A recap of the January Education Open House
If you missed our first Open House of 2016 please remember that these programs are an additional FBS service to Educate Serious Real Estate Investors & Existing FBS clients in a convenient way.
It is also a gathering point for Our Network of Realtors & Industry Professionals. It’s good to meet face-to-face with the individuals that can help you achieve your goals.
This session emphasized the importance of including careful tax planning BEFORE any real estate transaction. We surround our clients with complete advisory services and ensure expected results with our management. However, whether a CPA or CFP or CPM you’re advised to reach out to let them know what you’re thinking beforehand instead of asking them to clean up the mess afterward.
Interesting story: the next day one of us was inspecting property with an existing client looking to acquire 3 apartment properties through an exchange. Now this is the way to utilize us best by bringing our management in to walk the subject properties together before finalizing the transaction. This way we can advise, so that realistic expectations are established and we’re ready to take over day-to-day property management at closing. During this time the client apologized for not attending the open house due to another commitment. Our representative indicated that he had missed an enjoyable time AND some great advice since we brought in a CPA that outlined Dos & Don’ts for 1031s. The conversation went on for a while then the client broke in. “Who was the CPA because I didn’t know what you’re sharing?” The answer was “Randy Goodsell”. He then exclaimed, “He’s my CPA. How come he never told me these things? Perhaps he did and I missed it” So you see that resources can be available but if unused aren’t very valuable.
We wanted to share some of the basic points in the presentation dialogue between Randy, Neil and Chris. Many of these points are included in a separate video session that we hope to introduce at a later time.
FBS Guidelines to Remember for 1031 Exchanges by Randy Goodsell, CPA
The reasons to participate in a 1031 exchange are numerous. There are specific timelines and procedures that must be followed to take advantage of the benefits of this program.
•Seller should have the contract specify that the sale may be structured as a 1031 exchange
•Seller cannot receive or control the net sale proceeds- the proceeds must be deposited in a qualified escrow.
•Replacement property must be like-kind to the relinquished property
•The replacement property must be identified within 45 days for the sale of the original property
•The replacement property must be acquired within 180 days from the sale of the original property.
•In a reverse exchange the taxpayer acquires the replacement property prior to the disposing of the relinquished property.
•Generally, the cash invested in the replacement property must be equal to or greater than the cash received from the sale of the relinquished property
•The debt placed or assumed on the replacement property must be equal to or greater than the debt relieved with regard to the relinquished property.
FBS REAL ESTATE INVESTMENTS
Standards for Serious RE Investors by Neil Fjellestad and Chris DeMarco
Real Estate as an investment remains a mystery to many. There are raving fans that believe or would like you to believe that real estate is a sure bet. There are also rash critics that see nothing but risk and loss every time real estate is mentioned as an investment alternative.
If we think about it both must be right to some degree. The purpose of this discussion is to illustrate that there are some realities that are ignored or misunderstood by both. Take a closer look to discover that there are standards for investment success. Whether followed or not, the outcome is reasonably predictable.
Standard #1- All successful investment begins with deliberate strategy and a plan. What are your personal objectives? Security against principal loss; potential or predictable growth appreciation; durability of future income; tax-favored investment return; inflation hedge and liquidity access are possible objectives to consider.
Standard #2- Successful investment strategy is more than one or two transactions: execution requires patience and allocation of resources. Performance can be measured and improved with “best practices” applied by trusted advisors and professional business managers.
Standard #3- Develop a philosophy of an independent investor. Real estate should be acquired and held long term (not sold) in order to qualify as part of a working strategy. Eventually, independent ownership without partners that is debt-free enjoys the highest investor rewards and pride of ownership. Many mistakenly think real estate is to buy and sell. This approach is dependent upon external conditions and the results are reduced substantially by costs surrounding these events. Transactional real estate is by definition speculative, not strategic.
Standard #4- Strategically held real estate is a long-term investment and must be operated as a business. To accomplish, a long-term hold ownership should include as many “silent benefactors” as possible. Silent benefactors provide investors with key business advantages. These benefactors include: lenders; renters; government taxing agencies; professional advisors and comprehensive property management. In all cases they sustain the real estate ownership as an operating business. Here are the primary advantages they provide:
I.Appropriate leverage (generally a minimum of 30% equity at all times) is the foundational principle that makes RE returns on invested capital the best in smart financial circles. Mortgage lenders have confidence in RE Investment. Don’t kill the golden goose.
II.Reasonable financing on balance with terms that are competitive and affordable are available for qualified borrowers. It is important to avoid and/or have plans to resolve: principal due dates, negative amortization and adjustable interest rates.
III.The real estate or a portion thereof should be rentable. Such capability enlists tenant(s) to provide an income stream, an interested party onsite, enhances the tax-favored nature of income and the deductibility of expenditures. Rented property also enjoys favored access to borrowed funds with better terms. Tenants provide the investor with long term staying power.
IV.Taxing agencies consider your investment a rental business whether one condo or an apartment high-rise because rentals are essential in the marketplace representing about half the households. Though government might provide health care, roads, water and energy rental housing must be provided by rewarding investors.
V.Real estate equity grows with every mortgage payment. These rental contributions to your forced savings plan will grow substantially over time. There are simple methods to accelerate this key strategy. Potential appreciation is an investment bonus.
VI.While spec build-outs and fix and flip schemes can have merit these are speculative in nature and normally not included in a personal investment plan. However, physical improvements to expand floorplan, reduce energy footprint or re-design landscaping are prudent methods to expand long term rental business profit.
Standard #5- Some rentable real estate is more conducive to an individual investment plan:
I.Property that is local is more easily understood and convenient for oversight. An exception can be a distant location with personal benefits. Example: Southern California property makes economic sense no matter where you live. In addition, such holdings might allow enjoyable tax deductible family visits.
II.Rent ability generally favors residential lease(s) of one year staggered to be renewed when leasing traffic is at a substantial level.
III.Rent should be readily comparable – floorplan, age, condition, neighborhood.
IV.Comparable properties demonstrate history of increase – rents, prices, value-added improvements.
V.Every rental should have an improvement plan that fits the neighborhood, has a payback horizon, and increases rental income.
Standard #6- Surround yourself with a team of real estate savvy advisors and hire complete property management. Expect transparent accountability; inspect operations; and receive monthly financial reporting. Annually align actual outcomes with financial expectations.
Standard #7- Keep your property investment appropriately maintained; improve to enhance rental value; accelerate pay down on loan(s); keep it simple; keep it in the family; just keep it. Avoid equity leaks from unnecessary transaction costs. Examples include: loan fees, sales closing costs, income taxes, and capital gains.
Standard #8- Be transparent with your heirs by updating your estate plan together. Enhanced results will be experienced when heirs are educated in the details of the investment strategy, the workings of the rental business that supports the investment performance, and introduction to your advisory team.