Real estate is a perennially popular investment type for individuals to pursue within their self-directed IRAs. The ability to invest in real estate – both developed and undeveloped properties – can provide an investment and risk profile that generally can’t be mirrored with traditional stock market investments.But holding real estate within a self-directed IRA can also require a greater level of investment involvement as compared to those other asset classes.With stocks or mutual funds, the only invest
The Federal Reserve cannot afford to ignore the risk of fallout in emerging markets from the winding down of its $85 billion-a-month bond buying program, said Christine Lagarde, managing director of the International Monetary Fund.”Very negative spill-over effects on the emerging market economies could very much backfire on other economies. So to assume that [the] domestic economy is totally isolated, that a country is an island, would not be the right approach,” Lagarde told CNBC on the sidelines of the Ambrosetti Forum in northern Italy over the weekend.
Today, I had the displeasure of communicating with a broker who has the idea that acquiring a property “as-is” means that a buyer should acquire the property without questioning what the “as-is” entails. As ridiculous as this may sound, this is exactly what this particular broker expects a buyer to do. To agree to purchase a property as-is, where-is….and blind.
Ok, so now I am going to speak to the real estate investment buyers out there; my peers who make their livelihoods investing in this great product called REAL ESTATE. The success of our business depends fully on the good decisions we make concerning the properties we choose to acquire for our businesses regardless of niche. This a critical element to our success, and it requires that we NEVER buy ANYTHING blind; least of all, real estate.
If you want to agree to an “as-is” and “where-is” purchase, then it is your business; but, at least KNOW what the “as-is” condition of the property entails before agreeing to close on it. Otherwise, you are asking for unwelcome–and often expensive–surprises in the future. These unknown elements will raise your level of risk in the deal; make no mistake.
A smart real estate investor knows how to apply the principles of risk to their investment decisions; and then adjust the expected return accordingly. Without an inspection period, the opportunity to ascertain the level of risk in the deal is not there.
A little due diligence goes a long way, and it should be done upfront with EVERY deal in order to uncover exactly what “AS-IS /WHERE-IS” means. Don’t ever buy blind.
When a broker tells me that “no inspection period is allowed,” I perceive that agent as playing a con game. Don’t get conned.
Insist on an inspection period with sufficient time to conduct due diligence.
I believe it is wrong and shows poor form to not allow an inspection period. To me, it means that there is something hidden that the other side does not want me to discover. This is a major RED FLAG.
If I am going to accept a property “as-is” and “where-is,” then I am going to insist on an inspection period to uncover what it is exactly that I am taking over.
If you are a serious investor, you would be wise to do the same.
Interesting turn of events in Florida:
“But since Blackstone began buying investment homes here in October — a shopping spree that began at local foreclosure auctions — lenders began to greatly increase their bids. In those eight months, banks bid above assessed value on about 39 percent of their auction offers, a Herald-Tribune analysis of auction records shows. Meanwhile, competition has grown fierce.
Spending activity from investors has spiked 220 percent over the year, with non-banking entities paying $108.1 million during the past 12 months to snap up Sarasota and Manatee foreclosures.
A recent Herald-Tribune review showed these institutional investors have routinely paid well above realistic values for their purchases.”
Now banks appear to be joining in.
Seasonally adjusted prices rose in all of the index’s 20 cities for the fourth month in a row. Non-seasonally adjusted, only New York and Minneapolis posted monthly declines.The biggest gains came from areas hit hard by the housing collapse: Prices in Phoenix rose 22.5 percent from last year; San Francisco saw a 22.2 percent year-over-year increase. In Las Vegas, prices rose 20.6 percent.
Let’s assume that you’ve decided to start assembling groups of investors to buy investment real estate. If you followed my Roadmap of a successful syndication in my previous articles (Part 1 and Part 2), then you know that the first step is to research a neighborhood and pick a property to buy. You’ll first want to focus on the type of commercial real estate to purchase for your syndications.
So what is the best kind of investment real estate? In the process of putting together your groups, you’ll come to realize that not all types of real estate are “created equal” from an investment perspective. Here is a breakdown of property types and their attractiveness as syndication investments:
LAND: Including Remote (currently unusable), agricultural, and “pre-builder” land.
1. “Remote” land is held for a long period of time with the expectation that growth will increase its value. Unfortunately, it’s highly risky and provides no current income for investors. The biggest down side is that investors would have to make periodic contributions of capital to cover expenses for taxes, insurance, and possibly loan payments.
2. Agricultural land is used to create crops for sale. It is essentially unimproved land used in a business and its value is derived from the ongoing operations of that business.
3. “Pre-builder” land is subdivided and sold off to various builders who complete the end product, whether housing or commercial. The land is effectively inventory and its value is created in the subdivision process.
CONSTRUCTION: Including new commercial and sub-division projects, beyond the pre-builder stage.
EXISTING: Operating residential and commercial income producing property.
If we go by the list above, we’ll soon realize that as syndicators, we’ll want to focus our efforts on only one of the major categories. This would be income producing rental property. There are several reasons for this, some obvious, and others that can get you into a heap of trouble if you don’t spend some serious time with your attorney. You’ll want to be clear on the benefits both you and your co-investors will derive from your real estate investment efforts, as well. This will help not only in focusing your efforts, but in promoting your properties to prospective investors. Here they are:
– Agricultural land, pre-builder land, and new construction projects derive their value from the efforts of others beyond the investment in the property itself. This creates a “corporate securities risk” for the money investors and puts the syndicator under the jurisdiction of both state and Federal securities laws. Ultimately, it means that you could be severely liable to your investors if things don’t go as planned. Do not operate in these types of investments without both significant previous experience and excellent legal help.
– Remote land will most likely require “capital calls” to existing investors to pay real estate taxes, insurance, and debt service as you wait for its value to increase. There is nothing an investor hates more than a call from his managing partner to ask for more money. Even if it’s disclosed up front and anticipated, it’s not good psychologically.
With existing properties:
1. Investors’ capital is contributed without the expectation of future contributions, in most cases.
2. There is minimal involvement of the capital contributors beyond providing the investment funds.
3. The owners can expect to receive spend-able income on a periodic basis.
4. The owners can expect an increase in equity through the amortization of any loan used to assist in the acquisition.
5. There is also a realistic expectation of an increase in value of the asset from both monetary inflation and appreciation.
6. There will also be tax benefits from depreciation of the improvements (not the land) and utilizing a 1031 Exchange reinvestment strategy at the property’s sale.
So as we go forward on this topic, we will focus on existing, operating, commercial rental income properties. This greatly reduces the syndicator’s exposure to regulatory requirements and provides investors with regular checks, making them very happy to get your phone calls!
EzineArticle Author: Craig Higdon, "The Mortgage Black Belt," is a commercial mortgage broker. He publishes the weekly "Investment Property Insider" e-zine and the "Real Estate Secrets Blog" (http://www.RealEstateSecretsBlog.com). Sign up now and get a bonus FREE report at http://www.ExcelsionMortgage.com/CommercialNewsletter
I just posted a new episode to my podcast Sagely Reflections. It is about breaking through the old ways of thinking to achieve the kind of mindset that will support personal and financial growth. The mind is the very first place to start when it comes to finding direction and purpose. How we think affects how we feel and how we behave as a result. Building sustainable wealth whether through real estate or any other venture requires that we first believe in our own abilities to find learning resources that will enable us to learn, grow, and evolve confidently.
I hope you enjoy this episode!
It’s a situation familiar to almost any real estate investor with some years of experience in real estate investing…a shortage of equity for funding new real estate projects and acquisitions.
There are many ethical solutions to this dilemma…prepare a private placement memorandum (aka. Reg D), form an investment club / group, form a REIT, etc.
However, each source has its own set of requirements–legal and otherwise. An investment in education that lessens the learning curve is a smart move, but start where you are. Educational costs can run the gamut from affordable to not so affordable.
It is possible to start small and then build a strong financial foundation from there. It takes determination, perseverance, and an inner-hunger to want more out of life and the experience of living.
The obstacle of project funding is universal. It requires forethought, planning, and a trusted and experienced consultant to guide the effort.
Many good things are on the horizon!
Learning, growing, and evolving everyday as a real estate investor means tapping into your big “WHY” and understanding the processes that go behind raising capital, and connecting with those who can inform or guide the effort to move forward.
I am grateful for all the good learning opportunities that come my way. 🙂