Realty411 Team

By Marco Santarelli

Classifying a neighborhood by “type”, or what many investors refer to as a “grade”, is typically nothing more than a subjective description. Although most people will have a general idea of what is being referred to, in my experience it is usually nothing more than a qualitative rather than quantitative description.  Because of that ambiguity, we’ve developed a proprietary, simple grading system that we use with all our investment-grade properties. To help you understand this, a basic overview and description follows:

NEIGHBORHOOD TYPES

Low Income (“C” and “D” grade neighborhoods)

Low income neighborhoods generally have a large portion of their residents on government assistance (for example Section 8 housing assistance). The ratio of renters to owner-occupied homes is greater than 50% and often as high as 80%. These neighborhoods are almost always the most affordable (lowest-priced) areas within a market and usually have some of the highest rent-to-value ratios.

This provides some of the highest cap rates and cash-oncash returns compared to other neighborhood types. You will find substantial area anchors including schools, churches and shopping in these neighborhoods. The anchors are there to meet the needs of the people that live there. Low income neighborhoods are best suited for the wholesale (flip) strategy.

Moderate Income (“B” grade neighborhoods)

Moderate income neighborhoods are similar to Low Income neighborhoods with one critical difference – higher home ownership. While low income areas have a large portion of their residents on government assistance, moderate income areas have a large portion of residents working in the blue-collar sector. This stabilizes the neighborhood and makes for a more attractive investment area.

The ratio of renters to owner-occupied homes is more balanced and closer to 50% for each. Area anchors are similar to low income neighborhoods but with home owners being anchors as well. Moderate income neighborhoods are best suited for the wholesale (flip) and buy-and-hold strategies.

Middle Income (“A” grade neighborhoods)

Completely different in almost every way to low income and moderate income neighborhoods. The biggest differences are homeownership and types of employment. Most of the residents own their homes in these neighborhoods and are employed in high-level blue-collar jobs or in the white-collar sector. Middle income areas are excellent for long-term holds because of the stable nature of the area and tenants.

The ratio of renters to owner-occupied homes is closer to 80% owners and 20% renters. Middle income areas will have a greater number of anchors that meet the wants of the people that live there. These include the three “Ms”: malls, movies and meals. Middle income neighborhoods are best suited for retail fix-andflips and buy-and-hold strategies.

HOME VALUES

Home values vary from market to market, and between neighborhoods within each market. So one should not choose a neighborhood based on the market values alone. It is usually best to target those neighborhoods where property values represent the affordable housing stock in the middle market.

These properties are often within desirable neighborhoods making them easy to lease, buy and sell. Properties in the upper-end of a market’s price spectrum often don’t provide desirable rates of return, while properties in the lower-end of a market’s price spectrum often provide some of the highest expected returns but with the risk of attracting some of the lowest-quality tenants.

SCHOOLS

When it comes to residential real estate investing, it is not as important to have top-rated schools as it is to have multiple schools located in the area. Too many investors put more weight and emphasis on the school’s rating than all the other factors which can be a mistake and cost you in lost opportunities.

While many of our investors choose properties in neighborhoods with some of the best school districts, when it comes to investment properties, often times these properties come at a premium price relative to the income it generates. Many renters are just not willing to pay premium rents for premium schools.

CRIME

Generally speaking, better neighborhoods (“A” and “B”) will have below average crime rates (both violent and property crimes). Although lower relative crime rates are certainly a desirable characteristic to have, it is not the most important factor in your neighborhood selection criteria.

Finally, if you’re working with a reputable company to help you find or provide you with investment-grade properties then they should be able to advise you on the various markets and neighborhoods as well as provide you with detailed information such as neighborhood characteristics and demographics.

By Anita Woods

Investing in property can be frustrating, especially when you’re always searching for good financing options that suit your time-frame as an investor.

Having someone in your corner toprovide quality information and advice can help you reach your goals more quickly than going at it alone.

Steve Bighaus’s clients know they can count on him when they need to finance a new opportunity, even when that opportunity is their own place of residence.

Bighaus has a vested interest in the success of property investors…it’s why he does what he does. His number one goal is to become the all-in-one resource for property investors.

But as a forward-thinking kind of guy, Bighaus is always on the lookout for ways he can improve his processes to get better results for his clients.

One such process is technology, using it efficiently and effectively.

That’s why, after speaking with thirty to forty companies, Bighaus settled on working with Sierra Pacific Mortgage Company. They understand his goals as a specialist in lending to investors, and they share his vision of using technology to deliver exceptional products for his customers.

One exciting development is the creation of a new loan origination system that will allow a borrower’s information to be obtained straight from the source.

This will simplify the process for both investors and homeowners and expedite the loan origination process.

One particular issue that many fix-and-flip investors are facing is the challenge of finding eligible buyers for their properties.

Steve’s research has found that these investors are experiencing a dismal fall-out rate of 40 to 50 percent.

As part of his goal to be a full-service company for investors, Steve and The Bighaus Team at Sierra Pacific Mortgage Company aspire to preclude any potential problems as early in the process as possible.

Using all of the tools at their disposal, they can provide quality pre-approval letters towards the goal of improving results for investors. Other tools that Bighaus can use include an automated system for appraisals that will let the lender know whether or not an appraisal is needed, and a great customer relationship system.

And as any of his customers will tell you, Team Bighaus is known for their stellar customer service. Whether you leave a voice message, drop an email or send a fax, you will receive a response the same day.

Need a pre-qual letter and it’s the weekend? Just call Steve Bighaus! He’ll take care of it.

Think of him as your personal banker – someone you can count on to be in your corner.

Bottom line, while pricing is important, there’s something Bighaus and his team can offer that few can: Responsive customer service paired with innovative technology to create exceptional products to help investors grow their wealth.

By Randy Hughes aka Mr. Land Trust

Recently I read an article by an attorney telling his readers not to use a Land Trust. He recommended titling your investment property in a Limited Liability Company. His reasoning was that Land Trusts are only a “deterrent” to a lawsuit and they do not provide “true” asset protection. The attorney went on explaining how any lawyer “worth his salt” would find out you are the beneficiary of a Land Trust as the result of a judgment debtor’s exam (which is a hearing in a court room…sometimes called a Citation to Discover Assets). The attorney writing this article concluded that you have “zero” privacy with a Land Trust and if you want privacy you should “save the expense” of a Land Trust and title your investment real estate directly into an LLC (Nevada or Delaware).

After over 40 years in the real estate investment business, I can spot an attorney who understands the law but does not have practical real world experience. I agree that LLC’s have better asset protection than a Land Trust, but Land Trusts have far better privacy elements than LLC’s. I use LLC’s in my business but NOT to hold title to investment property. Let’s review the benefits of using a Land Trust.

LAND TRUSTS:

• Are NOT registered anywhere on the planet
• Do not require a registered agent
• Pay no franchise taxes
• Cost nothing to form (you can form them yourself)
• File no tax returns
• Require no tax ID number
• Can be formed in a state other than where the property is located (for terrific privacy and asset protection)
• Can easily hold each property separately from other properties to keep all investments insulated
• Can have an LLC, Corporation or Personal Property Trust as its beneficiary

Experienced real estate investors understand that putting all of your properties into any one entity (be it an LLC, Corporation or a Land Trust) is a nexus for a lawsuit. Remember grandma’s advice to not put all your eggs in one basket? It makes logical sense to put each property into its own separate Land Trust and then make the beneficiary of the trust your LLC or Corporation.

This yields the best of both worlds from a privacy and asset protection standpoint. Since the Land Trust Agreement is not recorded anywhere no one can find out who the true owner of the trust is without a full blown lawsuit…which is expensive for your adversary. Furthermore, if the property is in one state, the Land Trust is formed in another state, and the LL C beneficiary is registered in a third state you get a dy-no-mite structure that is not only difficult to unravel but legally expensive to pursue. Most contingency fee lawyers would give up and start looking for another sucker to pursue.

Real estate investors are more susceptible to a lawsuit than most other Americans. The general public’s perception of a real estate investor is that they do not have any debt on their property, have lots of cash in the bank and tons of positive cash flow. So, even if the investor is upside down on their property debt and suffers monthly negative cash flow they are still at the mercy of the contingency fee lawyer and his/her dead-beat client. Keeping property isolated in separate Land Trusts makes logical practical sense to those of us in the trenches every day. A huge benefit to holding title to each property in a separate trust is the ability to finance without affecting the other properties.

You can also sell property on an installment contract basis without affecting other properties. If you title multiple properties in one LLC the lender will want to tie up all the assets of the LLC as collateral for the loan on just one property. Take your advice from a streetwise investor with decades of real-life experience. Use a Land Trust to hold title to your investment real estate…you will be glad you did!

To receive a FREE copy of my booklet “50 Reasons to Use a Land Trust” send me an email at: mailto:[email protected]

 

By Tom K. Wilson

One of the most common questions I get is: Which are better investments, multifamily properties (apartments) or single-family homes? My answer is, both, but not multifamily without experienced or qualified and experienced partners.

A multifamily property is defined as 5 units or greater, and single-family homes, duplexes, triplexes, and four-plexes are referred to as “1-4s”. For someone with a goal of building a medium to large real estate portfolio, I generally recommend considering the inclusion of a commercial or multifamily property with one caveat: Don’t start by yourself and don’t put all of your real estate working capital into one large investment.

After purchasing and selling over 2,000 units and 12 multifamily properties over 37 years, my experience is that the best investment property I ever owned was a multifamily property and the worst investment property I ever owned was a multifamily property. These properties have ranged from 10 units for $400K to 176 units for $10M.

Multifamily properties offer higher potential reward along with higher risks. On the surface, an apartment building seems to be nothing more than many units, like single-family detached homes, but in one address, however, their proper management is a specialty. There are many more variables and expenses than in 1-4s including utilities, landscaping, contract maintenance, on-site maintenance, office management, tenant profile, advertising, lender and government inspections, requirements, and more.

So why are the largest investors attracted to them? For one factor, the rent ratios are usually higher and, therefore, the potential Net Operating Income (NOI) and the cash-on-cash return can be higher. In the multifamily world, rent ratios are represented as the GRM (gross rent multiplier): The property price divided by the annual gross income, the lower the better.

There is also generally an efficiency of scale for maintenance and other expenses, and with good management, expenses are easier and more efficient to control. The advantage of scale best manifests itself when the monthly income is great enough to afford full-time, on-site management and maintenance. For non-high end metro areas this is usually about a $2.5M property or higher. With a typical 60-70% loan this is a stiff barrier to entry that may best be solved by partnering with other experienced investors.

And then there is the issue of the loan. In these post crash years, getting a government- backed loan such as from Fannie Mae is virtually impossible in today’s tight money market without current or significant past multifamily ownership experience. Regional banks and private lenders may sometimes provide loans at the cost of higher rates, shorter terms and amortization, and lower LTVs. For investors who are “tapped out” at 10 loans for 1-4 residential properties and can’t get more loans because of Fannie Mae loan quantity restrictions, a multifamily purchase has the advantage of not being forbidden just because you have 10 or more loans on 1-4s.

For an investor who would like to own a multifamily product, but who does not have the experience or local residency that the lender wants, one can work with a syndicator who can connect you with an investor or investors who can qualify for the loan, reduce your risk and exposure, provide the expertise needed to evaluate a deal, and to manage the property for maximum return on investment.

Many investors are drawn to small multifamily “Tweeners” (5-50 units) because it is a lower entry price. However, the problems include:

• Loans are generally more difficult to obtain
• Loan terms are not as good
• Price per unit is higher
• Banks prefer local borrowers
• Properties are generally older
• The economics cannot justify full-time, on site management and maintenance

And, it is usually difficult to manage effectively. Stories of offsite management showing up after a week or two at small multifams only to discover that drug dealers have run off decent tenants are common stories. Also, a single vacancy in a small mulitfam has a greater percentage impact on cash flow than in a larger investment. Again, one valuable way to mitigate these factors is to purchase a larger product with partners through syndication.

Due diligence is much more critical than with single-family rentals but there are also more resources available to get a lot of the general information because there are a lot of marketing firms that support the REIT and institutional investors who mostly purchase large multifamily and commercial properties.

A multifamily seller’s proforma (projections of the potential income and expenses in a perfect world) should for the most part be disregarded. True expenses are seldom less than 50-60% of gross income, otherwise be suspect. And study local demographics carefully. Visit the prospective property unannounced, walk it, and then sit in your vehicle to observe who is living on and visiting the property. Take note of the time of day and night. Yes, evening observations are the most enlightening. Go to the local schools, parks, and retail stores and see whom your prospective tenants and demographics are.

Do you feel at risk parked so near your potential property, or would you feel comfortable joining the tenants for a barbeque? Please do not rely on website data about the neighborhood. There are a lot of variances in a one-mile radius. Lastly, my post data analysis is always punctuated with the satellite view question: Would I be comfortable with my daughter living here?

In addition to syndications an alternate way to have many of the benefits of a multifam with less money down, an achievable loan, and much less risk is with a portfolio of single-family properties. Throughout my investment career, I have always also owned many 1-4s.

 This approach spreads your risks by building a “mutual fund” of properties in various locations. In addition to having a variation of rent, price appreciations, and occupancies that tend to converge on the averages for a region, single-family homes are more liquid, have less expenses, are less complex to manage, and tend to appreciate more because they are based on owner occupant demand rather than on income. In the next decade, most economists project a higher upward trend in occupancies and rent for single-family homes and for multifams.

The most important ingredient is to select that right team of professional resources. How much experience and knowledge do they have in the region and product of interest? Are they invested in the products themselves? If you are considering partnering to own multifamily properties, do they have experience with syndications and access to experienced and qualified investors, lenders and property management?

When you invest in real estate, don’t start with the “deal.” An honest assessment of the amount you have available to invest, your risk tolerance, your experience, and your long-term goals, along with the right professional team, will lead you to the right deal or deals: A multifamily investment or a portfolio of cash-flowing single-family properties? I choose both.

Tom Wilson is a 37-year real estate veteran who has executed over $100M and 2000 units of real estate investments. Wilson is also a weekly host of the Real Estate 360 Radio program on KDOW 1220 am every Wednesday at 2 pm. Listen to his podcasts on iTunes or his website: www.tomwilsonproperties.com

 

By Jillian Ivey Sidoti, Esq.

Many people assume that in order to raise capital all they have to do is go out and find potential investors to whom they may pitch their idea. However, the laws regulating the sale of any security are such that operating in such a matter would be illegal.

Too often, people learn fact and decide that their aspirations are out of their reach… or worse, raise the capital illegally, putting themselves at risk to suffer very serious consequences should the SEC catch on to what they are up to. Truth is, with the appropriate planning and effort, anyone can raise the capital necessary to execute their business plan.

At a very abstract level, there are five steps to raising private capital, and they are as follows:

1. Develop Your Business Plan: One cannot very well start a company without a plan! At the very least, you want to put together bullet points of the “who,” “what,” when,” “where,” “why,” and “how” you will put your company to work and start generating income. From there, you can flesh out the details.

2. Set Up Your Company: Your next step is to decide what type of entity is appropriate for your business plan, and in which state. A corporation, limited liability company, and limited partnership each have their respective positives and negatives. The particulars of your situation will dictate what best fits your company.

3. Decide What To Offer Investors: If people are going to invest money in your company, one of the most important questions they will have is “what do I get out of this?” First and foremost, you have to analyze your business plan to determine your baseline of what you can afford to offer investors in addition to what the market dictates in your particular industry. You must then determine what you are comfortable offering investors and land somewhere between those points. This could be a percentage return on their capital investment, simply just a share of profits the company earns, or a combination thereof.

4. Put Your Offering Documents Together: Not only may you be required by law to present offering documents (called a “Private Placement Memorandum”) to your prospective investors before taking their money in order to ensure you have made all the appropriate disclosures, but such documents will provide all the information they need to decide to make the investment. The private placement memorandum encompasses the three “D’s” – disclaimers, disclosures, and details.

5. Find Investors: For many entrepreneurs, finding investors is the most intimidating step in the process. However, if you organize and execute your capital raising efforts in the correct manner, then you will be well on your way to meeting your capital goals.

Yes, this is a very boiled down step-by-step. Yes, you will need the advice of a professional to help you along the way. However, you need to realize that if you do give all the above steps the appropriate amount of attention, there is no reason that you cannot raise the capital you need.

Jillian Ivey Sidoti is a partner in Trowbridge, Taylor & Sidoti, a boutique securities law firm with locations in California and Florida. Jillian may be reached for consultation at 323-799-1342 or at: [email protected]