITs are modeled after mutual funds, where numerous investors pool their capital to make an investment. This model allows individual investors to profit off real estate without having to purchase, operate or fully finance a single property. 

Because of the way they are structured, REITs are much more focused on earnings from generated income, and most REIT investors make very little money from appreciation. Some REITs will have a required minimum investment for you to get involved. Still, as long as you have the funds needed to satisfy this requirement,  REITs are a straightforward and hands-off method of investing in real estate projects that would otherwise be cost-prohibitive for the average investor. 

Strategy #5 — Pre-Construction Real Estate Investment

Pre-construction real estate investment is one of the riskiest real estate investment strategies, but it also can earn you serious, serious profits. (Think millions of bucks!)  Pre-construction investing is just what it sounds like: before ground is broken on a development project, you purchase an “option” on the property. This allows you to buy real estate at a fraction of the value of a fully-developed property. 

Pre-construction investments are the most successful in high-demand areas that often experience housing shortages. In these locations, prices can rise quickly, and new units can even be sold before they are completed. In some neighborhoods, your investment can appreciate in value before the project is finished. However, when things don’t work out, you could be facing substantial losses.

Strategy #6 — Wholesaling Real Estate

The process of wholesaling real estate is relatively straightforward: you find an excellent real estate deal, write a contract to acquire the property and sell the contract to another buyer for a fee. In other words, you’re not purchasing real estate; you’re a deal-hunting middleman. The fee you receive, called an assignment fee, usually ranges from $500 to $5,000 per property, but larger deals can come with an even higher payout.

Some wholesalers will sell contracts to retail buyers, but most of the wholesaling market is other real estate investors, commonly house flippers. These types of investors are usually cash buyers, which means the wholesaler can get paid their assignment fee within days or weeks. Wholesaling is an excellent strategy for new investors who don’t have a lot of capital but want to get started in the real estate investment world. Since you never have to actually purchase the property or pay to repair and manage it, you can get started in wholesaling with very little financial investment.

Strategy #7 — Crowdfunding Real Estate

Crowdfunding real estate is a fairly recent development in the real estate investing world. While crowdfunding, in general, is well-known due to platforms such as GoFundMe, the concept of crowdfunding real estate is just starting to grow in popularity.  

Crowdfunding can allow investors who don’t have the capital to purchase property on their own to pool their resources to invest in real estate. If you can't raise the funds you need through traditional methods, you can try crowdfunding your purchase through a real estate crowdfunding website, social media or another online platform. 

For what it's worth, Investopedia lists its top crowdfunded real estate investing platforms as follows:

Keep Learning

These seven strategies are only a few of the many ways you can make money investing in real estate. There really is a niche for everyone, so if the seven strategies discussed in this article aren’t what you’re looking for, don’t give up. There are plenty of other options out there! 

 

Check out our article How To Build Your Real Estate Empire to learn even more real estate investment strategies. 

 

Property Management Agreements for Real Estate Investors

Clearly lay out all of the responsibilities a property management company is taking on for you.

Real estate investors can prevent misunderstandings and protect themselves with clear, professional property management agreements.

If you have multiple properties or properties that aren’t close to home, you need management help. Make sure the people helping you have clear, legally binding instructions.

Third-Party Property Management
In these situations, we outsource property management. If you are among the investors using any kind of third-party property management, whether it’s on-site, off-site, a single person, or a large company, or some other version of a property manager, you will need a property management agreement.

Managing Property Management
When you can’t be there to do the job yourself, your job becomes managing your managers. All the research in the world may not prepare you for the realities of handling your management. We find “informal” agreements tend to end poorly. The property management agreement helps establish expectations and boundaries in your relationship with your property management.

The Property Management Agreement
Don’t underestimate the power of this little document. It’s the single most effective way for you to manage your property managers. Their duties will be clarified in this document, as will your obligations to them. Remedies for common problems may be included, and a well-written agreement should prevent most in the first place.

WHY DO I NEED A PROPERTY MANAGEMENT AGREEMENT?

First of all, few property management companies will do business without a formal agreement. Next, think of all the things that can possibly go wrong with managing a property. Perhaps some of these things are reasons you wouldn’t wish to manage this property yourself.

If there’s one thing we have observed about real estate litigation, it is this: rarely is either party truly acting in bad faith. More lawsuits are fueled by misunderstanding than fraud.

Good contracts are one huge way to prevent lawsuits in real estate generally, and between property management and the investor specifically. Having the rules everyone plays by, and the remedies for parties harmed by breaking the rules, in black and white makes life easier. This clarity prevents the types of misunderstandings that may land you in court.

WHY YOU WANT A REAL ESTATE ATTORNEY’S HELP WITH PROPERTY MANAGEMENT AGREEMENTS

When’s the last time you practiced your legal prose? Or reviewed the basics of contract law?

Never? That’s okay. It’s probably not your job to do either of those things, which is fine. You’ve been busy investing and likely mastering many other skills throughout your life while folks like our attorneys were knee-deep in the books that taught them the finer points of contract law, legal research, and how to write ironclad documents that will hold up under legal scrutiny.

A real estate attorney knows the law, what to look for in a contract, and perhaps most importantly, how to tailor a contract to your needs. At Royal Legal Solutions, we always listen to the client first, then form our plan to keep your assets defended and support you in your other business goals.

WHAT IS IN A PROPERTY MANAGEMENT AGREEMENT?

CUSTOMIZED TO YOUR BUSINESS
While we will absolutely tailor your agreement to your situation as much as possible, there are some common items you will see across a wide variety of property management agreements. Some of the things you can expect to see in yours are listed below.

RESPONSIBILITIES
This includes theirs and yours. If there’s an item you don’t want to handle, make sure it’s in the agreement on their side of the deal. Their day-to-day duties should be spelled out as well.

FINANCIAL AND FEE INFORMATION
What fees you owe and how you will pay them should be crystal clear.

LIABILITY
You want the managers to assume as much legal liability as possible, an item our attorneys can help ensure by contract.

CONTRACT TERM AND TERMINATION PROCEDURES
Of course, the contract will need to have a specified length of time it is in effect or term. Termination issues should also be covered.

Our experts can show you other ways to limit your personal liability and safeguard your assets. Whether you need a single property management agreement or a comprehensive asset protection strategy, Royal Legal Solutions can help.

Equity Stripping for Real Estate Investors

Make yourself an unattractive target for lawsuits and creditors with equity stripping.

As real estate investors, one key issue for protecting our assets is making sure we have very little or no equity exposed to the world. Why? Quite simply, the equity in a property is what can be seized and sold off in the event of a successful lawsuit and judgment against you. So what’s the smart investor to do?

Fortunately, this is where equity stripping comes into play.

What is Equity Stripping?

Equity stripping is any process that will reduce the value of a given real estate asset. It is a classic among asset protection strategies, well known for being a tried-and-true method of creditor protection. Equity stripping may be used to protect your home or an investment.

Wait. I want to look poorer than I am?

Yes, you do. It’s the smart play. You can invest and earn all you like yet still appear to qualify for food stamps. The illusion that you own little to nothing makes initiating a lawsuit incredibly difficult for the other side.

Is Equity Stripping legal?

Equity stripping makes you less desirable to sue because you appear to have less than you actually do. Some investors wonder if this is ethical or even legal. The answer is yes, provided you set everything up before a creditor or lawsuit comes your way. Be proactive!

We Simplify Equity Stripping For Real Estate Investors

Don’t attempt equity stripping alone. There are some tasks that require a professional’s oversight, and this is one of them. Fortunately, the pros at Royal Legal Solutions are happy to help you out.

Who Needs Equity Stripping?

Equity stripping is a viable solution for many types of real estate investors and even ordinary homeowners. Therefore the answer to what type of person needs this service can be varied and diverse.

For instance, not all laws protect the equity in a homestead equally across the United States. For those who have paid off more on their home than is statutorily protected, equity stripping is one legal method for protecting that homestead.

DOMESTIC EQUITY STRIPPING
There are many methods for equity stripping. Anything that encumbers an asset on purpose, or moves it from a position of exposure to safety, could be considered a form of equity stripping.

For most of our clients, we recommend domestic equity stripping. To employ this tactic, you use one of Royal Legal Solutions’ Traditional LLC structures. You can then use the LLC to strategically issue notes on the properties you own.

Which of these options is most appropriate for you?

That will depend on your needs and the advice of your attorney.

FOREIGN AND OFFSHORE METHODS
Offshore equity stripping is legally similar but has a key difference. With this method, you would need an offshore trust to issues notes on your properties. This type of offshore trust, also known as a bridge trust, offers additional benefits. However, while the offshore option is highly secure, there is a price trade-off. Bridge trusts can cost thousands to establish.

CREATING YOUR OWN MORTGAGE COMPANY
Another means of harmless debt creation we have used is instructing investors like you on the less conventional, although far easier-than-it-sounds, tactic of creating your own mortgage company. And there are even more ways to get the job done.

Assignment of Interest for Real Estate Investors

If you own an LLC or Series LLC, chances are that you may need to handle an Assignment of Interest.

There are a wide variety of situations where assigning all or part of the interest of a company can benefit the business as a whole. How this process looks is governed by state law as well as the Articles of Organization for your particular LLC. Some common reasons you may need an Assignment of Interest include the below scenarios.

Lending Negotiations

Sometimes members of an LLC will use their shares of the company as collateral for a loan. This is a fairly common practice in the real estate industry. Members may assign all or merely a portion of their interest in this situation.

Debt Resolution

Forming companies and purchasing properties is expensive. Occasionally, members of an LLC may assign a portion of their interest in a company until their profits have satisfied a personal debt.

Personal Reasons

There is a wide range of reasons you may choose to assign your interest in your company to a trusted partner or family member. Marriage, death, or other major life events can raise this issue.

Royal Legal Solutions Can Assist You With Many Assignment Of Interest Needs

If your Assignment of Interest is part of a greater issue with forming or managing your Traditional LLC or Series LLC, Royal Legal Solutions can assist you. We have years of experience forming these companies and managing the necessary paperwork. We also offer free educational resources on the best practices for corporate management, taxes, and asset protection. Our belief that informed clients are the best kind of clients drives us to offer regularly updated, accurate free materials to help you get the most out of your professional LLC. Forming your LLC with Royal Legal Solutions can simplify the process of assigning interest, as we will be the ones to draft your Articles of Organization. If you know this will be a concern for you, be certain that you advise the professional you work with of your situation when forming your LLC.

What Exactly Is An Assignment Of Interest?

An Assignment of Interest is the legal means for transferring the ownership of an LLC or other Company is from one entity to another. Typically, there are additional complications regarding under what conditions and what approvals are necessary in order to enforce the assignment. These conditions and approvals are located in the Subscription or Operating Agreement of the investment.

Why You Should Choose Royal Legal Solutions For Your Assignment Of Interest

BEWARE OF “FREE” ONLINE TEMPLATES

One mistake that some investors fall for is attempting to draft their own contracts or pulling them from free online services.

Perhaps you have seen that you can get certain templates for legal documents, including Assignments of Interest, from Legalzoom or another website. Any attorney will caution you against using these for your business. Ultimately, these “free” documents can cost you a great deal of money in the end.

Anyone can write something and give it away on the internet. So that document may have been penned by an attorney who makes $1500 an hour, or it may have been a school exercise for a student who does not speak English as a first language.

Frankly, it is impossible to know the source of such documents and they should be regarded with suspicion. Only an attorney with experience in the real estate field can tell you whether such a document would hold up under legal scrutiny. In fact, we have been called after clients of ours have made this mistake. Trying to correct errors in legal documents after the fact is infinitely more difficult, time-consuming, and costly to the client than hiring a professional to handle the document in the first place.

It is well worth the investment to ensure that your Assignment of Interest and other legal documents are properly drafted by professionals.

Our Experienced Legal Professionals Advocate For You

When you get your Assignment of Interest from Royal Legal Solutions, you do not have to live with these anxieties. You can rest assured that your document does exactly what it needs to do, and will protect your best interests.

We know you take your real estate business seriously, that you have invested a great deal of your hard-earned money into growing your investments. Royal Legal Solutions specializes in customizing the necessary legal documents and seamlessly obtaining the approvals to transfer the ownership interests for your LLC. If any of these steps are done incorrectly, the transfer will be invalid.

The good news is that we are here so that you do not have to take this unnecessary risk. Simply tell us what you need. Let us worry about how to get it done, while you do what you do best: run your real estate business.

Why We Assist Real Estate LLC Owners With Assignment Of Interest

Whatever your reasons are for needing an Assignment of Interest, Royal Legal Solutions can assist you. We can also help with other operational or legal aspects of your corporate structure if you have additional questions or needs regarding your Traditional LLC or Series LLC.

Having an actual real estate attorney draft your LLC’s documents can make the difference between whether they will hold up in court if you ever come under attack. Smart investors don’t have to take this risk. With Royal Legal Solutions by your side, you can feel secure in the fact that your business documents are legally compliant and accomplish exactly what you need them to.

Why Use Royal Legal Solutions For A Real Estate Investment Asset Protection?

We have experience in setting up the proper asset protection and making it easy for an investor to use. Our system simplifies management structure as much as possible, and we also use common sense to ensure your needs are met. For example, just one tip we give our clients is that you don’t need multiple bank accounts as long as you have accurate accounting records. For taxation, they should stay exactly how they are now while being reported on a Schedule E of your personal return (if you’re an individual/married partners) or a partnership return (if unmarried partners).