Many investors are turned off by real estate because they do not have the time or inclination to become landlords and property managers, both of which are in fact, a career in themselves. If the investor is a rehabber or wholesaler, real estate becomes more of a business rather than an investment. Many successful property "investors" are actually real estate "operators" in the real property business. Fortunately, there are other ways for passive investors to enjoy many of the secure and inflation proof benefits of real estate investing without the hassle.
Active participation in property investing has many advantages. Middlemen fees, charged by syndicators, brokers, property managers and asset managers can be eliminated, possibly resulting in a higher rate of return. Further, you as the investor make all decisions; for better or worse the bottom line responsibility is yours. Also, the active, direct investor can make the decision to sell whenever he wants out (assuming that a market exists for his property at a price sufficient to pay off all liens and encumbrances).
Passive investment in real estate is the flip side of the coin, offering many advantages of its own. Property or mortgage assets are selected by professional real estate investment managers, who spent full time investing, analyzing and managing real property. Often, these professionals can negotiate lower prices than you would be able to on your own. Additionally, when a number of individual investor's money is pooled, the passive investor is able to own a share of property much larger, safer, more profitable, and of a better investment class than the active investor operating with much less capital.
Most real estate is purchased with a mortgage note for a large part of the purchase price. While the use of leverage has many advantages, the individual investor would most likely have to personally guarantee the note, putting his other assets at risk. As a passive investor, the limited partner or owner of shares in a Real Estate Investment Trust would have no liability exposure over the amount of original investment. The direct, active investor would likely be unable to diversify his portfolio of properties. With ownership only 2, 3 or 4 properties the investor's capital can be easily damaged or wiped out by an isolated problem at only one of his properties. The passive investor would likely own a small share of a large diversified portfolio of properties, thereby lowering risk significantly through diversification. With portfolios of 20, 30 or more properties, the problems of any one or two will not significantly hurt the performance of the portfolio as a whole.
Types of Passive Real Estate Investments
REITs
Real Estate Investment Trusts are companies that own, manage and operate income producing real estate. They are organized so that the income produced is taxed only once, at the investor level. By law, REITs must pay at least 90% of their net income as dividends to their shareholders. Hence REITs are high yield vehicles that also offer a chance for capital appreciation. There are currently about 180 publicly traded REITs whose shares are listed on the NYSE, ASE or NASDAQ. REITS specialize by property type (apartments, office buildings, malls, warehouses, hotels, etc.) and by region. Investors can expect dividend yields in the 5-9 % range, ownership in high quality real property, professional management, and a decent chance for long term capital appreciation.
Real Estate Mutual Funds
There are over 100 Real Estate Mutual Funds. Most invest in a select portfolio of REITs. Others invest in both REITs and other publicly traded companies involved in real estate ownership and real estate development. Real estate mutual funds offer diversification, professional management and high dividend yields. Unfortunately, the investor ends up paying two levels of management fees and expenses; one set of fees to the REIT management and an additional management fee of 1-2% to the manager of the mutual fund.
Real Estate Limited Partnerships
Limited Partnerships are a way to invest in real estate, without incurring a liability beyond the amount of your investment. However, an investor is still able to enjoy the benefits of appreciation and tax deductions for the total value of the property. LPs can be used by landlords and developers to buy, build or rehabilitate rental housing projects using other people's money. Because of the high degree of risk involved, investors in Limited Partnerships expect to earn 15% + annually on their invested capital.
Limited Partnerships allow centralization of management, through the general partner. They allow sponsors/developers to maintain control of their projects while raising new equity. The terms of the partnership agreement, governing the on-going relationship, are set jointly by the general and limited partner(s). Once the partnership is established, the general partner makes all day to day operating decisions. Limited partner(s) may only take drastic action if the general partner defaults on the terms of the partnership agreement or is grossly negligent, events that can lead to removal of the general partner. The LPs come in all shapes and sizes, some are public funds with thousands of limited partners, others are private funds with as few as 3 or 4 friends investing $25,000 each.
Don H Konipol has a BS in Economics and an MBA in Finance from the University of Michigan and is General Partner of the Managed Mortgage Investment Fund LP, a private limited partnership that invests in short term, high yield private mortgage notes. He is also General Partner of Real Estate Asset Management Fund LP, a private fund set up to invest in distressed property as 60% or less of value .He can be reached at 832.577.8838 or by email at dkonipol@yahoo.com.
[http://PrivateMortgageFinancing.com].
ABOUT DON KONIPOL
Don Konipol holds an MBA in Finance from the University of Michigan and a B.S. in Economics from the City University of New York. In 2002 he formed the Managed Mortgage Investment Fund LP as a high yield real estate mortgage fund, and serves in the capacity of General Partner. The fund invests in a diversified portfolio of short term, high interest real estate mortgages secured by investment real estate. Upon receiving his MBA in 1975, Mr. Konipol went to work for Societe General De Survalliance S.A., Geneva, Switzerland in investment banking.
He left in 1978 to come back to the United States and went to work as a commercial realtor for First Equity Company in Houston, Texas. In 1984 Mr. Konipol formed the Investment Realty Group to purchase distressed real estate at auction. Don has successfully invested in numerous real estate deals, operating businesses, high yield commercial mortgages, and REITs. He currently invests his capital and client/investors capital in real estate, real estate debt and real estate securities.
Don Konipol can be reached at (832) 577-8838 or emailed at donhkonipol@yahoo.com
Friday, June 14, 2019
Sunday, May 12, 2019
Commercial Real Estate, A Career - How Do You Get Into It?
1. WHAT IS IT AND HOW DO YOU GET INTO IT?
Several years ago, I was attending a Society of Industrial Realtors Annual Spring Conference in Maui. My wife had accompanied me on the trip so that we could also do a lot of sightseeing. Colliers International, a 241 office worldwide firm, sponsored its own company cocktail party the night before the Conference officially began and my wife and I attended the party.
A short while into introductions, a fellow came in from the golf course and he sat down at our table. Andrew Friedlander introduced himself an we discussed our home in Philadelphia, his original home in Brooklyn and his new home in Honolulu. As to how he ended up in Hawaii, Andrew told us that on R&R during his tours in the Army in Vietnam, he decided to take a break in Hawaii after he was finished his last duty tour. He rented an apartment, waited tables, washed cars, etc. to have some extra cash. He said that he paid his apartment rent to an older man who came around once a month and he finally asked the man whether that was his business. Andrew said that he never thought about property management as a business, but the more he spoke to the man the more that he realized how diverse a business commercial real estate could be, particularly in Hawaii. The rental agent began to show Andrew the basics of the business and Andrew decided not to return to Brooklyn.
Forty years later, Andrew is the manager of approximately six Colliers International offices in Hawaii with over 40 brokers and salespeople as his responsibility. Aside from selling and leasing commercial real estate and traditional brokerage transactions through the islands, Andrew's team is involved in all of the other aspects of commercial and industrial real estate.
As one concierge person told my wife and I while we were touring there, "Yes, it is a great place, now where would you ever think of moving to once you are here."
In the past year, a young Army Captain and friend called me from Hawaii. He and his wife were taking in some R&R after his last duty tour and he called to ask me for some advice on commercial real estate firms. I gave him Andrews phone number after I checked with Andrew on his availability. Andrew treated my friend to lunch and introduced him to Colliers' business in the islands. As it turned out, my friend and his wife decided later to relocate to Florida to be closer to their parents. Our Colliers office in Ft. Lauderdale was anxious to interview him and did so. He found a better fit for a concentration in office brokerage with another firm, but I think that it is clear that opportunities do exist with major firms for someone who has an interest, who can demonstrate that they are self motivated and whose comportment (manners, speech, personal grooming, business attire) are all positive. A long time friend told me one night after we and our wives checked in, very late, at a hotel owned by a well known hotel group, "That desk clerk is the person representing this hotel company to its customers and I know the CEO. That clerk's slight rudeness toward us does not at all represent what their CEO wants his company to be known for in their business. He will need to learn that if he is going to be more than the late night clerk."
I mention this because a company such as Colliers or any of its competitors must ensure that a salesperson or broker first meeting a potential customer properly represents the company's image. So much money is spent defining that image to the business community that each person, including all staff, must reflect that effort. Otherwise, a potential customer will choose to hire a competitor whose act is together. My understanding is that customer relation training at Wal-Mart is quite strong for all personnel. I would think that any major restaurant chain has in place a thorough program for staff training and it may pay to observe whether if the customer is not always right at an establishment how the staff person handles a customer who is being a bit particular.
2. Entry
I use Andrew's story as an example of the opportunity that commercial real estate offers. A senior business mentor and good friend of mine told me in Florida in 1971, just at the beginning of that recession, that commercial real estate offered an opportunity to enter a business without having my own capital to invest other than my time and energy, and, with no limit on the size of transactions that could be put together. We discussed this in relation to my going back to law school. His opinion was that it was almost a "sky is the limit" approach, but with some basic sense to it. I had done a few financial reports on potential deals offered to him. I also handed over that year, at my mentor's instruction, a $300k commission check to a broker who he had employed to buy a property that he had settled on the year prior to that. The next year, at the same time, I handed over the same check to that broker as the second half of that commission to that broker. Please realize that in 1972 that commission amount in the onset of that recession was a significant amount of money for any transaction.
Each state has its own regulations for licensure. Florida required a person to take a sales licensing course, pass that, then work in a licensed real estate broker's office for a minimum of two years before being eligible to take a state broker's exam. The sales course is offered by numerous private firms and colleges, evening courses in particular. The cost of the course is minimal. The basic skills for reading, writing and math portions are not difficult. Depending upon your educational qualifications, commercial real estate firms may often offer to provide the course. Smaller, more generalized, brokerage firms may also do the same in order to gain a salesperson.
There typically is a recognized "culture" or business reputation known for a real estate firm in any community, The community can be local, regional or national. It pays to do your homework as to which firm appears to suit your style. The internet is definitely one of the most productive sources for finding a firm's history, its areas of expertise, personnel, and its successes. Recognize that major metropolitan commercial firms often outsource client needs in an outlying area to a smaller commercial firm in that area rather than requiring one of their main office brokers to commit to travel time. Consequently, if you are in a rural market outside or between major metropolitan markets, you should investigate which real estate firms have those relationships for the larger deals.
Your time for success starting in commercial real estate (particularly without capital) will be the result of what you put into it. I had the option in the early '70's of returning to law school and finishing. What I realized most was that I liked being out of an office and "on the street." My attorney friends in Ft. Lauderdale were spending innumerable hours, as needed, in their offices to write briefs, draft documents, etc., all of which that profession requires. My decision was to put in the same hours on commercial real estate that I would have to put in for any law practice. If it worked, then fine, if not I would go back to school.
Considering that the early '70's recession in Florida hit every occupation with almost equal damage, many attorneys had practices with slim billings and clients whose businesses were suffering economically. Several real estate brokers who I met were having very difficult times because the banks were not lending money for deals. Florida had a usury cap of 14% at that time. Deposits were down and when interest rates in California started to go above 14% that is where the money went.
Weekdays in those years, I was knocking on the doors of businesses in the West Palm to Miami corridor. Weekends, I was often painting a house or captaining a motor sailer owned by a friend's corporation. Weekday evenings after dinner, I was at the office reviewing property information, ownerships, tax data, etc. for the next day's driving or phone calls. I found that it was possible to earn a living while getting into the commercial real estate field. I later found out after moving back to Philadelphia, that several of the commercial real estate firms did not mind their starting salespeople to moonlight as bartenders, waiters, or whatever until they had enough experience to close transactions. That has changed somewhat in the larger cities due to the financial strength of the larger firms and their ability to either offer a base salary or draw to new salespersons.
Gender in today's commercial real estate world is not an issue as it was in the '70's. At that time, men only eating clubs were often the norm and women were not often able to match that type of selling locale. The number of women who have joined commercial real estate organizations such as SIOR, CCIM, etc. (which I will discuss later) has increased dramatically over the past 15 years. The commercial real estate courses offered today provide an excellent means of obtaining knowledge that once was taught generally "in house" by senior brokerage personnel responsible for a new salesperson's progress.
Therefore, in considering commercial real estate the aspect of having minimal capital has not changed. Gender is not an issue and many women who have chosen to specialize in industrial or office real estate have done very well. You
can choose your hours, choose your area of specialty(s), choose your market area(s), and choose who you want to approach as a firm to join. Most commercial real estate involes the standard business week, not including late Saturday or Sunday hours (vs. residential Sunday open houses). These are several of the positive aspects of working in commercial real estate. The competition is keen, your competitors respect a good work effort and, most importantly, they respect a strong reputation for any individual.
You should investigate both larger commercial firms and smaller real estate brokerage firms. There are advantages and disadvantages to both.
A). Larger firms may be willing to offer a base salary or a draw against commissions. They may prefer prior business experience, but not necessarily prior real estate brokerage experience that may conflict with what their "culture" is and what their in-house training entails. Typically, a new salesperson would be assigned to a senior broker or brokers to do cold calling, marketing materials, marketing reports for any existing client's property and probably handle property inspections by other competing brokers with their prospects.
A few points on Larger Firms:
Future ownership potential for you in the company may be limited or non-existent.
Control over what market, territory or discipline that you work in may not be your choice. If you are hired for one department, such as retail, that may change if they need personnel support in another department, such as office. You may find that they prefer a new person to rotate through each department and possible each regional office if they have multiple offices.
Depending upon whether the firm is privately held or a public company it could be sold or merged without you being involved in the discussion. There is no real "safety blanket" for any position in a larger firm. If a primary, large, client is lost to a competitor, cuts may be relatively fast to absorb the lack of revenues.
Senior brokers who are successful occasionally leave to join another firm or to start their own competing firm. Clients usually follow those brokers and that could disrupt your potential income if you are in that department and the rain makers leave.
Deal volume can be significant as can be the size of the deals. If an institutional owner (bank, insurance company, pension fund, etc.) has a presence in an urban market, the leasing or sale assignment that they may award to a larger firm can be a "year maker" if the assignment is completed. Usually some year end bonus money flows down to the salespersons who may have participated in the marketing effort.
Senior brokers should have upper level corporate contacts through either a business association, country club, educational institutions, commercial lenders, or contacts referred from other cities where a corporate headquarters may be located. If the firm owners or top brokers are not developing those contacts and relationships, but are relying on the mid-level brokers to do that you may want to look at another firm whose top management is better involved. You want work to filter down from the top instead of getting the crumbs leftover from competing firms who have a solid community (business and non-business) presence.
B). Smaller firms usually will have a broker/owner running the operations with or without broker partners in the firm. Quite often they will have a residential department and a separate commercial department in which a few of the brokers may work in residential and commercial properties.
A few points about Smaller Firms:
Future ownership shares may be offered depending upon deal volume and commitment to the firm. If the founding broker of the firm is nearing retirement age, the opportunity may be better provided that they are maintaining an fully active presence in the community.
Commission percentages may be much more liberal once a minimum threshold of deal volume is met to cover the cost of your desk, phone, secretarial, etc..
A salary or draw is less likely to be offered.
A senior broker may be more likely to have you work directly under him on any property. You will be accountable directly to him and, as should be the case, learn "on the job."
If there is a residential component to the firm, those brokers specializing in that area should be a source of commercial referrals and the same for you referring any possible single family residential to them. Smaller multi-family buildings should be on the commercial side of the business, but motels may be on either side. This can vary in an area such as Ft. Lauderdale, Hilton Head, or New Jersey resorts where a residential owner with a relationship to the firm may also own retail rentals.
Most regional areas have a Realtors Association, Chamber of Commerce or other organization that offers discounted insurance and other benefits to its members. Whereas a larger firm may have a good corporate health plan and other bulk discounted benefits to its employees, you should look at the costs for each that are offered. I have not found that much of a saving on either side, but if you leave a larger firm you will need to find the alternatives that are affordable.
Your business exposure may actually be more effective working out of a smaller firm and being a primary contact for that firm instead of a secondary contact at a larger firm.
Property databases and the Internet have provided smaller firms with much better access to real estate information than in the mid-'90's and before when only larger firms could afford to maintain proprietary property information for a larger market. Launching a significant marketing campaign for a property can be expensive even with the Internet and smaller firms will have a lack of cash resources to compete for major property listings. Deal size, therefore, will be smaller and you will have to strive for volume,
Best regards.
Peter P. Liebert,IV-SIOR
Flourtown, PA
Several years ago, I was attending a Society of Industrial Realtors Annual Spring Conference in Maui. My wife had accompanied me on the trip so that we could also do a lot of sightseeing. Colliers International, a 241 office worldwide firm, sponsored its own company cocktail party the night before the Conference officially began and my wife and I attended the party.
A short while into introductions, a fellow came in from the golf course and he sat down at our table. Andrew Friedlander introduced himself an we discussed our home in Philadelphia, his original home in Brooklyn and his new home in Honolulu. As to how he ended up in Hawaii, Andrew told us that on R&R during his tours in the Army in Vietnam, he decided to take a break in Hawaii after he was finished his last duty tour. He rented an apartment, waited tables, washed cars, etc. to have some extra cash. He said that he paid his apartment rent to an older man who came around once a month and he finally asked the man whether that was his business. Andrew said that he never thought about property management as a business, but the more he spoke to the man the more that he realized how diverse a business commercial real estate could be, particularly in Hawaii. The rental agent began to show Andrew the basics of the business and Andrew decided not to return to Brooklyn.
Forty years later, Andrew is the manager of approximately six Colliers International offices in Hawaii with over 40 brokers and salespeople as his responsibility. Aside from selling and leasing commercial real estate and traditional brokerage transactions through the islands, Andrew's team is involved in all of the other aspects of commercial and industrial real estate.
As one concierge person told my wife and I while we were touring there, "Yes, it is a great place, now where would you ever think of moving to once you are here."
In the past year, a young Army Captain and friend called me from Hawaii. He and his wife were taking in some R&R after his last duty tour and he called to ask me for some advice on commercial real estate firms. I gave him Andrews phone number after I checked with Andrew on his availability. Andrew treated my friend to lunch and introduced him to Colliers' business in the islands. As it turned out, my friend and his wife decided later to relocate to Florida to be closer to their parents. Our Colliers office in Ft. Lauderdale was anxious to interview him and did so. He found a better fit for a concentration in office brokerage with another firm, but I think that it is clear that opportunities do exist with major firms for someone who has an interest, who can demonstrate that they are self motivated and whose comportment (manners, speech, personal grooming, business attire) are all positive. A long time friend told me one night after we and our wives checked in, very late, at a hotel owned by a well known hotel group, "That desk clerk is the person representing this hotel company to its customers and I know the CEO. That clerk's slight rudeness toward us does not at all represent what their CEO wants his company to be known for in their business. He will need to learn that if he is going to be more than the late night clerk."
I mention this because a company such as Colliers or any of its competitors must ensure that a salesperson or broker first meeting a potential customer properly represents the company's image. So much money is spent defining that image to the business community that each person, including all staff, must reflect that effort. Otherwise, a potential customer will choose to hire a competitor whose act is together. My understanding is that customer relation training at Wal-Mart is quite strong for all personnel. I would think that any major restaurant chain has in place a thorough program for staff training and it may pay to observe whether if the customer is not always right at an establishment how the staff person handles a customer who is being a bit particular.
2. Entry
I use Andrew's story as an example of the opportunity that commercial real estate offers. A senior business mentor and good friend of mine told me in Florida in 1971, just at the beginning of that recession, that commercial real estate offered an opportunity to enter a business without having my own capital to invest other than my time and energy, and, with no limit on the size of transactions that could be put together. We discussed this in relation to my going back to law school. His opinion was that it was almost a "sky is the limit" approach, but with some basic sense to it. I had done a few financial reports on potential deals offered to him. I also handed over that year, at my mentor's instruction, a $300k commission check to a broker who he had employed to buy a property that he had settled on the year prior to that. The next year, at the same time, I handed over the same check to that broker as the second half of that commission to that broker. Please realize that in 1972 that commission amount in the onset of that recession was a significant amount of money for any transaction.
Each state has its own regulations for licensure. Florida required a person to take a sales licensing course, pass that, then work in a licensed real estate broker's office for a minimum of two years before being eligible to take a state broker's exam. The sales course is offered by numerous private firms and colleges, evening courses in particular. The cost of the course is minimal. The basic skills for reading, writing and math portions are not difficult. Depending upon your educational qualifications, commercial real estate firms may often offer to provide the course. Smaller, more generalized, brokerage firms may also do the same in order to gain a salesperson.
There typically is a recognized "culture" or business reputation known for a real estate firm in any community, The community can be local, regional or national. It pays to do your homework as to which firm appears to suit your style. The internet is definitely one of the most productive sources for finding a firm's history, its areas of expertise, personnel, and its successes. Recognize that major metropolitan commercial firms often outsource client needs in an outlying area to a smaller commercial firm in that area rather than requiring one of their main office brokers to commit to travel time. Consequently, if you are in a rural market outside or between major metropolitan markets, you should investigate which real estate firms have those relationships for the larger deals.
Your time for success starting in commercial real estate (particularly without capital) will be the result of what you put into it. I had the option in the early '70's of returning to law school and finishing. What I realized most was that I liked being out of an office and "on the street." My attorney friends in Ft. Lauderdale were spending innumerable hours, as needed, in their offices to write briefs, draft documents, etc., all of which that profession requires. My decision was to put in the same hours on commercial real estate that I would have to put in for any law practice. If it worked, then fine, if not I would go back to school.
Considering that the early '70's recession in Florida hit every occupation with almost equal damage, many attorneys had practices with slim billings and clients whose businesses were suffering economically. Several real estate brokers who I met were having very difficult times because the banks were not lending money for deals. Florida had a usury cap of 14% at that time. Deposits were down and when interest rates in California started to go above 14% that is where the money went.
Weekdays in those years, I was knocking on the doors of businesses in the West Palm to Miami corridor. Weekends, I was often painting a house or captaining a motor sailer owned by a friend's corporation. Weekday evenings after dinner, I was at the office reviewing property information, ownerships, tax data, etc. for the next day's driving or phone calls. I found that it was possible to earn a living while getting into the commercial real estate field. I later found out after moving back to Philadelphia, that several of the commercial real estate firms did not mind their starting salespeople to moonlight as bartenders, waiters, or whatever until they had enough experience to close transactions. That has changed somewhat in the larger cities due to the financial strength of the larger firms and their ability to either offer a base salary or draw to new salespersons.
Gender in today's commercial real estate world is not an issue as it was in the '70's. At that time, men only eating clubs were often the norm and women were not often able to match that type of selling locale. The number of women who have joined commercial real estate organizations such as SIOR, CCIM, etc. (which I will discuss later) has increased dramatically over the past 15 years. The commercial real estate courses offered today provide an excellent means of obtaining knowledge that once was taught generally "in house" by senior brokerage personnel responsible for a new salesperson's progress.
Therefore, in considering commercial real estate the aspect of having minimal capital has not changed. Gender is not an issue and many women who have chosen to specialize in industrial or office real estate have done very well. You
can choose your hours, choose your area of specialty(s), choose your market area(s), and choose who you want to approach as a firm to join. Most commercial real estate involes the standard business week, not including late Saturday or Sunday hours (vs. residential Sunday open houses). These are several of the positive aspects of working in commercial real estate. The competition is keen, your competitors respect a good work effort and, most importantly, they respect a strong reputation for any individual.
You should investigate both larger commercial firms and smaller real estate brokerage firms. There are advantages and disadvantages to both.
A). Larger firms may be willing to offer a base salary or a draw against commissions. They may prefer prior business experience, but not necessarily prior real estate brokerage experience that may conflict with what their "culture" is and what their in-house training entails. Typically, a new salesperson would be assigned to a senior broker or brokers to do cold calling, marketing materials, marketing reports for any existing client's property and probably handle property inspections by other competing brokers with their prospects.
A few points on Larger Firms:
Future ownership potential for you in the company may be limited or non-existent.
Control over what market, territory or discipline that you work in may not be your choice. If you are hired for one department, such as retail, that may change if they need personnel support in another department, such as office. You may find that they prefer a new person to rotate through each department and possible each regional office if they have multiple offices.
Depending upon whether the firm is privately held or a public company it could be sold or merged without you being involved in the discussion. There is no real "safety blanket" for any position in a larger firm. If a primary, large, client is lost to a competitor, cuts may be relatively fast to absorb the lack of revenues.
Senior brokers who are successful occasionally leave to join another firm or to start their own competing firm. Clients usually follow those brokers and that could disrupt your potential income if you are in that department and the rain makers leave.
Deal volume can be significant as can be the size of the deals. If an institutional owner (bank, insurance company, pension fund, etc.) has a presence in an urban market, the leasing or sale assignment that they may award to a larger firm can be a "year maker" if the assignment is completed. Usually some year end bonus money flows down to the salespersons who may have participated in the marketing effort.
Senior brokers should have upper level corporate contacts through either a business association, country club, educational institutions, commercial lenders, or contacts referred from other cities where a corporate headquarters may be located. If the firm owners or top brokers are not developing those contacts and relationships, but are relying on the mid-level brokers to do that you may want to look at another firm whose top management is better involved. You want work to filter down from the top instead of getting the crumbs leftover from competing firms who have a solid community (business and non-business) presence.
B). Smaller firms usually will have a broker/owner running the operations with or without broker partners in the firm. Quite often they will have a residential department and a separate commercial department in which a few of the brokers may work in residential and commercial properties.
A few points about Smaller Firms:
Future ownership shares may be offered depending upon deal volume and commitment to the firm. If the founding broker of the firm is nearing retirement age, the opportunity may be better provided that they are maintaining an fully active presence in the community.
Commission percentages may be much more liberal once a minimum threshold of deal volume is met to cover the cost of your desk, phone, secretarial, etc..
A salary or draw is less likely to be offered.
A senior broker may be more likely to have you work directly under him on any property. You will be accountable directly to him and, as should be the case, learn "on the job."
If there is a residential component to the firm, those brokers specializing in that area should be a source of commercial referrals and the same for you referring any possible single family residential to them. Smaller multi-family buildings should be on the commercial side of the business, but motels may be on either side. This can vary in an area such as Ft. Lauderdale, Hilton Head, or New Jersey resorts where a residential owner with a relationship to the firm may also own retail rentals.
Most regional areas have a Realtors Association, Chamber of Commerce or other organization that offers discounted insurance and other benefits to its members. Whereas a larger firm may have a good corporate health plan and other bulk discounted benefits to its employees, you should look at the costs for each that are offered. I have not found that much of a saving on either side, but if you leave a larger firm you will need to find the alternatives that are affordable.
Your business exposure may actually be more effective working out of a smaller firm and being a primary contact for that firm instead of a secondary contact at a larger firm.
Property databases and the Internet have provided smaller firms with much better access to real estate information than in the mid-'90's and before when only larger firms could afford to maintain proprietary property information for a larger market. Launching a significant marketing campaign for a property can be expensive even with the Internet and smaller firms will have a lack of cash resources to compete for major property listings. Deal size, therefore, will be smaller and you will have to strive for volume,
Best regards.
Peter P. Liebert,IV-SIOR
Flourtown, PA
Friday, April 26, 2019
Top 7 Fears of Real Estate Investors Today & How Syndication is the Answer to Your Problems
As a real estate investor, are you suffering from this massive, global economic meltdown, or are you one of the thousands of investors who are actually taking advantage of this "Perfect Real Estate Storm" of opportunity?
You see, with unemployment rising, bank foreclosures skyrocketing and prices in most markets falling more than half from their peak, many investors believe that the market is dead. These investors are running around like a chicken without a head, desperately trying to close deals as they struggle to manage their existing portfolios.
If you're one of them, then it's no wonder why most investors today are packing their bags and leaving the market afraid! After all, in a recent survey polling residential investors, it was discovered that real estate investors today have many reasons to be scared.
The Top 7 Fears of Real Estate Investors Today
1. Lack of Cash -- Personal incomes are dropping. Unemployment is nearing record highs. Renters in most markets are defaulting. Credit card companies are cutting the amount of cash available even for those who have amazing credit scores and always pay back on time.
2. Lack of Confidence - Many investors are lacking confidence in their ability to get through the next three years of this huge downturn. For example, many investors are finding that it's taking months to close a property deal. If you're working short sale strategies, because banks are so burdened with offloading inventory, you could wait six months just to receive a BPO (Broker's Price Opinion).
3. Loan Challenges - A friend of mine couldn't even refinance his house for a lower mortgage payment than what he's paying right now because the household income dropped since his wife's death. If he can't refinance his home for a lower payment, what do you think your chances of getting a loan are? What's more, banks have raised down payment requirements on residential and commercial properties to as much as 40%.
4. Can't Find Deals - The majority of housing and condo sales are foreclosures, as homeowners don't want to sell now and lose all the value that they put into the house.
5. Not Enough Buyers - Yes, incentives like the tax credit are beginning to enter the market. Yes, we are starting to see a reduction in new inventories. The key word is "starting." Yet in many markets, investors are finding a lack of buyers even at bargain prices!
6. Takes Too Much Time - Many old-hat real estate investors are spending their days and nights trying to close deals. Most of their time is spent late at night on their computers, or traveling around the country hopping from one airport to the next, in hopes of getting that six- or seven-figure real estate deal done, just to be disappointed again and again.
7. Lack of Knowledge - Old-hat investing requires you to understand negotiation strategies, NLP mind tricks, what's-working-now techniques, contracts, and how to adapt to opportunities in more than one marketplace, using more than one investing strategy.
Now, I can completely understand these fears of old-hat investors. In fact, the probability is extremely high that investors operating in that fashion will be in the poor house by Christmas, unless they harness the power of real estate investing syndication.
How can real estate syndication solve your problems?
As National Business Credit Expert Thomas Kish says, "Real estate investing syndication drastically reduces the risk and barriers to entry for creating a business of your dreams that is typically unknown to 99% of us."
What Real Estate Syndication Is and How It Will Help You
The idea of real estate syndication is pretty simple. I define it as matchmaking. It's the ultimate joint venture investment business.
You partner with investors who have money to invest in the market, but do not have the expertise required for setting up and closing real estate deals. The money lenders want to limit their exposure with a stronger assurance of profits, and lend money to syndicators or private investors who secure their interest against prime investment real estate.
This enables the syndicator to do a number of deals by leveraging multiple investment partners, rather than using their own credit or cash to try and do a single deal.
Now you, as the syndicator, put the deal together and receive a significant share of the profits (between 20% and 50%) without having to invest your own money. Using your knowledge and business skills, you drive the entire real estate investing syndication business model forward.
By operating this way you can:
o Build a formidable reputation
o Do more deals by leveraging this concept
o Create a fortune for yourself without using your own money
o Become a major player in the market without risking any of your own capital
In other words, when you transform your investing business into a syndicator, you create a win/win/win for everyone involved.
How Real Estate Investing Syndication Has Helped Others Grow a Six-Figure Investing Business with Little Time and Effort
o Using these techniques, with only 10 hours of time invested into a deal, my client Jay Redding syndicated his first commercial real estate property in Indiana earned $250,000 of cash and equity profits.
o Following this methodology within 5 weeks, Certified Financial Planner, my client Michelle Agar syndicated her first group of 5 investment properties in Edmonton, Alberta, earning her $269,000 in profits.
o Re-inventing himself as a real estate syndicator, with just 10 hours of effort, my client Robert Beagle closed his first real estate deal and made over $61,000 in profits on a property he had never seen!
Once you grasp the concepts, you will be on your way to becoming financially independent as a syndicator and you will have an enjoyable, recession-proof business that begins to work for you for the rest of your life.
Real estate investment syndicator Brad Wozny, has transacted over $14 million worth of real estate across 5 markets in North America in just 26 months, Now, he's sharing how everyday real estate investors can close more real estate deals around the world and pocket more 6-figure checks simply with real estate syndication. Claim your copy of his FREE 6-FIGURE Syndication™ Secrets report now at: [http://www.realestatesyndicationriches.com]
Click Here [http://www.realestatesyndicationriches.com]!
By: R Brad Wozny
You see, with unemployment rising, bank foreclosures skyrocketing and prices in most markets falling more than half from their peak, many investors believe that the market is dead. These investors are running around like a chicken without a head, desperately trying to close deals as they struggle to manage their existing portfolios.
If you're one of them, then it's no wonder why most investors today are packing their bags and leaving the market afraid! After all, in a recent survey polling residential investors, it was discovered that real estate investors today have many reasons to be scared.
The Top 7 Fears of Real Estate Investors Today
1. Lack of Cash -- Personal incomes are dropping. Unemployment is nearing record highs. Renters in most markets are defaulting. Credit card companies are cutting the amount of cash available even for those who have amazing credit scores and always pay back on time.
2. Lack of Confidence - Many investors are lacking confidence in their ability to get through the next three years of this huge downturn. For example, many investors are finding that it's taking months to close a property deal. If you're working short sale strategies, because banks are so burdened with offloading inventory, you could wait six months just to receive a BPO (Broker's Price Opinion).
3. Loan Challenges - A friend of mine couldn't even refinance his house for a lower mortgage payment than what he's paying right now because the household income dropped since his wife's death. If he can't refinance his home for a lower payment, what do you think your chances of getting a loan are? What's more, banks have raised down payment requirements on residential and commercial properties to as much as 40%.
4. Can't Find Deals - The majority of housing and condo sales are foreclosures, as homeowners don't want to sell now and lose all the value that they put into the house.
5. Not Enough Buyers - Yes, incentives like the tax credit are beginning to enter the market. Yes, we are starting to see a reduction in new inventories. The key word is "starting." Yet in many markets, investors are finding a lack of buyers even at bargain prices!
6. Takes Too Much Time - Many old-hat real estate investors are spending their days and nights trying to close deals. Most of their time is spent late at night on their computers, or traveling around the country hopping from one airport to the next, in hopes of getting that six- or seven-figure real estate deal done, just to be disappointed again and again.
7. Lack of Knowledge - Old-hat investing requires you to understand negotiation strategies, NLP mind tricks, what's-working-now techniques, contracts, and how to adapt to opportunities in more than one marketplace, using more than one investing strategy.
Now, I can completely understand these fears of old-hat investors. In fact, the probability is extremely high that investors operating in that fashion will be in the poor house by Christmas, unless they harness the power of real estate investing syndication.
How can real estate syndication solve your problems?
As National Business Credit Expert Thomas Kish says, "Real estate investing syndication drastically reduces the risk and barriers to entry for creating a business of your dreams that is typically unknown to 99% of us."
What Real Estate Syndication Is and How It Will Help You
The idea of real estate syndication is pretty simple. I define it as matchmaking. It's the ultimate joint venture investment business.
You partner with investors who have money to invest in the market, but do not have the expertise required for setting up and closing real estate deals. The money lenders want to limit their exposure with a stronger assurance of profits, and lend money to syndicators or private investors who secure their interest against prime investment real estate.
This enables the syndicator to do a number of deals by leveraging multiple investment partners, rather than using their own credit or cash to try and do a single deal.
Now you, as the syndicator, put the deal together and receive a significant share of the profits (between 20% and 50%) without having to invest your own money. Using your knowledge and business skills, you drive the entire real estate investing syndication business model forward.
By operating this way you can:
o Build a formidable reputation
o Do more deals by leveraging this concept
o Create a fortune for yourself without using your own money
o Become a major player in the market without risking any of your own capital
In other words, when you transform your investing business into a syndicator, you create a win/win/win for everyone involved.
How Real Estate Investing Syndication Has Helped Others Grow a Six-Figure Investing Business with Little Time and Effort
o Using these techniques, with only 10 hours of time invested into a deal, my client Jay Redding syndicated his first commercial real estate property in Indiana earned $250,000 of cash and equity profits.
o Following this methodology within 5 weeks, Certified Financial Planner, my client Michelle Agar syndicated her first group of 5 investment properties in Edmonton, Alberta, earning her $269,000 in profits.
o Re-inventing himself as a real estate syndicator, with just 10 hours of effort, my client Robert Beagle closed his first real estate deal and made over $61,000 in profits on a property he had never seen!
Once you grasp the concepts, you will be on your way to becoming financially independent as a syndicator and you will have an enjoyable, recession-proof business that begins to work for you for the rest of your life.
Real estate investment syndicator Brad Wozny, has transacted over $14 million worth of real estate across 5 markets in North America in just 26 months, Now, he's sharing how everyday real estate investors can close more real estate deals around the world and pocket more 6-figure checks simply with real estate syndication. Claim your copy of his FREE 6-FIGURE Syndication™ Secrets report now at: [http://www.realestatesyndicationriches.com]
Click Here [http://www.realestatesyndicationriches.com]!
By: R Brad Wozny
Wednesday, March 13, 2019
How to Get Started in Real Estate Investing
Introduction
This article has been written to provide a novice person considering real estate investing some fundamental concepts to consider as you commit yourself to this area of interest. Like all new endeavors explored, it will be to your advantage to have some basic knowledge on the particular topic before you can truly appreciate if this is right for you.
What Are The Financial Benefits Of Investing In Real Estate?
There are various opportunities that will financially benefit you by investing in real estate. Based upon your current financial condition and future investment goals, there are many factors that must be considered when selecting both a business model as well as a specific project. The following section will provide an overview on the significant financial benefits that are achievable when you invest in real estate.
Property Appreciation
Although predicting future appreciation with great certainty is not feasible, by looking at specific economic indicators can assist the Real Estate Investor in understanding future trends with regards to property value and possible appreciation. Some of these key indicators are as follows:
Job growth
Job growth is a key contributor in establishing possible future appreciation. As Primary jobs (those jobs that export products outside of the local area like the car makers of Detroit) increase, the need for Secondary jobs will also increase by 2-3 times the number of Primary jobs. Secondary jobs provide services to the people performing the Primary jobs. Examples of secondary jobs include the following:
Restaurant workers
Retail store workers
Local trades (plumbers, electricians, builders, etc.)
School employees
Demographic Trends
Demographic trends are another factor to consider when trying to determine if an area has the potential for future appreciation. Demographic research will provide data on the general population of an area which includes the following:
Population Changes
Age distribution
Income
Family Size
Race
Owners verses renters
Marital status
Revitalization Initiatives
Another factor that can affect the appreciation of an area is any revitalization initiatives the local government is undertaking. Revitalization can include the following:
Improvements of roads and transportation
Condemning and removing abandoned houses and buildings
Crime reduction
Tax credit, grants, and loans to developers and Investors to come into the area as well as programs to help keep the current employers from moving away.
Economic development offices from the local government are typically responsible for implementing and managing the revitalization efforts.
Cash flow
Another aspect of how to financially benefit from real estate investing is through the creation of cash flow. Although there are many factors that are taken into consideration that derives your cash flow, simply put, it is the amount of money left over for you after all of the expenses have been paid.
The term cash flow is usually associated with properties that you are holding and generating income from rental units or homes. The great thing about creating a cash flow stream is that it will typically continue whether you stay in bed all day or off on a vacation. However, sustaining this cash flow will take some effort on your part and may include the following:
Maintaining the property
Managing the existing tenants
Keeping the property occupied
Managing property management companies
Equity
Property equity is the difference between the fair market value of the property and the sum of all of the loans against the property. For example, if a property is worth $250,000 and there is a first and second mortgage totaling $200,000, the property has $50,000 in equity. Having equity in your property is essential in order to have a cushion in the event the market exhibits declining value during the time you are holding the property. By utilizing strategies like a refinance or Line of Credit, it will allow you to pull this equity out of the property and use it as you see fit including a return of your initial investment or to leverage this capital to purchase another property. Although having strong cash flow with your properties is vital during your hold times, this income stream will disappear if you ever need to sell the property. Ultimately, it is the equity in your properties that will help set the stage for your long-term wealth creation and financial security.
Tax Incentives
In addition to the benefits mentioned above, there are outstanding tax incentives that the real estate investor can benefit from, they include the following:
Depreciation of the actual property and any capital equipment that may be utilized in your business.
Deductions resulting from expenses from owning and managing the property the property as well as business expenses you may incur.
IRC 1031 exchanges, this is a powerful tax strategy that will allow you to leverage Capital Gains taxes that you would normally pay on the sale of an investment property and defer paying those taxes by purchasing a "Like-kind" replacement property with the full proceeds you received from the sale.
Why Do You Want To Invest In Real Estate?
It will be important for you to understand what reason(s) have motivated you to be interested and involved with real estate investing. Over the years, I have spoken to many new Investors on this subject and I have boiled it down to the following reasons:
Supplement Your Current Income
There are some people who are looking at just supplementing their current income without the intention of leaving their current profession and look at real estate investing as their second job. The Investor's that fall into this group are fortunate because they are not relying solely on real estate investing as their primary source of income, this will be very beneficial during the time you are developing you real estate skill set and investment portfolio.
Take Control of Your Financial Future
Based upon the many years of speaking with Real Estate Investors, perhaps the most compelling reasons people consider real estate investing is the ability for you to have a significant influence of your financial security and for you to control the level of income you would like to receive.
Create a Retirement Plan for Yourself
Using real estate investing as a vehicle to establish or augment a retirement plan is another common motivator I hear frequently from new investors. It is understandable that when economic conditions include downsizing, cost of living increases, and the fear of Social Security meltdown, people are concerned about having an adequate financial foundation to sustain them during their retirement phase of life.
Critical Things to Consider Before Considering Real Estate Investing
Investing in real estate is certainly not for everyone and it will be important for you to honestly assess if this is the right path for you. The following section will provide some basic questions you should ask yourself as you evaluate the feasibility of becoming involved as a Real Estate Investor.
How Much Time Will You Have To Dedicate Towards Real Estate Investing?
As we all know, you can't create anymore time; there can only be 24 hours in a day. As you consider real estate investing, you will need to be realistic with regards to how much time you will have to devote to this endeavor. With today's fast paced society that requires multiple income sources combined with the commitments you may already have with your family, many people can be left with little or no time to devote towards their real estate investing goals.
Are You Able To Motivate Yourself And Have The Discipline Required To Succeed?
Having the desire to be a successful Real Estate Investor is only part of the equation for ultimate success. Along with the desire to succeed comes the need for you to be able to motivate and discipline yourself. Real estate investing is certainly not for everyone despite the late
Carl Schiovone has been actively involved in real estate investing for nearly 30 years. As the co-founder of Cypress Investment Properties, he specializes in the acquisition, rehabilitation, and property management of residential properties. Carl has lectured on various investment topics to numerous investment organizations and is currently working on publishing a series of real estate investment textbooks.
Carl is also the founder and President of Carl Schiovone and Associates Real Estate Coaching, Inc. This organization provides both group and one-on-one educational programs for all levels of investing experience. Please visit our website to learn about our outstanding complimentary coaching offer where we can discuss any real estate topic you like! http://CarlSchiovone.com
By: Carl Schiovone
This article has been written to provide a novice person considering real estate investing some fundamental concepts to consider as you commit yourself to this area of interest. Like all new endeavors explored, it will be to your advantage to have some basic knowledge on the particular topic before you can truly appreciate if this is right for you.
What Are The Financial Benefits Of Investing In Real Estate?
There are various opportunities that will financially benefit you by investing in real estate. Based upon your current financial condition and future investment goals, there are many factors that must be considered when selecting both a business model as well as a specific project. The following section will provide an overview on the significant financial benefits that are achievable when you invest in real estate.
Property Appreciation
Although predicting future appreciation with great certainty is not feasible, by looking at specific economic indicators can assist the Real Estate Investor in understanding future trends with regards to property value and possible appreciation. Some of these key indicators are as follows:
Job growth
Job growth is a key contributor in establishing possible future appreciation. As Primary jobs (those jobs that export products outside of the local area like the car makers of Detroit) increase, the need for Secondary jobs will also increase by 2-3 times the number of Primary jobs. Secondary jobs provide services to the people performing the Primary jobs. Examples of secondary jobs include the following:
Restaurant workers
Retail store workers
Local trades (plumbers, electricians, builders, etc.)
School employees
Demographic Trends
Demographic trends are another factor to consider when trying to determine if an area has the potential for future appreciation. Demographic research will provide data on the general population of an area which includes the following:
Population Changes
Age distribution
Income
Family Size
Race
Owners verses renters
Marital status
Revitalization Initiatives
Another factor that can affect the appreciation of an area is any revitalization initiatives the local government is undertaking. Revitalization can include the following:
Improvements of roads and transportation
Condemning and removing abandoned houses and buildings
Crime reduction
Tax credit, grants, and loans to developers and Investors to come into the area as well as programs to help keep the current employers from moving away.
Economic development offices from the local government are typically responsible for implementing and managing the revitalization efforts.
Cash flow
Another aspect of how to financially benefit from real estate investing is through the creation of cash flow. Although there are many factors that are taken into consideration that derives your cash flow, simply put, it is the amount of money left over for you after all of the expenses have been paid.
The term cash flow is usually associated with properties that you are holding and generating income from rental units or homes. The great thing about creating a cash flow stream is that it will typically continue whether you stay in bed all day or off on a vacation. However, sustaining this cash flow will take some effort on your part and may include the following:
Maintaining the property
Managing the existing tenants
Keeping the property occupied
Managing property management companies
Equity
Property equity is the difference between the fair market value of the property and the sum of all of the loans against the property. For example, if a property is worth $250,000 and there is a first and second mortgage totaling $200,000, the property has $50,000 in equity. Having equity in your property is essential in order to have a cushion in the event the market exhibits declining value during the time you are holding the property. By utilizing strategies like a refinance or Line of Credit, it will allow you to pull this equity out of the property and use it as you see fit including a return of your initial investment or to leverage this capital to purchase another property. Although having strong cash flow with your properties is vital during your hold times, this income stream will disappear if you ever need to sell the property. Ultimately, it is the equity in your properties that will help set the stage for your long-term wealth creation and financial security.
Tax Incentives
In addition to the benefits mentioned above, there are outstanding tax incentives that the real estate investor can benefit from, they include the following:
Depreciation of the actual property and any capital equipment that may be utilized in your business.
Deductions resulting from expenses from owning and managing the property the property as well as business expenses you may incur.
IRC 1031 exchanges, this is a powerful tax strategy that will allow you to leverage Capital Gains taxes that you would normally pay on the sale of an investment property and defer paying those taxes by purchasing a "Like-kind" replacement property with the full proceeds you received from the sale.
Why Do You Want To Invest In Real Estate?
It will be important for you to understand what reason(s) have motivated you to be interested and involved with real estate investing. Over the years, I have spoken to many new Investors on this subject and I have boiled it down to the following reasons:
Supplement Your Current Income
There are some people who are looking at just supplementing their current income without the intention of leaving their current profession and look at real estate investing as their second job. The Investor's that fall into this group are fortunate because they are not relying solely on real estate investing as their primary source of income, this will be very beneficial during the time you are developing you real estate skill set and investment portfolio.
Take Control of Your Financial Future
Based upon the many years of speaking with Real Estate Investors, perhaps the most compelling reasons people consider real estate investing is the ability for you to have a significant influence of your financial security and for you to control the level of income you would like to receive.
Create a Retirement Plan for Yourself
Using real estate investing as a vehicle to establish or augment a retirement plan is another common motivator I hear frequently from new investors. It is understandable that when economic conditions include downsizing, cost of living increases, and the fear of Social Security meltdown, people are concerned about having an adequate financial foundation to sustain them during their retirement phase of life.
Critical Things to Consider Before Considering Real Estate Investing
Investing in real estate is certainly not for everyone and it will be important for you to honestly assess if this is the right path for you. The following section will provide some basic questions you should ask yourself as you evaluate the feasibility of becoming involved as a Real Estate Investor.
How Much Time Will You Have To Dedicate Towards Real Estate Investing?
As we all know, you can't create anymore time; there can only be 24 hours in a day. As you consider real estate investing, you will need to be realistic with regards to how much time you will have to devote to this endeavor. With today's fast paced society that requires multiple income sources combined with the commitments you may already have with your family, many people can be left with little or no time to devote towards their real estate investing goals.
Are You Able To Motivate Yourself And Have The Discipline Required To Succeed?
Having the desire to be a successful Real Estate Investor is only part of the equation for ultimate success. Along with the desire to succeed comes the need for you to be able to motivate and discipline yourself. Real estate investing is certainly not for everyone despite the late
Carl Schiovone has been actively involved in real estate investing for nearly 30 years. As the co-founder of Cypress Investment Properties, he specializes in the acquisition, rehabilitation, and property management of residential properties. Carl has lectured on various investment topics to numerous investment organizations and is currently working on publishing a series of real estate investment textbooks.
Carl is also the founder and President of Carl Schiovone and Associates Real Estate Coaching, Inc. This organization provides both group and one-on-one educational programs for all levels of investing experience. Please visit our website to learn about our outstanding complimentary coaching offer where we can discuss any real estate topic you like! http://CarlSchiovone.com
By: Carl Schiovone
Tuesday, February 12, 2019
Real Estate Auctions (How Do They Work)
The popularity of auction sales of real estates is increasing day by day despite the dominance of the traditional process of real estate selling. Earlier these auctions were labelled as dishonour sales done by the distressed sellers when there was no other way to liquidate a property. But this view has changed as the number of real estate auctions are increasing day by day because sellers of residential as well as commercial properties are opting to auction their property directly or turning to real estate broker houses to get top price as per market rates from the auctions.
Auction opportunity arises when a seller's mind is auction oriented with a hope that the property will fetch a fair market price. To get a fair price, his equity position in the auctioned property should be strong. With a strong equity position in the property, he will save the cost of paying a sales commission. The time of auctioning should be perfect, when the market is soaring high. The auctioneer should also try to avoid bearing high carrying costs associated with the property.
A profitable auction opportunity is created when there is limited supply of a particular type of property whose demand in the real estate market is relatively high or the market is declining with limited buyer's interest in this traditional sales process.
When a property is offered for auctioned, a sense of urgency arises to bring the interested parties together on a particular day and the sales process creates a sales price through competitive bidding among the participating parties.
In early days of real estate auctions only the properties in bad conditions or subjected to foreclosure were auctioned. But now sellers are shifting to real estate auctions to sell their homes. This transformation has occurred because the earlier believe that a seller will not take the risk of auctioning his property at a lesser price than its market value has changed. Real estate auctioneers are at a liberty to set a minimum price which is more than its market value that he will receive in any case. In addition by setting a minimum price, he will no longer have to bear the risk of buying back the property if it does not reach that price and will also save the cost of paying the required sales commission to the auction house.
Many real estate owners prefer to go for a direct auction instead of going to a auction houses to avoid payment of sales commission to real estate brokers which is about 8-10 percent of the property's value. Also the property owners have absolute control on the auction sales process. This is essential when a real estate takes lot of time to sell and the owner is represented by a real estate agent or broker. Many times, it is wise for a real estate owner to auction a property not in use to cut down maintenance expenses. Real estate auction is an exciting event both for the auctioneer and the bidding parties therefore they are always well attended.
Since auction is the best way to get true market value for the real estate, the magic of an exciting real estate auction works for the marketing of these properties for sale. Onus rests on the auctioneer to create demand or an urge to make a bid in the buyers/bidders mind and to attract the attention of the potential buyers/bidders. The potential buyers of the property are then registered after it is ensured that they are financially qualified. It is to be ensured that a considerable sum is paid by the buyer as a down payment which is non refundable and both parties are willing to close the deal as soon as possible. It is necessary to make sure before the auction that the buyer is financially secure so that the seller will not have to wait for receiving the entire payment. Many times it has been found that real estate auctions remain incomplete because the buyer or successful bidder is turned down for mortgages.
The following factors should be kept in mind before a real estate is auctioned by the property owner-
. He should consult experienced and professional auction consultant who have specialized in real estate auctioning.
. It should be ensured that the marketing campaign of the auction event focused properly to have a high impact.
. Importance should be given on direct mail marketing to targeted bidders/buyers.
. The auction event should be advertised in print and audio visual media to have a greater impact. If possible the consignment should be assigned to a reputed advertising agency to make the ad campaign more attractive.
. The auction event should also be advertised through internet and email.
After the promotion or advertisement campaign is launched, the auction event takes place within a few weeks on completion of official formalities. Sellers are informed about the auction date before hand after the auctioneer is ensured that the sellers/bidders are able to meet the preset terms and conditions laid down by him.
Following are the advantages of real estate auctions for the seller-
. The property owner is able to make a quick liquidation of their property.
. The auction is successful in creating a healthy competition among the bidders.
. Their property is exposed to a wide range of prospects.
. Closing is accelerated.
.The sellers are well aware about the date and time when the property will be sold.
. Auctions are successful in considerably bringing down the amount of time a property is on the market for sale.
. Auction gets rid of number of out of the blue events related to property sales.
. Auction reduces the burden of negotiation process from the sellers mind. He is able to sell the property according to the terms and conditions set by him.
. In contrast to conventional sales processes where it is mandatory for the property owner to make necessary improvements and renovations to get a fair price, these properties are auctioned on as-is-where-is basis. Potential buyers receive enough time to make a decision on whether to make a bid or not after having a good look at the property to be auctioned. Therefore it is sold with no emergency and the seller gains from it.
The buyer also enjoys innumerable advantages from real estate auctions, they are-
. He can set his own purchase price.
. He purchases the property at a fair market price.
. He does not have to make long negotiations or bargains to finalize a deal.
. Auction reduces the time to purchase a property.
. He will not have to worry about emergencies because purchasing and closing dates are known to him beforehand.
. Buyers are well aware that sellers are predetermined to sell.
For Free Report and more on Profiting from Real Estate Investing go to [http://www.wealthyideas.net].
By: Frank Berry
Auction opportunity arises when a seller's mind is auction oriented with a hope that the property will fetch a fair market price. To get a fair price, his equity position in the auctioned property should be strong. With a strong equity position in the property, he will save the cost of paying a sales commission. The time of auctioning should be perfect, when the market is soaring high. The auctioneer should also try to avoid bearing high carrying costs associated with the property.
A profitable auction opportunity is created when there is limited supply of a particular type of property whose demand in the real estate market is relatively high or the market is declining with limited buyer's interest in this traditional sales process.
When a property is offered for auctioned, a sense of urgency arises to bring the interested parties together on a particular day and the sales process creates a sales price through competitive bidding among the participating parties.
In early days of real estate auctions only the properties in bad conditions or subjected to foreclosure were auctioned. But now sellers are shifting to real estate auctions to sell their homes. This transformation has occurred because the earlier believe that a seller will not take the risk of auctioning his property at a lesser price than its market value has changed. Real estate auctioneers are at a liberty to set a minimum price which is more than its market value that he will receive in any case. In addition by setting a minimum price, he will no longer have to bear the risk of buying back the property if it does not reach that price and will also save the cost of paying the required sales commission to the auction house.
Many real estate owners prefer to go for a direct auction instead of going to a auction houses to avoid payment of sales commission to real estate brokers which is about 8-10 percent of the property's value. Also the property owners have absolute control on the auction sales process. This is essential when a real estate takes lot of time to sell and the owner is represented by a real estate agent or broker. Many times, it is wise for a real estate owner to auction a property not in use to cut down maintenance expenses. Real estate auction is an exciting event both for the auctioneer and the bidding parties therefore they are always well attended.
Since auction is the best way to get true market value for the real estate, the magic of an exciting real estate auction works for the marketing of these properties for sale. Onus rests on the auctioneer to create demand or an urge to make a bid in the buyers/bidders mind and to attract the attention of the potential buyers/bidders. The potential buyers of the property are then registered after it is ensured that they are financially qualified. It is to be ensured that a considerable sum is paid by the buyer as a down payment which is non refundable and both parties are willing to close the deal as soon as possible. It is necessary to make sure before the auction that the buyer is financially secure so that the seller will not have to wait for receiving the entire payment. Many times it has been found that real estate auctions remain incomplete because the buyer or successful bidder is turned down for mortgages.
The following factors should be kept in mind before a real estate is auctioned by the property owner-
. He should consult experienced and professional auction consultant who have specialized in real estate auctioning.
. It should be ensured that the marketing campaign of the auction event focused properly to have a high impact.
. Importance should be given on direct mail marketing to targeted bidders/buyers.
. The auction event should be advertised in print and audio visual media to have a greater impact. If possible the consignment should be assigned to a reputed advertising agency to make the ad campaign more attractive.
. The auction event should also be advertised through internet and email.
After the promotion or advertisement campaign is launched, the auction event takes place within a few weeks on completion of official formalities. Sellers are informed about the auction date before hand after the auctioneer is ensured that the sellers/bidders are able to meet the preset terms and conditions laid down by him.
Following are the advantages of real estate auctions for the seller-
. The property owner is able to make a quick liquidation of their property.
. The auction is successful in creating a healthy competition among the bidders.
. Their property is exposed to a wide range of prospects.
. Closing is accelerated.
.The sellers are well aware about the date and time when the property will be sold.
. Auctions are successful in considerably bringing down the amount of time a property is on the market for sale.
. Auction gets rid of number of out of the blue events related to property sales.
. Auction reduces the burden of negotiation process from the sellers mind. He is able to sell the property according to the terms and conditions set by him.
. In contrast to conventional sales processes where it is mandatory for the property owner to make necessary improvements and renovations to get a fair price, these properties are auctioned on as-is-where-is basis. Potential buyers receive enough time to make a decision on whether to make a bid or not after having a good look at the property to be auctioned. Therefore it is sold with no emergency and the seller gains from it.
The buyer also enjoys innumerable advantages from real estate auctions, they are-
. He can set his own purchase price.
. He purchases the property at a fair market price.
. He does not have to make long negotiations or bargains to finalize a deal.
. Auction reduces the time to purchase a property.
. He will not have to worry about emergencies because purchasing and closing dates are known to him beforehand.
. Buyers are well aware that sellers are predetermined to sell.
For Free Report and more on Profiting from Real Estate Investing go to [http://www.wealthyideas.net].
By: Frank Berry
Friday, February 1, 2019
Making Money in Real Estate
Making money in Real Estate is the most popular strategy to build wealth. If you're not currently making money and building wealth in real estate you need to start. I have been making money using four very simple strategies that are very simple to duplicate.
All of the millionaires I have learned from make money and build wealth in real estate. That's right, all of them! These real estate strategies can set you free for life!
If you learn and implement them you can build a massive amount of wealth in a very short period of time. I use a system for all four of the strategies that all go hand in hand.
These strategies can easily make you rich in a very short period of time. I use the first strategy to make money fast, the second strategy for making money in chunks and the third strategy is for building wealth and creating income for the rest of my life. The last strategy I use to buy real estate extremely cheap.
I use a step by step system for all of these money making systems. The first strategy requires in many cases no money and no credit. It's the strategy I use to create anywhere from three to fifteen thousand dollars in profits per deal in a short period of time without ever even buying real estate. This strategy is known as wholesaling.
It's easy to begin making quick money. You don't need money to make money with this strategy! If you have bad credit don't worry, you don't need good credit to make money with this strategy. My goal is for you to have a check in your hands of $5,000 or more in 30 days or less!
I can show you my exact system on how to do it. Wholesale is nothing more than making an offer on a piece of real estate, getting that offer accepted, then simply assigning to contract to someone else. Don't worry, making an offer on something doesn't mean you'll be forced to buy it".
Making offers on Real Estate is easy! You can do it two ways. Through a realtor or directly to sellers who don't have their homes listed with a realtor.
I developed a specific step by step system to find listed and unlisted properties to make offers on. Most of my deals are through listed properties. I use a realtor to make offers for me on properties that are listed.
There are a lot of realtors who won't understand what you're trying to accomplish. I'll teach you exactly the process I use to find my realtors as well as how to get them on the same page as you with what you want to accomplish.
There are so many properties for sale. You need to learn how to find the best one's to make offers on. Learning how to wholesale is the first step in becoming a real estate investor and getting out of the rat race! In all of my money making strategies I believe it is the easiest one for both beginners and advanced investors.
I use the second strategy to create larger chunks of cash anywhere from twenty to sixty thousand dollars in profits per deal. It takes a little longer to generate those profits than the first strategy but one deal generates much more money. This strategy is called retailing.
This strategy has some great advantages. It's easy to make consistent $20,000+ on every deal, it can be done part time, and it can and should be done with someone else's money!
Flipping real estate is nothing more than buying a house; fixing it up if it needs repairs, and then selling it for a profit. Most Real estate flippers that fail don't understand the number 1 rule, Buy Cheap! When they buy a house most of them think they're buying it cheap but chances are they're not.
The biggest mistake investors make is they don't calculate all of their costs before they do the deal. There is a specific formula that's easy to follow that will make sure you follow this very important rule. The way you buy your real estate is the difference between winning and losing.
If you are new to real estate investing the first strategy you should implement is wholesaling. The reason is with wholesaling you learn how to make extra money without risking your own money. When you accomplish that then move to retailing.
After you learn how to earn extra money wholesaling, you will have accomplished your first step in becoming a successful flipper. That first step is learning how to buy cheap!
The third strategy I use to build wealth and get paid forever. By doing this I create a monthly income that will last forever. Making money in Real Estate is not just creating quick cash; it's also about creating enough wealth where you can literally never have to work again! This strategy is known as buying and holding.
There are many ways to build a Money Making Machine. The best way is through real estate investing focused on building wealth. Making money now is important but creating wealth for the rest of your life is what will set you free!
Buying real estate isn't hard, but, buying real estate correctly is where most people go wrong. Understanding what makes up a good deal is your greatest asset with this strategy.
You make money when you buy; you get paid when you sell. If you're a beginner this will be the most important thing that must be understood. If you buy right you will have a lot of equity and great cash flow for the entire time you own a particular investment. This is what I refer to as building a money making machine.
In real estate there are many strategies to make money quick. Those are the strategies you should begin with because you have to learn how to buy cheap enough to make money.
After those strategies are executed that is the time to worry about building for the rest of your life. There are multiple ways to buy cheap it's all about learning the ones that will work for you.
Now, once you know how to buy cheap creating wealth is easy! Simply make sure you have great cash flow with each deal you intend on doing and before you know it after multiple deals you will start building monthly cash flow.
Continue this simple recipe over and over and in a very short period of time you could be generating enough cash flow to live on then you can focus on getting rich and wealthy! Best of all you can focus on whatever you want because you don't have to work if you don't want to.
The reason this is my favorite real estate strategy is because I love residual income. Creating something once that pays you for the rest of your life is the smartest thing you can do financially. All my rich mentors made this lesson very clear to me.
Building a money making machine first starts with making quick money in real estate. Once you learn that you will know how to buy real estate the right way. From there all you have to do is hold it for cash flow for the rest of your life!
The final strategy I use to buy real estate extremely cheap from distressed sellers. Buying cheap through properties in pre-foreclosure is a tremendous opportunity.
There are so many ways to make money in real estate. Many people have a hard time finding which way fit's them the best. Some people like to stick to one strategy, others like a lot of different strategies.
I recommend doing some research and reading some books to learn about all the different ways there are to make money before you choose one. I recommend the following products because they should help you decide what kind of real estate strategy you want to pursue.
Making money in real estate goes hand and hand with all of the other best money making strategies. The reason is the tax advantages you get blend very well together with all of the other money making strategies. Real estate investing is also one of my favorites because it is the best way to build ultimate wealth that will last forever!
Learning a simple money making strategy is easy. The hard part is where and who do you ask to teach you? This used to be my problem until I met some very successful mentors.
I learned for them many strategies to get rich, this one is one of the best. Making money in real estate is all about buying cheap! By finding and buying distressed real estate you will be able to buy extremely cheap.
Those who have a way to buy real estate extremely cheap will succeed. Pre-foreclosure investing is a great way to buy cheap from distressed sellers. It's a win-win situation for you and the seller.
There are a few ways to buy real estate in distressed situations. If a seller is in pre-foreclose which means they are behind on payments but their home hasn't been foreclosed on yet they would probably be very interested in selling.
Most of the time people end up losing their homes and would have been much better off if someone was there to help them out of that situation. Like I said, Win-Win situation.
There are two scenarios for the buyer. There is either already sufficient equity in the property for them to purchase it or there isn't enough equity. Most of the time there won't be enough.
There is a simple money making strategy know as short sales for properties that don't have enough equity. In this case the bank or mortgage company that has a lien on the property will most likely accept a huge discount on what they are owed in exchange for a payoff of some amount for what they are owed.
For example, if a property is worth $200,000 and the bank has a lien of $180,000 for a property in not great shape they will probably accept a huge discount. The reason is the cost they have to incur to foreclose, list, and resell is huge.
You make them and offer at $100,000 as a payoff. After negotiations they accept $120,000. You're now able to buy a $200,000 home for $120,000 through your knowledge.
All in all, these four Real Estate Investing Strategies all have their advantages and disadvantages. There is a sequential order they should be implemented in. Take this information and use it to the best of your ability and be smart and savvy out there.
My Name is Michael T. Keenan. I have been studying all aspect of finance for many years. I specialize in learning how to duplicate money making strategies that already exist which has allowed me to make a lot of money much quicker than normal. I have met hundreds of various millionaires and studied thousands. I used their strategies and techniques to get rich. I narrowed down all of the strategies used these millionaires to ten main strategies that I believed would be the easiest for me to duplicate and teach once I executed them. My studies have come a long way and it has allowed me to pursue two of my passions. I'm passionate about being wealthy and I'm even more passionate about teaching others how to get wealthy. After executing several of the ten strategies I began to write a website which allowed me to share my resources and knowledge with others. This was my first step in following my second passion which is educating others. I love adding new knowledge that I've required along the way to my website so everyone reading my site can benefit from that knowledge. I hope everyone interested in creating wealth and ultimately a better life for themselves and their families enjoys my articles and website. Visit my site below to learn more about the ten strategies I believe are the easiest money making strategies to duplicate in order to obtain massive wealth.
[http://www.bestmoneymakingstrategies.com/Making-Money-In-Real-Estate.html]
By: Michael T Keenan
All of the millionaires I have learned from make money and build wealth in real estate. That's right, all of them! These real estate strategies can set you free for life!
If you learn and implement them you can build a massive amount of wealth in a very short period of time. I use a system for all four of the strategies that all go hand in hand.
These strategies can easily make you rich in a very short period of time. I use the first strategy to make money fast, the second strategy for making money in chunks and the third strategy is for building wealth and creating income for the rest of my life. The last strategy I use to buy real estate extremely cheap.
I use a step by step system for all of these money making systems. The first strategy requires in many cases no money and no credit. It's the strategy I use to create anywhere from three to fifteen thousand dollars in profits per deal in a short period of time without ever even buying real estate. This strategy is known as wholesaling.
It's easy to begin making quick money. You don't need money to make money with this strategy! If you have bad credit don't worry, you don't need good credit to make money with this strategy. My goal is for you to have a check in your hands of $5,000 or more in 30 days or less!
I can show you my exact system on how to do it. Wholesale is nothing more than making an offer on a piece of real estate, getting that offer accepted, then simply assigning to contract to someone else. Don't worry, making an offer on something doesn't mean you'll be forced to buy it".
Making offers on Real Estate is easy! You can do it two ways. Through a realtor or directly to sellers who don't have their homes listed with a realtor.
I developed a specific step by step system to find listed and unlisted properties to make offers on. Most of my deals are through listed properties. I use a realtor to make offers for me on properties that are listed.
There are a lot of realtors who won't understand what you're trying to accomplish. I'll teach you exactly the process I use to find my realtors as well as how to get them on the same page as you with what you want to accomplish.
There are so many properties for sale. You need to learn how to find the best one's to make offers on. Learning how to wholesale is the first step in becoming a real estate investor and getting out of the rat race! In all of my money making strategies I believe it is the easiest one for both beginners and advanced investors.
I use the second strategy to create larger chunks of cash anywhere from twenty to sixty thousand dollars in profits per deal. It takes a little longer to generate those profits than the first strategy but one deal generates much more money. This strategy is called retailing.
This strategy has some great advantages. It's easy to make consistent $20,000+ on every deal, it can be done part time, and it can and should be done with someone else's money!
Flipping real estate is nothing more than buying a house; fixing it up if it needs repairs, and then selling it for a profit. Most Real estate flippers that fail don't understand the number 1 rule, Buy Cheap! When they buy a house most of them think they're buying it cheap but chances are they're not.
The biggest mistake investors make is they don't calculate all of their costs before they do the deal. There is a specific formula that's easy to follow that will make sure you follow this very important rule. The way you buy your real estate is the difference between winning and losing.
If you are new to real estate investing the first strategy you should implement is wholesaling. The reason is with wholesaling you learn how to make extra money without risking your own money. When you accomplish that then move to retailing.
After you learn how to earn extra money wholesaling, you will have accomplished your first step in becoming a successful flipper. That first step is learning how to buy cheap!
The third strategy I use to build wealth and get paid forever. By doing this I create a monthly income that will last forever. Making money in Real Estate is not just creating quick cash; it's also about creating enough wealth where you can literally never have to work again! This strategy is known as buying and holding.
There are many ways to build a Money Making Machine. The best way is through real estate investing focused on building wealth. Making money now is important but creating wealth for the rest of your life is what will set you free!
Buying real estate isn't hard, but, buying real estate correctly is where most people go wrong. Understanding what makes up a good deal is your greatest asset with this strategy.
You make money when you buy; you get paid when you sell. If you're a beginner this will be the most important thing that must be understood. If you buy right you will have a lot of equity and great cash flow for the entire time you own a particular investment. This is what I refer to as building a money making machine.
In real estate there are many strategies to make money quick. Those are the strategies you should begin with because you have to learn how to buy cheap enough to make money.
After those strategies are executed that is the time to worry about building for the rest of your life. There are multiple ways to buy cheap it's all about learning the ones that will work for you.
Now, once you know how to buy cheap creating wealth is easy! Simply make sure you have great cash flow with each deal you intend on doing and before you know it after multiple deals you will start building monthly cash flow.
Continue this simple recipe over and over and in a very short period of time you could be generating enough cash flow to live on then you can focus on getting rich and wealthy! Best of all you can focus on whatever you want because you don't have to work if you don't want to.
The reason this is my favorite real estate strategy is because I love residual income. Creating something once that pays you for the rest of your life is the smartest thing you can do financially. All my rich mentors made this lesson very clear to me.
Building a money making machine first starts with making quick money in real estate. Once you learn that you will know how to buy real estate the right way. From there all you have to do is hold it for cash flow for the rest of your life!
The final strategy I use to buy real estate extremely cheap from distressed sellers. Buying cheap through properties in pre-foreclosure is a tremendous opportunity.
There are so many ways to make money in real estate. Many people have a hard time finding which way fit's them the best. Some people like to stick to one strategy, others like a lot of different strategies.
I recommend doing some research and reading some books to learn about all the different ways there are to make money before you choose one. I recommend the following products because they should help you decide what kind of real estate strategy you want to pursue.
Making money in real estate goes hand and hand with all of the other best money making strategies. The reason is the tax advantages you get blend very well together with all of the other money making strategies. Real estate investing is also one of my favorites because it is the best way to build ultimate wealth that will last forever!
Learning a simple money making strategy is easy. The hard part is where and who do you ask to teach you? This used to be my problem until I met some very successful mentors.
I learned for them many strategies to get rich, this one is one of the best. Making money in real estate is all about buying cheap! By finding and buying distressed real estate you will be able to buy extremely cheap.
Those who have a way to buy real estate extremely cheap will succeed. Pre-foreclosure investing is a great way to buy cheap from distressed sellers. It's a win-win situation for you and the seller.
There are a few ways to buy real estate in distressed situations. If a seller is in pre-foreclose which means they are behind on payments but their home hasn't been foreclosed on yet they would probably be very interested in selling.
Most of the time people end up losing their homes and would have been much better off if someone was there to help them out of that situation. Like I said, Win-Win situation.
There are two scenarios for the buyer. There is either already sufficient equity in the property for them to purchase it or there isn't enough equity. Most of the time there won't be enough.
There is a simple money making strategy know as short sales for properties that don't have enough equity. In this case the bank or mortgage company that has a lien on the property will most likely accept a huge discount on what they are owed in exchange for a payoff of some amount for what they are owed.
For example, if a property is worth $200,000 and the bank has a lien of $180,000 for a property in not great shape they will probably accept a huge discount. The reason is the cost they have to incur to foreclose, list, and resell is huge.
You make them and offer at $100,000 as a payoff. After negotiations they accept $120,000. You're now able to buy a $200,000 home for $120,000 through your knowledge.
All in all, these four Real Estate Investing Strategies all have their advantages and disadvantages. There is a sequential order they should be implemented in. Take this information and use it to the best of your ability and be smart and savvy out there.
My Name is Michael T. Keenan. I have been studying all aspect of finance for many years. I specialize in learning how to duplicate money making strategies that already exist which has allowed me to make a lot of money much quicker than normal. I have met hundreds of various millionaires and studied thousands. I used their strategies and techniques to get rich. I narrowed down all of the strategies used these millionaires to ten main strategies that I believed would be the easiest for me to duplicate and teach once I executed them. My studies have come a long way and it has allowed me to pursue two of my passions. I'm passionate about being wealthy and I'm even more passionate about teaching others how to get wealthy. After executing several of the ten strategies I began to write a website which allowed me to share my resources and knowledge with others. This was my first step in following my second passion which is educating others. I love adding new knowledge that I've required along the way to my website so everyone reading my site can benefit from that knowledge. I hope everyone interested in creating wealth and ultimately a better life for themselves and their families enjoys my articles and website. Visit my site below to learn more about the ten strategies I believe are the easiest money making strategies to duplicate in order to obtain massive wealth.
[http://www.bestmoneymakingstrategies.com/Making-Money-In-Real-Estate.html]
By: Michael T Keenan
Thursday, January 10, 2019
Addicted to Real Estate - Why I Can't Stop and Why You Should Start
The All-Money-Down Technique
So how does the all-money-down technique work by purchasing a home with cash? First of all, let me repeat that I really didn't have any cash, but I had a significant amount of equity from Terry's home and several homes that I owned put together to give me a substantial cash down payment. Banks and mortgage companies alike will accept money from a home-equity line of credit as cash to purchase a home. At least they did in 1997 under the financial guidelines of the day. What you must remember about mortgages and lending is that the guidelines change constantly, so this technique I used in 1997 may or may not be able to be used in the future. Whether it is or isn't able to be used again doesn't really matter to me as I believe that there will always be a way to buy real estate with limited money down sooner or later. There will always be a technique to acquire real estate but exactly how that will be done in the future I'm not completely sure.
I began purchasing homes in the Mayfair section of Philadelphia with the prices in the $30,000 to $40,000 per home price range. I would purchase a home with three bedrooms and one bathroom on the second floor with a kitchen, dining room, and living room on the first floor and a basement. What we call a row home in Philadelphia would consist of a porch out front and a backyard the width of the home. Most row homes in Philadelphia are less than twenty-two feet wide. For those of you who are not from Philadelphia and can't picture what a Philadelphia row home looks like, I suggest you watch the movie Rocky. Twenty-two homes on each side of every block will really test your ability to be a neighbor. Things that will usually cause an argument with your Philadelphia neighbors often stem from parking, noise your children make, where you leave your trash cans, parties, and the appearance of your home.
In 1998 my girlfriend and I moved in together and to the suburbs of Philadelphia called Warminster. After living on a street in Tacony, much like Rocky did, I really looked forward to having space between my home and my next-door neighbor. I told Terry not to even think about talking with the people who lived next door to us. I told her if one of them comes over with a fruitcake I am going to take it and punt it like a football right into their backyard. I believe I was suffering from Philadelphia row home syndrome. My new neighbors in Warminster turned out to be wonderful people, but it took me eighteen months before I was willing to learn that.
So you just bought your row home for $35,000 in Mayfair, and after $2000 in closing costs and $5000 in repair costs, you find yourself a good tenant who wants to rent the home. After renting the home with a positive cash flow of $200 a month, you now have an outstanding debt of $42,000 on your home equity line of credit that will have to be paid off. When purchasing the home, I did not get a mortgage as I just purchased a home for cash as it is said in the business. All monies I spent on this house were spent from the home-equity line of credit.
The move now is to pay off your home-equity line of credit so you can go do it again. We now go to a bank with your fixed-up property and tell the mortgage department that you want to do a cash-out refinancing of your real estate investment. It helps to explain that the neighborhood you purchase your property in should have a wider range of pricing as the neighborhood of Mayfair did in the mid-90s. The pricing of homes in Mayfair is quite unusual as you would see a $3000 difference in home values from one block to the next. This was important when doing a cash-out refinancing because it's pretty easy for the bank to see that I just bought my property for $35,000 regardless of the fact that I did many repairs. I could justify the fact that I've spent more money on my home to fix it up, and by putting a tenant in, it was now a profitable piece of real estate from an investment standpoint.
If I was lucky like I was many times over doing this system of purchasing homes in Mayfair and the appraiser would use homes a block or two away and come back with an appraisal of $45,000. Back then there were programs allowing an investor to purchase a home for 10 percent down or left in as equity doing a 90 percent cash out refinance giving me back roughly $40,500. Utilizing this technique allowed me to get back most of the money I put down on the property. I basically paid just $1,500 down for this new home. Why did the mortgage companies and the appraisers keep giving me the numbers I wanted? I assume because they wanted the business. I would only tell the bank I need this to come in at $45,000 or I am just keeping it financed as is. They always seemed to give me what I wanted within reason.
This whole process took three to four months during which time I may have saved a few thousand dollars. Between the money I saved from my job and my investments and cash out refinancing, I had replenished most or all of my funds from my home-equity line of credit that was now almost back to zero to begin the process again. And that is exactly what I intended to do. I used this system to purchase four to six homes a year utilizing the same money to purchase home after home after home over and over again. In reality, the technique is a no-money down or little money down technique. At the time maybe I had $60,000 in available funds to use to buy homes off of my HELOC, so I would buy a home and then replenish the money. It was a terrific technique that was legal, and I could see my dream of being a real estate investor full-time coming to an eventual reality even though I wasn't there yet.
During the years from 1995 to 2002, the real estate market in Philadelphia made gradual increases of maybe 6 percent as each year went on. I began to track my net worth that was 100 percent equity, meaning I had no other forms of investments to look at when calculating my net worth. Generally speaking, the first five years of my real estate career did not go well because of the bad decisions I made purchasing buildings and the decline in the market. Furthermore, my lack of knowledge and experience in repairs made it a rough. The second five years of my real estate career that I just finished explaining didn't make much money either. I supported myself primarily through my career as a salesman, but I could definitely see the writing on the wall that down the road real estate was going to be my full-time gig.
Realty Professionals of America
I own an office building that has a real estate company as a tenant called Realty Professionals of America. The company has a terrific plan where a new agent receives 75 percent of the commission and the broker gets only 25 percent. If you don't know it, this is a pretty good deal, especially for a new real estate agent. The company also offers a 5 percent sponsorship fee to the agent who sponsors them on every deal they do. If you bring an individual who is a realtor in to the company that you have sponsored, the broker will pay you a 5 percent sponsorship out of the broker's end so that the new realtor you sponsored can still earn 75 percent commissions. In addition to the above, Realty Professionals of America offers to increase the realtor's commission by 5 percent after achieving cumulative commission benchmarks, up to a maximum of 90 percent. Once a commission benchmark is reached, an agent's commission rate is only decreased if commissions in the following year do not reach a lower baseline amount. I currently keep 85 percent of all my deals' commissions; plus I receive sponsorship checks of 5 percent from the commissions that the agents I sponsored earn. If you'd like to learn more about being sponsored into Realty Professionals of America's wonderful plan, please call me directly at 267-988-2000.
Getting My Real Estate License
One of the things that I did in the summer of 2005 after leaving my full-time job was to make plans to get my real estate license. Getting my real estate license was something I always wanted to do but never seemed to have the time to do it. I'm sure you've heard that excuse a thousand times. People always say that they're going to do something soon as they find the time to do it, but they never seem to find the time, do they? I try not to let myself make excuses for anything. So I've made up my mind before I ever left my full-time job that one of the first things I would do was to get my real estate license. I enrolled in a school called the American Real Estate Institute for a two-week full-time program to obtain my license to sell real estate in the state of Pennsylvania. Two terrific guys with a world of experience taught the class, and I enjoyed the time I spent there. Immediately after completing the course at the American Real Estate Institute, I booked the next available day offered by the state to take the state exam. My teachers' advice to take the exam immediately after the class turned out to be an excellent suggestion. I passed the exam with flying colors and have used my license many times since to buy real estate and reduce the expenses. If you are going to be a full-time real estate investor or a commercial real estate investor, then you almost have to get a license. While I know a few people who don't believe this, I'm convinced it's the only way.
I worked on one deal at $3 million where the commission to the buyer's real estate agent was $75,000. By the time my broker took a share, I walked with $63,000 commission on that deal alone. With the average cost per year of being a realtor running about $1200 per year, this one deal alone would've paid for my real estate license for fifty-three years. Not to mention all the other fringe benefits like having access to the multiple listing service offered too many realtors in this country. While there are other ways to get access to the multiple listing services or another program similar to it, a real estate license is a great way to go.
Some of the negatives I hear over and over again about having your real estate license is the fact that you have to disclose that you are realtor when buying a home if you're representing yourself. Maybe I'm missing something, but I don't see this as a negative at all. If you're skilled in the art of negotiation, it's just another hurdle that you have to deal with. I suppose you could end up in a lawsuit where a court of law could assume because you are realtor you should know all these things. I don't spend my life worrying about the million ways I can be sued any more than I worry about getting hit by a car every time I cross the street.
The Addict
From his first investment property over 20 years ago to his relentless search for the next great deal every day, Falcone is a non-stop real estate investment machine!
Get Addicted
Sometimes addiction is a very good thing. In this book Phil Falcone, the ultimate real estate addict, will show you how to achieve amazing success as a real estate investor:
• Delve into the details of actual deals he negotiated and learn why his methods were so effective
• Discover why his residential to commercial real estate strategy will create ultimate wealth
• Learn how he used apparent liabilities (OCD, insomnia, and workaholic behavior) to help him achieve his goals
• Explore why he can't stop investing in real estate, and how you can start controlling your own financial destiny through real estate
Frank, funny and informative, Addicted to Real Estate will inspire any investor to achieve higher levels of drive and success in the rewarding world of real estate.
Phil Falcone is a Philadelphia area full-time real estate investor who started in the business at the age of 23, and whose portfolio today includes commercial offices, apartment buildings, and residential homes. As the owner of Falcone Real Estate Holding Corporation, he prides himself on his non-stop real estate focus and determination, his ability to be a great coach and mentor, and on his fun, outside-the-box approach to real estate.
http://Addicted2realestate.com
http://Executecsuites.com
By: Phil Falcone
So how does the all-money-down technique work by purchasing a home with cash? First of all, let me repeat that I really didn't have any cash, but I had a significant amount of equity from Terry's home and several homes that I owned put together to give me a substantial cash down payment. Banks and mortgage companies alike will accept money from a home-equity line of credit as cash to purchase a home. At least they did in 1997 under the financial guidelines of the day. What you must remember about mortgages and lending is that the guidelines change constantly, so this technique I used in 1997 may or may not be able to be used in the future. Whether it is or isn't able to be used again doesn't really matter to me as I believe that there will always be a way to buy real estate with limited money down sooner or later. There will always be a technique to acquire real estate but exactly how that will be done in the future I'm not completely sure.
I began purchasing homes in the Mayfair section of Philadelphia with the prices in the $30,000 to $40,000 per home price range. I would purchase a home with three bedrooms and one bathroom on the second floor with a kitchen, dining room, and living room on the first floor and a basement. What we call a row home in Philadelphia would consist of a porch out front and a backyard the width of the home. Most row homes in Philadelphia are less than twenty-two feet wide. For those of you who are not from Philadelphia and can't picture what a Philadelphia row home looks like, I suggest you watch the movie Rocky. Twenty-two homes on each side of every block will really test your ability to be a neighbor. Things that will usually cause an argument with your Philadelphia neighbors often stem from parking, noise your children make, where you leave your trash cans, parties, and the appearance of your home.
In 1998 my girlfriend and I moved in together and to the suburbs of Philadelphia called Warminster. After living on a street in Tacony, much like Rocky did, I really looked forward to having space between my home and my next-door neighbor. I told Terry not to even think about talking with the people who lived next door to us. I told her if one of them comes over with a fruitcake I am going to take it and punt it like a football right into their backyard. I believe I was suffering from Philadelphia row home syndrome. My new neighbors in Warminster turned out to be wonderful people, but it took me eighteen months before I was willing to learn that.
So you just bought your row home for $35,000 in Mayfair, and after $2000 in closing costs and $5000 in repair costs, you find yourself a good tenant who wants to rent the home. After renting the home with a positive cash flow of $200 a month, you now have an outstanding debt of $42,000 on your home equity line of credit that will have to be paid off. When purchasing the home, I did not get a mortgage as I just purchased a home for cash as it is said in the business. All monies I spent on this house were spent from the home-equity line of credit.
The move now is to pay off your home-equity line of credit so you can go do it again. We now go to a bank with your fixed-up property and tell the mortgage department that you want to do a cash-out refinancing of your real estate investment. It helps to explain that the neighborhood you purchase your property in should have a wider range of pricing as the neighborhood of Mayfair did in the mid-90s. The pricing of homes in Mayfair is quite unusual as you would see a $3000 difference in home values from one block to the next. This was important when doing a cash-out refinancing because it's pretty easy for the bank to see that I just bought my property for $35,000 regardless of the fact that I did many repairs. I could justify the fact that I've spent more money on my home to fix it up, and by putting a tenant in, it was now a profitable piece of real estate from an investment standpoint.
If I was lucky like I was many times over doing this system of purchasing homes in Mayfair and the appraiser would use homes a block or two away and come back with an appraisal of $45,000. Back then there were programs allowing an investor to purchase a home for 10 percent down or left in as equity doing a 90 percent cash out refinance giving me back roughly $40,500. Utilizing this technique allowed me to get back most of the money I put down on the property. I basically paid just $1,500 down for this new home. Why did the mortgage companies and the appraisers keep giving me the numbers I wanted? I assume because they wanted the business. I would only tell the bank I need this to come in at $45,000 or I am just keeping it financed as is. They always seemed to give me what I wanted within reason.
This whole process took three to four months during which time I may have saved a few thousand dollars. Between the money I saved from my job and my investments and cash out refinancing, I had replenished most or all of my funds from my home-equity line of credit that was now almost back to zero to begin the process again. And that is exactly what I intended to do. I used this system to purchase four to six homes a year utilizing the same money to purchase home after home after home over and over again. In reality, the technique is a no-money down or little money down technique. At the time maybe I had $60,000 in available funds to use to buy homes off of my HELOC, so I would buy a home and then replenish the money. It was a terrific technique that was legal, and I could see my dream of being a real estate investor full-time coming to an eventual reality even though I wasn't there yet.
During the years from 1995 to 2002, the real estate market in Philadelphia made gradual increases of maybe 6 percent as each year went on. I began to track my net worth that was 100 percent equity, meaning I had no other forms of investments to look at when calculating my net worth. Generally speaking, the first five years of my real estate career did not go well because of the bad decisions I made purchasing buildings and the decline in the market. Furthermore, my lack of knowledge and experience in repairs made it a rough. The second five years of my real estate career that I just finished explaining didn't make much money either. I supported myself primarily through my career as a salesman, but I could definitely see the writing on the wall that down the road real estate was going to be my full-time gig.
Realty Professionals of America
I own an office building that has a real estate company as a tenant called Realty Professionals of America. The company has a terrific plan where a new agent receives 75 percent of the commission and the broker gets only 25 percent. If you don't know it, this is a pretty good deal, especially for a new real estate agent. The company also offers a 5 percent sponsorship fee to the agent who sponsors them on every deal they do. If you bring an individual who is a realtor in to the company that you have sponsored, the broker will pay you a 5 percent sponsorship out of the broker's end so that the new realtor you sponsored can still earn 75 percent commissions. In addition to the above, Realty Professionals of America offers to increase the realtor's commission by 5 percent after achieving cumulative commission benchmarks, up to a maximum of 90 percent. Once a commission benchmark is reached, an agent's commission rate is only decreased if commissions in the following year do not reach a lower baseline amount. I currently keep 85 percent of all my deals' commissions; plus I receive sponsorship checks of 5 percent from the commissions that the agents I sponsored earn. If you'd like to learn more about being sponsored into Realty Professionals of America's wonderful plan, please call me directly at 267-988-2000.
Getting My Real Estate License
One of the things that I did in the summer of 2005 after leaving my full-time job was to make plans to get my real estate license. Getting my real estate license was something I always wanted to do but never seemed to have the time to do it. I'm sure you've heard that excuse a thousand times. People always say that they're going to do something soon as they find the time to do it, but they never seem to find the time, do they? I try not to let myself make excuses for anything. So I've made up my mind before I ever left my full-time job that one of the first things I would do was to get my real estate license. I enrolled in a school called the American Real Estate Institute for a two-week full-time program to obtain my license to sell real estate in the state of Pennsylvania. Two terrific guys with a world of experience taught the class, and I enjoyed the time I spent there. Immediately after completing the course at the American Real Estate Institute, I booked the next available day offered by the state to take the state exam. My teachers' advice to take the exam immediately after the class turned out to be an excellent suggestion. I passed the exam with flying colors and have used my license many times since to buy real estate and reduce the expenses. If you are going to be a full-time real estate investor or a commercial real estate investor, then you almost have to get a license. While I know a few people who don't believe this, I'm convinced it's the only way.
I worked on one deal at $3 million where the commission to the buyer's real estate agent was $75,000. By the time my broker took a share, I walked with $63,000 commission on that deal alone. With the average cost per year of being a realtor running about $1200 per year, this one deal alone would've paid for my real estate license for fifty-three years. Not to mention all the other fringe benefits like having access to the multiple listing service offered too many realtors in this country. While there are other ways to get access to the multiple listing services or another program similar to it, a real estate license is a great way to go.
Some of the negatives I hear over and over again about having your real estate license is the fact that you have to disclose that you are realtor when buying a home if you're representing yourself. Maybe I'm missing something, but I don't see this as a negative at all. If you're skilled in the art of negotiation, it's just another hurdle that you have to deal with. I suppose you could end up in a lawsuit where a court of law could assume because you are realtor you should know all these things. I don't spend my life worrying about the million ways I can be sued any more than I worry about getting hit by a car every time I cross the street.
The Addict
From his first investment property over 20 years ago to his relentless search for the next great deal every day, Falcone is a non-stop real estate investment machine!
Get Addicted
Sometimes addiction is a very good thing. In this book Phil Falcone, the ultimate real estate addict, will show you how to achieve amazing success as a real estate investor:
• Delve into the details of actual deals he negotiated and learn why his methods were so effective
• Discover why his residential to commercial real estate strategy will create ultimate wealth
• Learn how he used apparent liabilities (OCD, insomnia, and workaholic behavior) to help him achieve his goals
• Explore why he can't stop investing in real estate, and how you can start controlling your own financial destiny through real estate
Frank, funny and informative, Addicted to Real Estate will inspire any investor to achieve higher levels of drive and success in the rewarding world of real estate.
Phil Falcone is a Philadelphia area full-time real estate investor who started in the business at the age of 23, and whose portfolio today includes commercial offices, apartment buildings, and residential homes. As the owner of Falcone Real Estate Holding Corporation, he prides himself on his non-stop real estate focus and determination, his ability to be a great coach and mentor, and on his fun, outside-the-box approach to real estate.
http://Addicted2realestate.com
http://Executecsuites.com
By: Phil Falcone
Wednesday, December 26, 2018
A Guide to Investments in Indian Real Estate
Real estate has traditionally been an avenue for considerable investment per se and investment opportunity for High Net-worth Individuals, Financial institutions as well as individuals looking at viable alternatives for investing money among stocks, bullion, property and other avenues.
Money invested in property for its income and capital growth provides stable and predictable income returns, similar to that of bonds offering both a regular return on investment, if property is rented as well as possibility of capital appreciation. Like all other investment options, real estate investment also has certain risks attached to it, which is quite different from other investments. The available investment opportunities can broadly be categorized into residential, commercial office space and retail sectors.
Investment scenario in real estate
Any investor before considering real estate investments should consider the risk involved in it. This investment option demands a high entry price, suffers from lack of liquidity and an uncertain gestation period. To being illiquid, one cannot sell some units of his property (as one could have done by selling some units of equities, debts or even mutual funds) in case of urgent need of funds.
The maturity period of property investment is uncertain. Investor also has to check the clear property title, especially for the investments in India. The industry experts in this regard claim that property investment should be done by persons who have deeper pockets and longer-term view of their investments. From a long-term financial returns perspective, it is advisable to invest in higher-grade commercial properties.
The returns from property market are comparable to that of certain equities and index funds in longer term. Any investor looking for balancing his portfolio can now look at the real estate sector as a secure means of investment with a certain degree of volatility and risk. A right tenant, location, segmental categories of the Indian property market and individual risk preferences will hence forth prove to be key indicators in achieving the target yields from investments.
The proposed introduction of REMF (Real Estate Mutual Funds) and REIT (Real Estate Investment Trust) will boost these real estate investments from the small investors' point of view. This will also allow small investors to enter the real estate market with contribution as less as INR 10,000.
There is also a demand and need from different market players of the property segment to gradually relax certain norms for FDI in this sector. These foreign investments would then mean higher standards of quality infrastructure and hence would change the entire market scenario in terms of competition and professionalism of market players.
Overall, real estate is expected to offer a good investment alternative to stocks and bonds over the coming years. This attractiveness of real estate investment would be further enhanced on account of favourable inflation and low interest rate regime.
Looking forward, it is possible that with the progress towards the possible opening up of the real estate mutual funds industry and the participation of financial institutions into property investment business, it will pave the way for more organized investment real estate in India, which would be an apt way for investors to get an alternative to invest in property portfolios at marginal level.
Investor's Profile
The two most active investor segments are High Net Worth Individuals (HNIs) and Financial Institutions. While the institutions traditionally show a preference to commercial investment, the high net worth individuals show interest in investing in residential as well as commercial properties.
Apart from these, is the third category of Non-Resident Indians (NRIs). There is a clear bias towards investing in residential properties than commercial properties by the NRIs, the fact could be reasoned as emotional attachment and future security sought by the NRIs. As the necessary formalities and documentation for purchasing immovable properties other than agricultural and plantation properties are quite simple and the rental income is freely repatriable outside India, NRIs have increased their role as investors in real estate
Foreign direct investments (FDIs) in real estate form a small portion of the total investments as there are restrictions such as a minimum lock in period of three years, a minimum size of property to be developed and conditional exit. Besides the conditions, the foreign investor will have to deal with a number of government departments and interpret many complex laws/bylaws.
The concept of Real Estate Investment Trust (REIT) is on the verge of introduction in India. But like most other novel financial instruments, there are going to be problems for this new concept to be accepted.
Real Estate Investment Trust (REIT) would be structured as a company dedicated to owning and, in most cases, operating income-producing real estate, such as apartments, shopping centres, offices and warehouses. A REIT is a company that buys, develops, manages and sells real estate assets and allows participants to invest in a professionally managed portfolio of properties.
Some REITs also are engaged in financing real estate. REITs are pass-through entities or companies that are able to distribute the majority of income cash flows to investors, without taxation, at the corporate level. The main purpose of REITs is to pass the profits to the investors in as intact manner as possible. Hence initially, the REIT's business activities would generally be restricted to generation of property rental income.
The role of the investor is instrumental in scenarios where the interest of the seller and the buyer do not match. For example, if the seller is keen to sell the property and the identified occupier intends to lease the property, between them, the deal will never be fructified; however, an investor can have competitive yields by buying the property and leasing it out to the occupier.
Rationale for real estate investment schemes
The activity of real estate includes a wide range of activities such as development and construction of townships, housing and commercial properties, maintenance of existing properties etc.
The construction sector is one the highest employment sector of the economy and directly or indirectly affects the fortunes of many other sectors. It provides employment to a large work force including a substantial proportion of unskilled labor. However for many reasons this sector does not have smooth access to institutional finance. This is perceived as one of the reasons for the sector not performing to its potential.
By channeling small savings into property, investments would greatly increase access to organized institutional finance. Improved activity in the property sector also improves the revenue flows to the State exchequer through-increased sales-tax, octroi and other collections.
Real estate is an important asset class, which is under conventional circumstances not a viable route for investors in India at present, except by means of direct ownership of properties. For many investors the time is ripe for introducing product to enable diversification by allocating some part of their investment portfolio to real estate investment products. This can be effectively achieved through real estate funds.
Property investment products provide opportunity for capital gains as well as regular periodic incomes. The capital gains may arise from properties developed for sale to actual users or direct investors and the income stream arises out of rentals, income from deposits and service charges for property maintenance.
Advantages of investment in real estate
The following are the advantages for investing in Real Estate Investment Schemes
• As an asset class, property is distinct from the other investment avenues available to a small as well as large investor. Investment in property has its own methodology, advantages, and risk factors that are unlike those for conventional investments. A completely different set of factors, including capital formation, economic performance and supply considerations, influence the realty market, leading to a low correlation in price behaviour vis-Ã -vis other asset classes.
• Historically, over a longer term, real estate provides returns that are comparable with returns on equities. However, the volatility in prices of realty is lower than equities leading to a better risk management to return trade-off for the investment.
• Real estate returns also show a high correlation with inflation. Therefore, real estate investments made over long periods of time provide an inflation hedge and yield real returns
Risks of investment in real estate
The risks involved in investing in real estate are primarily to do with future rental depreciation or general property market risk, liquidity, tenancy risk and property depreciation. The fundamental factors affecting the value of a specific property are:
Location - The location of a building is crucially important and a significant factor in determining its market value. A property investment is likely to be held for several years and the attractiveness of a given location may change over the holding period, for the better or worse. For example, part of a city may be undergoing regeneration, in which case the perception of the location is likely to improve. In contrast, a major new shopping center development may reduce the appeal of existing peaceful, residential properties.
Physical Characteristics - The type and utility of the building will affect its value, i.e. an office or a shop. By utility is meant the benefits an occupier gets from utilizing space within the building. The risk factor is depreciation. All buildings suffer wear and tear but advances in building technology or the requirements of tenants may also render buildings less attractive over time. For example, the need for large magnitude of under-floor cabling in modern city offices has changed the specifications of the required buildings' space. Also, a building which is designed as an office block may not be usable as a Cineplex, though Cineplex may serve better returns than office space.
Tenant Credit Risk - The value of a building is a function of the rental income that you can expect to receive from owning it. If the tenant defaults then the owner loses the rental income. However, it is not just the risk of outright default that matters. If the credit quality of the tenant were to deteriorate materially during the period of ownership then the sale value will likely be worse than it otherwise would have been.
Lease Length - The length of the leases is also an important consideration. If a building is let to a good quality tenant for a long period then the rental income is assured even if market conditions for property are volatile. This is one of the attractive features of property investment. Because the length of lease is a significant feature, it is important at the time of purchase to consider the length of lease at the point in time when the property is likely to be re-occupied. Many leases incorporate break options, and it is a standard market practice to assume that the lease will terminate at the break point.
Liquidity - All property investment is relatively illiquid to most bonds and equities. Property is slow to transact in normal market conditions and hence illiquid. In poor market conditions it will take even longer to find a buyer. There is a high cost of error in property investments. Thus, while a wrong stock investment can be sold immediately, undoing a wrong real estate investment may be tedious and distress process.
Tax Implications - Apart from income tax which is to be paid on rental income and capital gains, there are two more levies which have to be paid by the investor i.e. property tax and stamp duty. The stamp duty and property tax differ from state to state and can impact the investment returns ones expected from a property.
High Cost Of Investment - Real Estate values are high compared to other forms of investment. This nature of real estate investment puts it out of reach of the common masses. On the other hand, stocks and bonds can now be bought in quantities as small as-one share, thus enabling diversification of the portfolio despite lower outlays. Borrowing for investment in real estate increases the risks further.
Risk Of Single Property - Purchasing a single - property exposes the investor to specific risks associated with the property and does not provide any benefits of diversification. Thus, if the property prices fall, the investor is exposed to a high degree of risk.
Distress Sales - Illiquidity of the real estate market also brings in the risk of lower returns or losses in the event of an urgent need to divest. Distress sales are common in the real estate market and lead to returns that are much lower than the fair value of the property.
Legal Issues - While stock exchanges guarantee, to a certain extent, the legitimacy of a trade in equities or bonds and thus protect against bad delivery or fake and forged shares, no similar safety net is available in the property market. It is also difficult to check the title of a property and requires time, money and expertise.
Overall keeping an eye on market trends can reduce most of these risks. For instance, investing in properties where the rentals are at market rates, also, investing in assets that come with high-credit tenants and looking for lease lock-ins to reuse tenancy risk are simple guidelines to follow.
Future Outlook
The real estate market is witnessing a heightened activity from year 2000 both in terms of magnitude of space being developed as well as rational increase in price. Easy availability of housing loans at much lesser rates has encouraged people who are small investors to buy their own house, which may well be their second home too.
High net worth individuals have also demonstrated greater zeal in investing in residential real estate with an intention of reaping capital appreciation and simultaneously securing regular returns.
In the wake of strong economic growth, real estate market should continue to gain momentum resulting in falling vacancies in CBD areas and more development in suburbs; it is unlikely that commercial property prices will rise or fall significantly, beyond rational reasoning.
As the stamp duty on leave and license agreements has been further reduced, it should further attract to deal in this manner encouraging the investors and the occupiers.
With current budget focusing on infrastructure, it will attract quality tenants and add to market growth. Heighten retail activity will give upward push for space requirement.
Further, the proposed introduction of REMF (Real Estate Mutual Funds) and REIT (Real Estate Investment Trust) will boost these real estate investments from the small investors' point of view. These foreign investments would then mean higher standards of quality infrastructure and hence would change the entire market scenario in terms of competition and professionalism of market players.
Looking forward, it is possible that with evident steps of the possible opening up of the REMF industry and the participation of financial institutions into property investment business, it will pave the way for more organized investment in real estate in India, which would be an apt way for retail investors to get an alternative to invest in property portfolios at all levels. Overall, real estate is expected to offer a good investment alternative to stocks and bonds over the coming years.
Shobhit Agarwal is Joint MD, Capital Markets [http://www.joneslanglasalle.co.in/India/EN-GB/Pages/CapitalMarkets.aspx], Jones Lang LaSalle India, the Indian operations of the real estate consultancy [http://www.joneslanglasalle.co.in/], Jones Lang LaSalle.
With an extensive geographic footprint across ten cities, the firm provides investors, developers, local corporate and multinational companies with a comprehensive range of services including research, consultancy, transactions, project and development services, integrated facility management, property management, capital markets, residential, hotels and retail advisory.
By: Shobhit Agarwal
Money invested in property for its income and capital growth provides stable and predictable income returns, similar to that of bonds offering both a regular return on investment, if property is rented as well as possibility of capital appreciation. Like all other investment options, real estate investment also has certain risks attached to it, which is quite different from other investments. The available investment opportunities can broadly be categorized into residential, commercial office space and retail sectors.
Investment scenario in real estate
Any investor before considering real estate investments should consider the risk involved in it. This investment option demands a high entry price, suffers from lack of liquidity and an uncertain gestation period. To being illiquid, one cannot sell some units of his property (as one could have done by selling some units of equities, debts or even mutual funds) in case of urgent need of funds.
The maturity period of property investment is uncertain. Investor also has to check the clear property title, especially for the investments in India. The industry experts in this regard claim that property investment should be done by persons who have deeper pockets and longer-term view of their investments. From a long-term financial returns perspective, it is advisable to invest in higher-grade commercial properties.
The returns from property market are comparable to that of certain equities and index funds in longer term. Any investor looking for balancing his portfolio can now look at the real estate sector as a secure means of investment with a certain degree of volatility and risk. A right tenant, location, segmental categories of the Indian property market and individual risk preferences will hence forth prove to be key indicators in achieving the target yields from investments.
The proposed introduction of REMF (Real Estate Mutual Funds) and REIT (Real Estate Investment Trust) will boost these real estate investments from the small investors' point of view. This will also allow small investors to enter the real estate market with contribution as less as INR 10,000.
There is also a demand and need from different market players of the property segment to gradually relax certain norms for FDI in this sector. These foreign investments would then mean higher standards of quality infrastructure and hence would change the entire market scenario in terms of competition and professionalism of market players.
Overall, real estate is expected to offer a good investment alternative to stocks and bonds over the coming years. This attractiveness of real estate investment would be further enhanced on account of favourable inflation and low interest rate regime.
Looking forward, it is possible that with the progress towards the possible opening up of the real estate mutual funds industry and the participation of financial institutions into property investment business, it will pave the way for more organized investment real estate in India, which would be an apt way for investors to get an alternative to invest in property portfolios at marginal level.
Investor's Profile
The two most active investor segments are High Net Worth Individuals (HNIs) and Financial Institutions. While the institutions traditionally show a preference to commercial investment, the high net worth individuals show interest in investing in residential as well as commercial properties.
Apart from these, is the third category of Non-Resident Indians (NRIs). There is a clear bias towards investing in residential properties than commercial properties by the NRIs, the fact could be reasoned as emotional attachment and future security sought by the NRIs. As the necessary formalities and documentation for purchasing immovable properties other than agricultural and plantation properties are quite simple and the rental income is freely repatriable outside India, NRIs have increased their role as investors in real estate
Foreign direct investments (FDIs) in real estate form a small portion of the total investments as there are restrictions such as a minimum lock in period of three years, a minimum size of property to be developed and conditional exit. Besides the conditions, the foreign investor will have to deal with a number of government departments and interpret many complex laws/bylaws.
The concept of Real Estate Investment Trust (REIT) is on the verge of introduction in India. But like most other novel financial instruments, there are going to be problems for this new concept to be accepted.
Real Estate Investment Trust (REIT) would be structured as a company dedicated to owning and, in most cases, operating income-producing real estate, such as apartments, shopping centres, offices and warehouses. A REIT is a company that buys, develops, manages and sells real estate assets and allows participants to invest in a professionally managed portfolio of properties.
Some REITs also are engaged in financing real estate. REITs are pass-through entities or companies that are able to distribute the majority of income cash flows to investors, without taxation, at the corporate level. The main purpose of REITs is to pass the profits to the investors in as intact manner as possible. Hence initially, the REIT's business activities would generally be restricted to generation of property rental income.
The role of the investor is instrumental in scenarios where the interest of the seller and the buyer do not match. For example, if the seller is keen to sell the property and the identified occupier intends to lease the property, between them, the deal will never be fructified; however, an investor can have competitive yields by buying the property and leasing it out to the occupier.
Rationale for real estate investment schemes
The activity of real estate includes a wide range of activities such as development and construction of townships, housing and commercial properties, maintenance of existing properties etc.
The construction sector is one the highest employment sector of the economy and directly or indirectly affects the fortunes of many other sectors. It provides employment to a large work force including a substantial proportion of unskilled labor. However for many reasons this sector does not have smooth access to institutional finance. This is perceived as one of the reasons for the sector not performing to its potential.
By channeling small savings into property, investments would greatly increase access to organized institutional finance. Improved activity in the property sector also improves the revenue flows to the State exchequer through-increased sales-tax, octroi and other collections.
Real estate is an important asset class, which is under conventional circumstances not a viable route for investors in India at present, except by means of direct ownership of properties. For many investors the time is ripe for introducing product to enable diversification by allocating some part of their investment portfolio to real estate investment products. This can be effectively achieved through real estate funds.
Property investment products provide opportunity for capital gains as well as regular periodic incomes. The capital gains may arise from properties developed for sale to actual users or direct investors and the income stream arises out of rentals, income from deposits and service charges for property maintenance.
Advantages of investment in real estate
The following are the advantages for investing in Real Estate Investment Schemes
• As an asset class, property is distinct from the other investment avenues available to a small as well as large investor. Investment in property has its own methodology, advantages, and risk factors that are unlike those for conventional investments. A completely different set of factors, including capital formation, economic performance and supply considerations, influence the realty market, leading to a low correlation in price behaviour vis-Ã -vis other asset classes.
• Historically, over a longer term, real estate provides returns that are comparable with returns on equities. However, the volatility in prices of realty is lower than equities leading to a better risk management to return trade-off for the investment.
• Real estate returns also show a high correlation with inflation. Therefore, real estate investments made over long periods of time provide an inflation hedge and yield real returns
Risks of investment in real estate
The risks involved in investing in real estate are primarily to do with future rental depreciation or general property market risk, liquidity, tenancy risk and property depreciation. The fundamental factors affecting the value of a specific property are:
Location - The location of a building is crucially important and a significant factor in determining its market value. A property investment is likely to be held for several years and the attractiveness of a given location may change over the holding period, for the better or worse. For example, part of a city may be undergoing regeneration, in which case the perception of the location is likely to improve. In contrast, a major new shopping center development may reduce the appeal of existing peaceful, residential properties.
Physical Characteristics - The type and utility of the building will affect its value, i.e. an office or a shop. By utility is meant the benefits an occupier gets from utilizing space within the building. The risk factor is depreciation. All buildings suffer wear and tear but advances in building technology or the requirements of tenants may also render buildings less attractive over time. For example, the need for large magnitude of under-floor cabling in modern city offices has changed the specifications of the required buildings' space. Also, a building which is designed as an office block may not be usable as a Cineplex, though Cineplex may serve better returns than office space.
Tenant Credit Risk - The value of a building is a function of the rental income that you can expect to receive from owning it. If the tenant defaults then the owner loses the rental income. However, it is not just the risk of outright default that matters. If the credit quality of the tenant were to deteriorate materially during the period of ownership then the sale value will likely be worse than it otherwise would have been.
Lease Length - The length of the leases is also an important consideration. If a building is let to a good quality tenant for a long period then the rental income is assured even if market conditions for property are volatile. This is one of the attractive features of property investment. Because the length of lease is a significant feature, it is important at the time of purchase to consider the length of lease at the point in time when the property is likely to be re-occupied. Many leases incorporate break options, and it is a standard market practice to assume that the lease will terminate at the break point.
Liquidity - All property investment is relatively illiquid to most bonds and equities. Property is slow to transact in normal market conditions and hence illiquid. In poor market conditions it will take even longer to find a buyer. There is a high cost of error in property investments. Thus, while a wrong stock investment can be sold immediately, undoing a wrong real estate investment may be tedious and distress process.
Tax Implications - Apart from income tax which is to be paid on rental income and capital gains, there are two more levies which have to be paid by the investor i.e. property tax and stamp duty. The stamp duty and property tax differ from state to state and can impact the investment returns ones expected from a property.
High Cost Of Investment - Real Estate values are high compared to other forms of investment. This nature of real estate investment puts it out of reach of the common masses. On the other hand, stocks and bonds can now be bought in quantities as small as-one share, thus enabling diversification of the portfolio despite lower outlays. Borrowing for investment in real estate increases the risks further.
Risk Of Single Property - Purchasing a single - property exposes the investor to specific risks associated with the property and does not provide any benefits of diversification. Thus, if the property prices fall, the investor is exposed to a high degree of risk.
Distress Sales - Illiquidity of the real estate market also brings in the risk of lower returns or losses in the event of an urgent need to divest. Distress sales are common in the real estate market and lead to returns that are much lower than the fair value of the property.
Legal Issues - While stock exchanges guarantee, to a certain extent, the legitimacy of a trade in equities or bonds and thus protect against bad delivery or fake and forged shares, no similar safety net is available in the property market. It is also difficult to check the title of a property and requires time, money and expertise.
Overall keeping an eye on market trends can reduce most of these risks. For instance, investing in properties where the rentals are at market rates, also, investing in assets that come with high-credit tenants and looking for lease lock-ins to reuse tenancy risk are simple guidelines to follow.
Future Outlook
The real estate market is witnessing a heightened activity from year 2000 both in terms of magnitude of space being developed as well as rational increase in price. Easy availability of housing loans at much lesser rates has encouraged people who are small investors to buy their own house, which may well be their second home too.
High net worth individuals have also demonstrated greater zeal in investing in residential real estate with an intention of reaping capital appreciation and simultaneously securing regular returns.
In the wake of strong economic growth, real estate market should continue to gain momentum resulting in falling vacancies in CBD areas and more development in suburbs; it is unlikely that commercial property prices will rise or fall significantly, beyond rational reasoning.
As the stamp duty on leave and license agreements has been further reduced, it should further attract to deal in this manner encouraging the investors and the occupiers.
With current budget focusing on infrastructure, it will attract quality tenants and add to market growth. Heighten retail activity will give upward push for space requirement.
Further, the proposed introduction of REMF (Real Estate Mutual Funds) and REIT (Real Estate Investment Trust) will boost these real estate investments from the small investors' point of view. These foreign investments would then mean higher standards of quality infrastructure and hence would change the entire market scenario in terms of competition and professionalism of market players.
Looking forward, it is possible that with evident steps of the possible opening up of the REMF industry and the participation of financial institutions into property investment business, it will pave the way for more organized investment in real estate in India, which would be an apt way for retail investors to get an alternative to invest in property portfolios at all levels. Overall, real estate is expected to offer a good investment alternative to stocks and bonds over the coming years.
Shobhit Agarwal is Joint MD, Capital Markets [http://www.joneslanglasalle.co.in/India/EN-GB/Pages/CapitalMarkets.aspx], Jones Lang LaSalle India, the Indian operations of the real estate consultancy [http://www.joneslanglasalle.co.in/], Jones Lang LaSalle.
With an extensive geographic footprint across ten cities, the firm provides investors, developers, local corporate and multinational companies with a comprehensive range of services including research, consultancy, transactions, project and development services, integrated facility management, property management, capital markets, residential, hotels and retail advisory.
By: Shobhit Agarwal
Monday, November 19, 2018
Limited Liability Corportations and Foreign Investment in California Real Estate
There is some exciting news for foreign investors due to recent geo-political developments and the emergence of several financial factors. This coalescence of events, has at its core, the major drop in the price of US real estate, combined with the exodus of capital from Russia and China. Among foreign investors this has suddenly and significantly produced a demand for real estate in California.
Our research shows that China alone, spent $22 billion on U.S. housing in the last 12 months, much more than they spent the year before. Chinese in particular have a great advantage driven by their strong domestic economy, a stable exchange rate, increased access to credit and desire for diversification and secure investments.
We can cite several reasons for this rise in demand for US Real Estate by foreign Investors, but the primary attraction is the global recognition of the fact that the United States is currently enjoying an economy that is growing relative to other developed nations. Couple that growth and stability with the fact that the US has a transparent legal system which creates an easy avenue for non-U.S. citizens to invest, and what we have is a perfect alignment of both timing and financial law... creating prime opportunity! The US also imposes no currency controls, making it easy to divest, which makes the prospect of Investment in US Real Estate even more attractive.
Here, we provide a few facts that will be useful for those considering investment in Real Estate in the US and Califonia in particular. We will take the sometimes difficult language of these topics and attempt to make them easy to understand.
This article will touch briefly on some of the following topics: Taxation of foreign entities and international investors. U.S. trade or businessTaxation of U.S. entities and individuals. Effectively connected income. Non-effectively connected income. Branch Profits Tax. Tax on excess interest. U.S. withholding tax on payments made to the foreign investor. Foreign corporations. Partnerships. Real Estate Investment Trusts. Treaty protection from taxation. Branch Profits Tax Interest income. Business profits. Income from real property. Capitol gains and third-country use of treaties/limitation on benefits.
We will also briefly highlight dispositions of U.S. real estate investments, including U.S. real property interests, the definition of a U.S. real property holding corporation "USRPHC", U.S. tax consequences of investing in United States Real Property Interests " USRPIs" through foreign corporations, Foreign Investment Real Property Tax Act "FIRPTA" withholding and withholding exceptions.
Non-U.S. citizens choose to invest in US real estate for many different reasons and they will have a diverse range of aims and goals. Many will want to insure that all processes are handled quickly, expeditiously and correctly as well as privately and in some cases with complete anonymity. Secondly, the issue of privacy in regards to your investment is extremely important. With the rise of the internet, private information is becoming more and more public. Although you may be required to reveal information for tax purposes, you are not required, and should not, disclose property ownership for all the world to see. One purpose for privacy is legitimate asset protection from questionable creditor claims or lawsuits. Generally, the less individuals, businesses or government agencies know about your private affairs, the better.
Reducing taxes on your U.S. investments is also a major consideration. When investing in U.S. real estate, one must consider whether property is income-producing and whether or not that income is 'passive income' or income produced by trade or business. Another concern, especially for older investors, is whether the investor is a U.S. resident for estate tax purposes.
The purpose of an LLC, Corporation or Limited Partnership is to form a shield of protection between you personally for any liability arising from the activities of the entity. LLCs offer greater structuring flexibility and better creditor protection than limited partnerships, and are generally preferred over corporations for holding smaller real estate properties. LLC's aren't subject to the record-keeping formalities that corporations are.
If an investor uses a corporation or an LLC to hold real property, the entity will have to register with the California Secretary of State. In doing so, articles of incorporation or the statement of information become visible to the world, including the identity of the corporate officers and directors or the LLC manager.
An great example is the formation of a two-tier structure to help protect you by creating a California LLC to own the real estate, and a Delaware LLC to act as the manager of the California LLC. The benefits to using this two-tier structure are simple and effective but must one must be precise in implementation of this strategy.
In the state of Delaware, the name of the LLC manager is not required to be disclosed, subsequently, the only proprietary information that will appear on California form is the name of the Delaware LLC as the manager. Great care is exercised so that the Delaware LLC is not deemed to be doing business in California and this perfectly legal technical loophole is one of many great tools for acquiring Real Estate with minimal Tax and other liability.
Regarding using a trust to hold real property, the actual name of the trustee and the name of the trust must appear on the recorded deed. Accordingly, If using a trust, the investor might not want to be the trustee, and the trust need not include the investor's name. To insure privacy, a generic name can be used for the entity.
In the case of any real estate investment that happens to be encumbered by debt, the borrower's name will appear on the recorded deed of trust, even if title is taken in the name of a trust or an LLC. But when the investor personally guarantees the loan by acting AS the borrower through the trust entity, THEN the borrower's name may be kept private! At this point the Trust entity becomes the borrower and the owner of the property. This insures that the investor's name does not appear on any recorded documents.
Because formalities, like holding annual meetings of shareholders and maintaining annual minutes, are not required in the case of limited partnerships and LLCs, they are often preferred over corporations. Failing to observe corporate formalities can lead to failure of the liability shield between the individual investor and the corporation. This failure in legal terms is called "piercing the corporate veil".
Limited partnerships and LLCs may create a more effective asset protection stronghold than corporations, because interests and assets may be more difficult to reach by creditors to the investor.
To illustrate this, let's assume an individual in a corporation owns, say, an apartment complex and this corporation receives a judgment against it by a creditor. The creditor can now force the debtor to turn over the stock of the corporation which can result in a devastating loss of corporate assets.
However, when the debtor owns the apartment building through either a Limited Partnership or an LLC the creditor's recourse is limited to a simple charging order, which places a lien on distributions from the LLC or limited partnership, but keeps the creditor from seizing partnership assets and keeps the creditor out the affairs of the LLC or Partnership.
Income Taxation of Real Estate
For the purposes of Federal Income tax a foreigner is referred to as nonresident alien (NRA). An NRA can be defined as a foreign corporation or a person who either;
A) Physically is present in the United States for less than 183 days in any given year. B) Physically is present less than 31 days in the current year. C) Physically is present for less than 183 total days for a three-year period (using a weighing formula) and does not hold a green card.
The applicable Income tax rules associated to NRAs can be quite complex, but as a general rule, the income that IS subject to withholding is a 30 percent flat tax on "fixed or determinable" - "annual or periodical" (FDAP) income (originating in the US), that is not effectively connected to a U.S. trade or business that is subject to withholding. Important point there, which we will address momentarily.
Tax rates imposed on NRAs may be reduced by any applicable treaties and the Gross income is what gets taxed with almost not offsetting deductions. So here, we need to address exactly what FDAP income includes. FDAP is considered to include; interest, dividends, royalties, and rents.
Simply put, NRAs are subject to a 30 percent tax when receiving interest income from U.S. sources. Included within the definitions of FDAP are some miscellaneous categories of income such as; annuity payments, certain insurance premiums, gambling winnings, and alimony.
Capital gains from U.S. sources, however, are generally not taxable unless: A)The NRA is present in the United States for more than 183 days. B) The gains can be effectively connected to a U.S. trade or business. C) The gains are from the sale of certain timber, coal, or domestic iron ore assets.
NRA's can and will be taxed on capital gains (originating in the US) at the rate of 30 percent when these exceptions apply.Because NRA's are taxed on income in the same manner as a US taxpayers when that income can effectively be connected to a US trade or business, then it becomes necessary to define what constitutes; "U.S. trade or business" and to what "effectively connected" means. This is where we can limit the taxable liability.
There are several ways in which the US defines "US trade or Business" but there is no set and specific code definition. The term "US Trade or Business" can be seen as: selling products in the United States (either directly or through an agent), soliciting orders for merchandise from the US and those goods out of the US, providing personal services in the United States, manufacturing, maintaining a retail store, and maintaining corporate offices in the United States.Conversely, there are highly specific and complex definitions for "effectively connected" involving the "force of attraction" and "asset-use" rules, as well as "business-activities" tests.
Generally and for simplistic explanation, an NRA is "effectively connected" if he or she is engaged as a General or limited partner in a U.S. trade or business. Similarly, if the estate or trust is so engaged in trade or business then any beneficiary of said trust or estate is also engaged
For real estate, the nature of the rental income becomes the critical concern. The Real Estate becomes passive if it is generated by a triple-net lease or from lease of unimproved land. When held in this manner and considered passive the rental income is taxed on a gross basis, at a flat rate of 30 percent with applicable withholding and no deductions.
Investors should consider electing to treat their passive real property income, as income from a U.S. trade or business, because the nature of this type of holding and loss of deduction inherent therein is often tax prohibited. However, the election can only be made if the property is generating income.
If the NRA owns or invests in or owns unimproved land that will be developed in the future, he or she should consider leasing the land. This is a great way to generate income. Investment in income-generating allows the NRA the ability to claim deductions from the property and generate a loss carry-forward that will offset income in future years.
There are many tools we can use to assist our NRA clients in avoiding taxation on Real Estate income property, one of which is 'portfolio interest', which is payable only on a debt instrument and not subject to taxation or withholding. There are several ways to fit within the confines of these 'portfolio interest' rules. NRAs can participate in the practice of lending through equity participation loans or loans with equity kickers. An equity kicker is like a loan that allows the lender to participate in equity appreciation. Allowing the lender to convert debt into equity in the form of a conversion option is one way that this can be accomplished as these provisions usually increase interest rates on a contingent basis to mimic equity participation.
There are two levels of tax applicable to a foreign individual or a foreign corporation who owns a U.S. corporation.
The U.S. corporation will be subject subjected to a 30 percent withholding tax on its profits, when the income is not re-invested in the United States and there will be a tax on dividends paid to the foreign shareholders as well. When the U.S. business is owned by a foreign corporation, whether directly or through a disregarded entity, or through a pass-through entity. The branch profits tax replicates the double tax.
The U.S. has treaties covering the 'branch profits tax' with most of the European nations, reducing the tax to between 5 and 10 percent. The 30 percent tax is onerous, as it applies to a "dividend equivalent amount," which is the corporation's effectively connected earnings and profits for the year, less investments the corporation makes in its U.S. assets (money and adjusted bases of property connected with the conduct of a U.S. trade or business). The tax is imposed even if there is no distribution.
Foreign corporations are taxed on their effectively connected income and on any deemed dividends, which are any profits not reinvested in the United State under the branch profits tax.
The rules applicable to the tax on the disposition of real estate are found in a separate regime known as the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).
Generally, FIRTPA taxes an NRAs holdings of U.S. real property interest (USRPI) as if he or she were engaged in a U.S. trade or business. As mentioned earlier, this means that the traditional income tax rules that apply to U.S. taxpayers will also apply to the NRA. Obligation to withhold 10 percent of the amount realized on any disposition falls on purchasers who acquire a USRPI from an NRA.
Ownership and interests of Real Estate Property include: fee ownership, co-ownership, leasehold, timeshare, a life estate, a remainder, a reversion or a right to participate in the appreciation of real property or in the profits from real property. For purposes of definition interest in real property would include any ownership of personal property used to exploit natural resources, land, buildings, mineral deposits, crops, fixtures, operations to construct improvements, the operation of a lodging facility, or providing a furnished office to a tenant (including movable walls or furnishings) as well as Improvements, leaseholds, or options to acquire any of the above.
There are several ways in which a partnership interest is treated as a USRPI: A domestic corporation will be treated as a U.S. real property holding corporation (USRPHC) if USRPIs are equal to or exceed 50 percent of the sum of the corporation's assets. OR when 50 percent or more of the value of the gross partnership assets consists of USRPIs - Or when 50 percent or more of the value of partnership gross assets consist of USRPIs plus cash and cash equivalents. The disposition of partnership interest will be subject to FIRPTA. To the extent that such partnership continues to own USRPIs they will remain subject to this withholding.
The good news is that disposition of an interest in a USRPHC is subject to the FIRPTA tax and withholding but is not subject to state income tax. There is an obvious benefit when compared with the disposition of a USRPI owned directly. USRPI which are owned directly are subject to the lower federal capital gains rate as well as state income tax. If, however on the date of the disposition the corporation had no USRPIs and the totality of the gain was fully recognized (no installment sales or exchanges) on the sale of any USRPIs sold within the past five years Then this disposition cannot be subject to these rules.
Any USRPI sold by an NRA (individual or corporation) will be subject to 10 percent withholding of the amount realized. Withholding applies even if the property is sold at a loss.
The purchaser must report the withholding and pay over the tax, using Form 8288 within 20 days of the purchase. This is to be duly noted because if the purchaser fails to collect the withholding tax from the foreigner, the purchaser will be liable for not only the tax, but also any applicable penalties and interest. The withheld taxes are later credited against the total tax liability of the foreigner.
Instances wherein withholding is not required, are the following:
The seller provides a certificate of non-foreign status. Property acquired by the purchaser is not a USRPI. The transferred property is stock of a domestic corporation and the corporation provides a certificate that it is not a USRPHC.
The USRPI acquired will be used by the purchaser as a residence and the amount realized by the foreigner on the disposition is $300,000 or less. The disposition is not subject to tax, or the amount realized by the foreigner on the disposition is zero.
Estate and Gift Tax: In determining who is an NRA and who is excluded the test is completely different for estate tax purposes. The focus of inquiry will centers around the decedent's residence. This test is very subjective and focuses primarily on intent.The test considers factors from across the board, such as how long the NRA has been in the United States, how often he or she travels as well as the size, and cost of home in the United States. The test will also look at the location of NRA's family, their participation in community activities, participation in U.S. business and ownership of assets in the United States. Voting is also taken into consideration.
A foreigner can be a U.S. resident for income tax purposes but not be domiciled for estate tax purposes. An NRA, whether a nonresident alien or non-domiciliary, will be subject to a different transfer taxes (estate and gift taxes) than a U.S. taxpayer. Only the gross part of the NRA's Estate that at the time of death is situated in the United States will be taxed with the estate tax. Although the rate of NRA's estate tax will be the same as that imposed on U.S. citizens and resident aliens, the unified credit is only $13,000 (equivalent to about $60,000 of property value).
These may be ameliorated by any existing estate tax treaty. European countries, Australia, and Japan enjoys these treaties, The U.S. does not maintain as many estate tax treaties as income tax treaties.
The IRC defines the following property as situated in the United States: A) Shares of stock of a U.S. corporation. B) Revocable transfers or transfers within three years of death of U.S. property or transfers with a retained interest (described in IRC Sections 2035 to 2038). C) Debt issued by a U.S. person or a governmental entity within the United States (e.g., municipal bonds).
Real estate in the United States is considered U.S. property when it is physical personal property such as works of art, furniture, cars, and currency. Debt, however is ignored if it is recourse debt, but gross value is included, not just equity. U.S.-situs property is also a US property if it is a beneficial interest in a trust holding. Life insurance is NOT included as U.S.-situs property.
The estate tax returns must disclose all of the NRA's worldwide assets, in order to determine the ratio that the U.S. assets bear to non-U.S. assets. The gross estate is reduced by various deductions relating to the U.S.-situs property. This ratio determines the percentage of allowable deductions that may be claimed against the gross estate.
As mentioned earlier, when real estate is subject to a recourse mortgage, the gross value of the real estate is included, offset by the mortgage debt. This distinction is very relevant for NRAs whose debts are subject to apportionment between U.S. and non-U.S. assets and therefore not fully deductible.
Accurate planning is crucial. Let us illustrate: An NRA can own US property through a foreign corporation and this property is not included in the NRA's estate. This means that the US Real property owned by the NRA has now effectively been converted into a non-U.S. intangible asset.
And with Real Estate that was not initially acquired through a foreign corporation, you can still avoid future taxation to the estate by paying an income tax today on the transfer of the real estate to a foreign corporation (usually treated as a sale).
An NRA donor is not subject to U.S. gift taxes on any gifts of non-U.S. situs property gifted to any person, including U.S. citizens and residents. Gift taxes are imposed on the donor. Gifts from an NRA that are in excess of $100,000 must reported on Form 3520.46 by citizens and residents, however, Gifts of U.S.-situs assets are subject to gift taxes, with the exception of intangibles, which are not taxable.
If it is physically located in the United States tangible personal property and real property is sited within the United States. The lifetime unified credit is not available to NRA donors, but NRA donors are allowed the same annual gift tax exclusion as other taxpayers. NRA's are also subject to the same rate-schedule for gift taxes.
The primary thrust of estate tax planning for NRAs is through the use of; the following: Foreign corporations to own U.S. assets, and the gift tax exemption for intangibles to remove assets from the United States. It is very important that the corporation have a business purpose and activity, lest it be deemed a sham designed to avoid U.S. estate taxes. If the NRA dies owning shares of stock in a foreign corporation, the shares are not included in the NRA's estate, regardless of the situs of the corporation's assets.
Let us break this down into one easy to read and understand paragraph:
In a nutshell, shares in U.S. corporations and interests in partnerships or LLCs are intangibles and the gift of an intangible, wherever situated, by an NRA is not subject to gift tax. Consequently, real estate owned by the NRA through a U.S. corporation, partnership, or LLC may be removed from the NRA's U.S. estate by gifting entity interests to foreign relatives.
Ownership Structures: Here we discuss the ownership architectures under which NRA's can acquire Real Estate. The NRA's personal goals and priorities of course dictate the type of architecture that will be used. There are advantages and disadvantages to each of these alternatives. Direct investment for example, (real estate owned by the NRA) is simple and is subject to only one level of tax on the disposition. The sale is taxed at a 15 percent rate If the real estate is held for one year. There are many disadvantages to the direct investment approach, a few of which are: no privacy, no liability protection, the obligation to file U.S. income tax returns, and if the NRA dies while owning the property, his or her estate is subject to U.S. estate taxes.
When an NRA acquires the real estate through an LLC or an LP, this is considered an LLC or a limited partnership structure. This structure provides the NRA with protection of privacy and liability and allows for lifetime transfers that escape the gift tax. The obligation to file U.S. income tax returns and the possibility for U.S. estate tax on death remain, however.
Ownership of real estate through a domestic corporation, will afford privacy and liability protection, obviate the foreigner's need to file individual U.S. income tax returns and allow lifetime gift tax-free transfers. *this refers to a C corporation, since a foreign shareholder precludes an S corporation.
Ownership of stock will not trigger a return filing obligation, unlike engaging in a U.S. trade or business which requires a U.S. tax return
Ownership of real estate through a domestic corporation has three disadvantages: Federal and state corporate income tax at the corporate level will add a second layer of tax. Dividends from the domestic corporation to its foreign shareholder will be subject to 30 percent withholding. Shares of the domestic corporation will be included in the U.S. estate of the foreign shareholder.
Furthermore, the foreign shareholder will be subject to FIRPTA, because the corporation will be treated as a USRPHC (upon the disposition of the stock in the corporation). The purchaser of the shares is then required the file a U.S. income tax return with 10 percent tax withholding. Actual ownership of the real estate may be held by the U.S. corporation directly, or by a disregarded entity owned by the corporation or through a U.S. partnership. An LLC that chooses to be taxed as a corporation can also be the corporation.
There are several advantages to foreign corporation ownership:
Liability protection- There is no U.S. income tax or filing requirement for the foreign shareholder. Shares in the foreign corporation are non-U.S. assets not included in the U.S. estate.
Dividends are not subject to U.S. withholding. There is no tax or filing requirement on the disposition of the stock. There is no gift tax on the transfer of those shares of stock.
Disadvantages of using the foreign corporation: A) just like with the domestic corporation, there will be corporate level taxes, because the foreign corporation will be deemed engaged in a U.S. trade or business. B) Possibly the largest disadvantage of ownership of U.S. real estate through a foreign corporation would be that the foreign corporation will be subject to the branch profits tax.
One of the most advantageous structure for ownership of U.S. real estate by NRAs is a hybrid foreign and U.S. corporation. It runs like this: The NRA owns a foreign corporation that in turn owns a U.S. LLC taxed as a corporation. The benefits to this type of structure is paramount to a good tax shield and offers: privacy and liability protection, escaping U.S. individual income tax filing requirements and it also avoids U.S. estate taxes. On top of that it allows for gift tax-free lifetime transfers, and avoids the branch profits tax.
The beauty and benefit of this is that the timing and the amount of this dividend is within the NRA's control even though distributions from the U.S. subsidiary to the foreign parent are subject to the 30 percent FDAP withholding.
There are many things to consider and several structures available to limit tax liability, preserve and protect anonymity and increase profits of US Real Estate investments by foreign investors. We must keep in mind that each investment presents its own challenges and no structure is perfect. Advantages and disadvantages abound which will require a tailored analysis in light of the individual or group objectives.
It's really about implementing a structure which will successfully carry the NRA through to his or her END GAME, with the utmost protection from liability and the maximum return on investment.
Jeffrey A Cancilla practices law in the area's of: Immigration, Mortgage, Real Estate, Real Estate Settlement and Procedures,Truth in Lending Laws and more. To find out how you can get more out of your investment in US Real Estate or for any other legal matter mentioned here, please visit: http://www.InvestinCalRealEstate.com or https://huntingtonlawgroup.wordpress.com/
By: Jeffrey A Cancilla
Our research shows that China alone, spent $22 billion on U.S. housing in the last 12 months, much more than they spent the year before. Chinese in particular have a great advantage driven by their strong domestic economy, a stable exchange rate, increased access to credit and desire for diversification and secure investments.
We can cite several reasons for this rise in demand for US Real Estate by foreign Investors, but the primary attraction is the global recognition of the fact that the United States is currently enjoying an economy that is growing relative to other developed nations. Couple that growth and stability with the fact that the US has a transparent legal system which creates an easy avenue for non-U.S. citizens to invest, and what we have is a perfect alignment of both timing and financial law... creating prime opportunity! The US also imposes no currency controls, making it easy to divest, which makes the prospect of Investment in US Real Estate even more attractive.
Here, we provide a few facts that will be useful for those considering investment in Real Estate in the US and Califonia in particular. We will take the sometimes difficult language of these topics and attempt to make them easy to understand.
This article will touch briefly on some of the following topics: Taxation of foreign entities and international investors. U.S. trade or businessTaxation of U.S. entities and individuals. Effectively connected income. Non-effectively connected income. Branch Profits Tax. Tax on excess interest. U.S. withholding tax on payments made to the foreign investor. Foreign corporations. Partnerships. Real Estate Investment Trusts. Treaty protection from taxation. Branch Profits Tax Interest income. Business profits. Income from real property. Capitol gains and third-country use of treaties/limitation on benefits.
We will also briefly highlight dispositions of U.S. real estate investments, including U.S. real property interests, the definition of a U.S. real property holding corporation "USRPHC", U.S. tax consequences of investing in United States Real Property Interests " USRPIs" through foreign corporations, Foreign Investment Real Property Tax Act "FIRPTA" withholding and withholding exceptions.
Non-U.S. citizens choose to invest in US real estate for many different reasons and they will have a diverse range of aims and goals. Many will want to insure that all processes are handled quickly, expeditiously and correctly as well as privately and in some cases with complete anonymity. Secondly, the issue of privacy in regards to your investment is extremely important. With the rise of the internet, private information is becoming more and more public. Although you may be required to reveal information for tax purposes, you are not required, and should not, disclose property ownership for all the world to see. One purpose for privacy is legitimate asset protection from questionable creditor claims or lawsuits. Generally, the less individuals, businesses or government agencies know about your private affairs, the better.
Reducing taxes on your U.S. investments is also a major consideration. When investing in U.S. real estate, one must consider whether property is income-producing and whether or not that income is 'passive income' or income produced by trade or business. Another concern, especially for older investors, is whether the investor is a U.S. resident for estate tax purposes.
The purpose of an LLC, Corporation or Limited Partnership is to form a shield of protection between you personally for any liability arising from the activities of the entity. LLCs offer greater structuring flexibility and better creditor protection than limited partnerships, and are generally preferred over corporations for holding smaller real estate properties. LLC's aren't subject to the record-keeping formalities that corporations are.
If an investor uses a corporation or an LLC to hold real property, the entity will have to register with the California Secretary of State. In doing so, articles of incorporation or the statement of information become visible to the world, including the identity of the corporate officers and directors or the LLC manager.
An great example is the formation of a two-tier structure to help protect you by creating a California LLC to own the real estate, and a Delaware LLC to act as the manager of the California LLC. The benefits to using this two-tier structure are simple and effective but must one must be precise in implementation of this strategy.
In the state of Delaware, the name of the LLC manager is not required to be disclosed, subsequently, the only proprietary information that will appear on California form is the name of the Delaware LLC as the manager. Great care is exercised so that the Delaware LLC is not deemed to be doing business in California and this perfectly legal technical loophole is one of many great tools for acquiring Real Estate with minimal Tax and other liability.
Regarding using a trust to hold real property, the actual name of the trustee and the name of the trust must appear on the recorded deed. Accordingly, If using a trust, the investor might not want to be the trustee, and the trust need not include the investor's name. To insure privacy, a generic name can be used for the entity.
In the case of any real estate investment that happens to be encumbered by debt, the borrower's name will appear on the recorded deed of trust, even if title is taken in the name of a trust or an LLC. But when the investor personally guarantees the loan by acting AS the borrower through the trust entity, THEN the borrower's name may be kept private! At this point the Trust entity becomes the borrower and the owner of the property. This insures that the investor's name does not appear on any recorded documents.
Because formalities, like holding annual meetings of shareholders and maintaining annual minutes, are not required in the case of limited partnerships and LLCs, they are often preferred over corporations. Failing to observe corporate formalities can lead to failure of the liability shield between the individual investor and the corporation. This failure in legal terms is called "piercing the corporate veil".
Limited partnerships and LLCs may create a more effective asset protection stronghold than corporations, because interests and assets may be more difficult to reach by creditors to the investor.
To illustrate this, let's assume an individual in a corporation owns, say, an apartment complex and this corporation receives a judgment against it by a creditor. The creditor can now force the debtor to turn over the stock of the corporation which can result in a devastating loss of corporate assets.
However, when the debtor owns the apartment building through either a Limited Partnership or an LLC the creditor's recourse is limited to a simple charging order, which places a lien on distributions from the LLC or limited partnership, but keeps the creditor from seizing partnership assets and keeps the creditor out the affairs of the LLC or Partnership.
Income Taxation of Real Estate
For the purposes of Federal Income tax a foreigner is referred to as nonresident alien (NRA). An NRA can be defined as a foreign corporation or a person who either;
A) Physically is present in the United States for less than 183 days in any given year. B) Physically is present less than 31 days in the current year. C) Physically is present for less than 183 total days for a three-year period (using a weighing formula) and does not hold a green card.
The applicable Income tax rules associated to NRAs can be quite complex, but as a general rule, the income that IS subject to withholding is a 30 percent flat tax on "fixed or determinable" - "annual or periodical" (FDAP) income (originating in the US), that is not effectively connected to a U.S. trade or business that is subject to withholding. Important point there, which we will address momentarily.
Tax rates imposed on NRAs may be reduced by any applicable treaties and the Gross income is what gets taxed with almost not offsetting deductions. So here, we need to address exactly what FDAP income includes. FDAP is considered to include; interest, dividends, royalties, and rents.
Simply put, NRAs are subject to a 30 percent tax when receiving interest income from U.S. sources. Included within the definitions of FDAP are some miscellaneous categories of income such as; annuity payments, certain insurance premiums, gambling winnings, and alimony.
Capital gains from U.S. sources, however, are generally not taxable unless: A)The NRA is present in the United States for more than 183 days. B) The gains can be effectively connected to a U.S. trade or business. C) The gains are from the sale of certain timber, coal, or domestic iron ore assets.
NRA's can and will be taxed on capital gains (originating in the US) at the rate of 30 percent when these exceptions apply.Because NRA's are taxed on income in the same manner as a US taxpayers when that income can effectively be connected to a US trade or business, then it becomes necessary to define what constitutes; "U.S. trade or business" and to what "effectively connected" means. This is where we can limit the taxable liability.
There are several ways in which the US defines "US trade or Business" but there is no set and specific code definition. The term "US Trade or Business" can be seen as: selling products in the United States (either directly or through an agent), soliciting orders for merchandise from the US and those goods out of the US, providing personal services in the United States, manufacturing, maintaining a retail store, and maintaining corporate offices in the United States.Conversely, there are highly specific and complex definitions for "effectively connected" involving the "force of attraction" and "asset-use" rules, as well as "business-activities" tests.
Generally and for simplistic explanation, an NRA is "effectively connected" if he or she is engaged as a General or limited partner in a U.S. trade or business. Similarly, if the estate or trust is so engaged in trade or business then any beneficiary of said trust or estate is also engaged
For real estate, the nature of the rental income becomes the critical concern. The Real Estate becomes passive if it is generated by a triple-net lease or from lease of unimproved land. When held in this manner and considered passive the rental income is taxed on a gross basis, at a flat rate of 30 percent with applicable withholding and no deductions.
Investors should consider electing to treat their passive real property income, as income from a U.S. trade or business, because the nature of this type of holding and loss of deduction inherent therein is often tax prohibited. However, the election can only be made if the property is generating income.
If the NRA owns or invests in or owns unimproved land that will be developed in the future, he or she should consider leasing the land. This is a great way to generate income. Investment in income-generating allows the NRA the ability to claim deductions from the property and generate a loss carry-forward that will offset income in future years.
There are many tools we can use to assist our NRA clients in avoiding taxation on Real Estate income property, one of which is 'portfolio interest', which is payable only on a debt instrument and not subject to taxation or withholding. There are several ways to fit within the confines of these 'portfolio interest' rules. NRAs can participate in the practice of lending through equity participation loans or loans with equity kickers. An equity kicker is like a loan that allows the lender to participate in equity appreciation. Allowing the lender to convert debt into equity in the form of a conversion option is one way that this can be accomplished as these provisions usually increase interest rates on a contingent basis to mimic equity participation.
There are two levels of tax applicable to a foreign individual or a foreign corporation who owns a U.S. corporation.
The U.S. corporation will be subject subjected to a 30 percent withholding tax on its profits, when the income is not re-invested in the United States and there will be a tax on dividends paid to the foreign shareholders as well. When the U.S. business is owned by a foreign corporation, whether directly or through a disregarded entity, or through a pass-through entity. The branch profits tax replicates the double tax.
The U.S. has treaties covering the 'branch profits tax' with most of the European nations, reducing the tax to between 5 and 10 percent. The 30 percent tax is onerous, as it applies to a "dividend equivalent amount," which is the corporation's effectively connected earnings and profits for the year, less investments the corporation makes in its U.S. assets (money and adjusted bases of property connected with the conduct of a U.S. trade or business). The tax is imposed even if there is no distribution.
Foreign corporations are taxed on their effectively connected income and on any deemed dividends, which are any profits not reinvested in the United State under the branch profits tax.
The rules applicable to the tax on the disposition of real estate are found in a separate regime known as the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).
Generally, FIRTPA taxes an NRAs holdings of U.S. real property interest (USRPI) as if he or she were engaged in a U.S. trade or business. As mentioned earlier, this means that the traditional income tax rules that apply to U.S. taxpayers will also apply to the NRA. Obligation to withhold 10 percent of the amount realized on any disposition falls on purchasers who acquire a USRPI from an NRA.
Ownership and interests of Real Estate Property include: fee ownership, co-ownership, leasehold, timeshare, a life estate, a remainder, a reversion or a right to participate in the appreciation of real property or in the profits from real property. For purposes of definition interest in real property would include any ownership of personal property used to exploit natural resources, land, buildings, mineral deposits, crops, fixtures, operations to construct improvements, the operation of a lodging facility, or providing a furnished office to a tenant (including movable walls or furnishings) as well as Improvements, leaseholds, or options to acquire any of the above.
There are several ways in which a partnership interest is treated as a USRPI: A domestic corporation will be treated as a U.S. real property holding corporation (USRPHC) if USRPIs are equal to or exceed 50 percent of the sum of the corporation's assets. OR when 50 percent or more of the value of the gross partnership assets consists of USRPIs - Or when 50 percent or more of the value of partnership gross assets consist of USRPIs plus cash and cash equivalents. The disposition of partnership interest will be subject to FIRPTA. To the extent that such partnership continues to own USRPIs they will remain subject to this withholding.
The good news is that disposition of an interest in a USRPHC is subject to the FIRPTA tax and withholding but is not subject to state income tax. There is an obvious benefit when compared with the disposition of a USRPI owned directly. USRPI which are owned directly are subject to the lower federal capital gains rate as well as state income tax. If, however on the date of the disposition the corporation had no USRPIs and the totality of the gain was fully recognized (no installment sales or exchanges) on the sale of any USRPIs sold within the past five years Then this disposition cannot be subject to these rules.
Any USRPI sold by an NRA (individual or corporation) will be subject to 10 percent withholding of the amount realized. Withholding applies even if the property is sold at a loss.
The purchaser must report the withholding and pay over the tax, using Form 8288 within 20 days of the purchase. This is to be duly noted because if the purchaser fails to collect the withholding tax from the foreigner, the purchaser will be liable for not only the tax, but also any applicable penalties and interest. The withheld taxes are later credited against the total tax liability of the foreigner.
Instances wherein withholding is not required, are the following:
The seller provides a certificate of non-foreign status. Property acquired by the purchaser is not a USRPI. The transferred property is stock of a domestic corporation and the corporation provides a certificate that it is not a USRPHC.
The USRPI acquired will be used by the purchaser as a residence and the amount realized by the foreigner on the disposition is $300,000 or less. The disposition is not subject to tax, or the amount realized by the foreigner on the disposition is zero.
Estate and Gift Tax: In determining who is an NRA and who is excluded the test is completely different for estate tax purposes. The focus of inquiry will centers around the decedent's residence. This test is very subjective and focuses primarily on intent.The test considers factors from across the board, such as how long the NRA has been in the United States, how often he or she travels as well as the size, and cost of home in the United States. The test will also look at the location of NRA's family, their participation in community activities, participation in U.S. business and ownership of assets in the United States. Voting is also taken into consideration.
A foreigner can be a U.S. resident for income tax purposes but not be domiciled for estate tax purposes. An NRA, whether a nonresident alien or non-domiciliary, will be subject to a different transfer taxes (estate and gift taxes) than a U.S. taxpayer. Only the gross part of the NRA's Estate that at the time of death is situated in the United States will be taxed with the estate tax. Although the rate of NRA's estate tax will be the same as that imposed on U.S. citizens and resident aliens, the unified credit is only $13,000 (equivalent to about $60,000 of property value).
These may be ameliorated by any existing estate tax treaty. European countries, Australia, and Japan enjoys these treaties, The U.S. does not maintain as many estate tax treaties as income tax treaties.
The IRC defines the following property as situated in the United States: A) Shares of stock of a U.S. corporation. B) Revocable transfers or transfers within three years of death of U.S. property or transfers with a retained interest (described in IRC Sections 2035 to 2038). C) Debt issued by a U.S. person or a governmental entity within the United States (e.g., municipal bonds).
Real estate in the United States is considered U.S. property when it is physical personal property such as works of art, furniture, cars, and currency. Debt, however is ignored if it is recourse debt, but gross value is included, not just equity. U.S.-situs property is also a US property if it is a beneficial interest in a trust holding. Life insurance is NOT included as U.S.-situs property.
The estate tax returns must disclose all of the NRA's worldwide assets, in order to determine the ratio that the U.S. assets bear to non-U.S. assets. The gross estate is reduced by various deductions relating to the U.S.-situs property. This ratio determines the percentage of allowable deductions that may be claimed against the gross estate.
As mentioned earlier, when real estate is subject to a recourse mortgage, the gross value of the real estate is included, offset by the mortgage debt. This distinction is very relevant for NRAs whose debts are subject to apportionment between U.S. and non-U.S. assets and therefore not fully deductible.
Accurate planning is crucial. Let us illustrate: An NRA can own US property through a foreign corporation and this property is not included in the NRA's estate. This means that the US Real property owned by the NRA has now effectively been converted into a non-U.S. intangible asset.
And with Real Estate that was not initially acquired through a foreign corporation, you can still avoid future taxation to the estate by paying an income tax today on the transfer of the real estate to a foreign corporation (usually treated as a sale).
An NRA donor is not subject to U.S. gift taxes on any gifts of non-U.S. situs property gifted to any person, including U.S. citizens and residents. Gift taxes are imposed on the donor. Gifts from an NRA that are in excess of $100,000 must reported on Form 3520.46 by citizens and residents, however, Gifts of U.S.-situs assets are subject to gift taxes, with the exception of intangibles, which are not taxable.
If it is physically located in the United States tangible personal property and real property is sited within the United States. The lifetime unified credit is not available to NRA donors, but NRA donors are allowed the same annual gift tax exclusion as other taxpayers. NRA's are also subject to the same rate-schedule for gift taxes.
The primary thrust of estate tax planning for NRAs is through the use of; the following: Foreign corporations to own U.S. assets, and the gift tax exemption for intangibles to remove assets from the United States. It is very important that the corporation have a business purpose and activity, lest it be deemed a sham designed to avoid U.S. estate taxes. If the NRA dies owning shares of stock in a foreign corporation, the shares are not included in the NRA's estate, regardless of the situs of the corporation's assets.
Let us break this down into one easy to read and understand paragraph:
In a nutshell, shares in U.S. corporations and interests in partnerships or LLCs are intangibles and the gift of an intangible, wherever situated, by an NRA is not subject to gift tax. Consequently, real estate owned by the NRA through a U.S. corporation, partnership, or LLC may be removed from the NRA's U.S. estate by gifting entity interests to foreign relatives.
Ownership Structures: Here we discuss the ownership architectures under which NRA's can acquire Real Estate. The NRA's personal goals and priorities of course dictate the type of architecture that will be used. There are advantages and disadvantages to each of these alternatives. Direct investment for example, (real estate owned by the NRA) is simple and is subject to only one level of tax on the disposition. The sale is taxed at a 15 percent rate If the real estate is held for one year. There are many disadvantages to the direct investment approach, a few of which are: no privacy, no liability protection, the obligation to file U.S. income tax returns, and if the NRA dies while owning the property, his or her estate is subject to U.S. estate taxes.
When an NRA acquires the real estate through an LLC or an LP, this is considered an LLC or a limited partnership structure. This structure provides the NRA with protection of privacy and liability and allows for lifetime transfers that escape the gift tax. The obligation to file U.S. income tax returns and the possibility for U.S. estate tax on death remain, however.
Ownership of real estate through a domestic corporation, will afford privacy and liability protection, obviate the foreigner's need to file individual U.S. income tax returns and allow lifetime gift tax-free transfers. *this refers to a C corporation, since a foreign shareholder precludes an S corporation.
Ownership of stock will not trigger a return filing obligation, unlike engaging in a U.S. trade or business which requires a U.S. tax return
Ownership of real estate through a domestic corporation has three disadvantages: Federal and state corporate income tax at the corporate level will add a second layer of tax. Dividends from the domestic corporation to its foreign shareholder will be subject to 30 percent withholding. Shares of the domestic corporation will be included in the U.S. estate of the foreign shareholder.
Furthermore, the foreign shareholder will be subject to FIRPTA, because the corporation will be treated as a USRPHC (upon the disposition of the stock in the corporation). The purchaser of the shares is then required the file a U.S. income tax return with 10 percent tax withholding. Actual ownership of the real estate may be held by the U.S. corporation directly, or by a disregarded entity owned by the corporation or through a U.S. partnership. An LLC that chooses to be taxed as a corporation can also be the corporation.
There are several advantages to foreign corporation ownership:
Liability protection- There is no U.S. income tax or filing requirement for the foreign shareholder. Shares in the foreign corporation are non-U.S. assets not included in the U.S. estate.
Dividends are not subject to U.S. withholding. There is no tax or filing requirement on the disposition of the stock. There is no gift tax on the transfer of those shares of stock.
Disadvantages of using the foreign corporation: A) just like with the domestic corporation, there will be corporate level taxes, because the foreign corporation will be deemed engaged in a U.S. trade or business. B) Possibly the largest disadvantage of ownership of U.S. real estate through a foreign corporation would be that the foreign corporation will be subject to the branch profits tax.
One of the most advantageous structure for ownership of U.S. real estate by NRAs is a hybrid foreign and U.S. corporation. It runs like this: The NRA owns a foreign corporation that in turn owns a U.S. LLC taxed as a corporation. The benefits to this type of structure is paramount to a good tax shield and offers: privacy and liability protection, escaping U.S. individual income tax filing requirements and it also avoids U.S. estate taxes. On top of that it allows for gift tax-free lifetime transfers, and avoids the branch profits tax.
The beauty and benefit of this is that the timing and the amount of this dividend is within the NRA's control even though distributions from the U.S. subsidiary to the foreign parent are subject to the 30 percent FDAP withholding.
There are many things to consider and several structures available to limit tax liability, preserve and protect anonymity and increase profits of US Real Estate investments by foreign investors. We must keep in mind that each investment presents its own challenges and no structure is perfect. Advantages and disadvantages abound which will require a tailored analysis in light of the individual or group objectives.
It's really about implementing a structure which will successfully carry the NRA through to his or her END GAME, with the utmost protection from liability and the maximum return on investment.
Jeffrey A Cancilla practices law in the area's of: Immigration, Mortgage, Real Estate, Real Estate Settlement and Procedures,Truth in Lending Laws and more. To find out how you can get more out of your investment in US Real Estate or for any other legal matter mentioned here, please visit: http://www.InvestinCalRealEstate.com or https://huntingtonlawgroup.wordpress.com/
By: Jeffrey A Cancilla
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