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3200-Units Foreclosure Key Takeaways for Operators and Passive Investors

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Passive Investors from Houston Multifamily Foreclosure As the whole Multifamily Industry knows, there was a foreclosure of 3200 Units with $229 million of debt in Houston by Arbor Realty from a private Deal Sponsor from Dallas. These properties were bought between August 2021 and April 2022. The Deal Sponsor defaulted on their mortgage payment. The investors from that deal have alerted their friends about the potential foreclosure two weeks before it came out on Twitter . This news eventually came out in Wall Street Journal.  As per Trepp Inc, these properties’ cash flow went from 3.8% to more than 8% due to the rapid interest rate hike by FED. While the interest rate hike by the Fed has caused this property to be further under distress, many other factors have caused these Deal Sponsors to face foreclosure. We have a written 10-series article that we wrote so that any passive investor can learn and avoid investing in this kind of Deal Sponsors. Bridge Loan with No Rate Caps As per the chart below from Howard Mark’s book “The Most Important Thing”, Non-Recourse Bridge Loan stacked with Preferred equity without a rate cap.   As you can see it’s considered the highest risk deal type. Preferred equity is a private institutional group that acts like a lender but holds a second position in the capital stack. Preferred equity usually charges a fixed 12-14% interest rate with 1%-2% when the deal is initiated and exited. Usually, preferred equity is used behind common equity (normal retail investors) to boost back-end profit. It’s also used when the sponsor can’t raise a large sum of equity from retail investors. The pitch to the investor is the deal has a lot f upside that even after paying the fixed return to the pref equity group, there will be a lot more upside to common equity.  I attended a webinar where the presenter declared using preferred equity is the way to do deals in 2021. To survive market fluctuations an operator needs to be disciplined and stick to their stringent underwriting criteria. However, when the buying spree seems to be forever, many operators start to do deals at any cost. This includes taking Bridge loans for a deal that does not have significant value-add. I call it a misuse of loan type. I see many cash-flowing deals with thin upsides were bought using bridge loans. Of course, when the Deal sponsor raises the capital, they declare their deals are value add. The question is how big is the upside? In the worst case, some Deal Sponsors did not even take a rate cap insurance.  After the year 2020 to mid-2022, the value of the multifamily assets has gone beyond its intrinsic value. Fannie Mae and Freddie Mac lenders have almost gone out of business as the only way to make any deal work is to get a bridge loan since it’s a forward-looking upside loan. Furthermore, many Deal sponsors didn’t realize that the rate is variable. When the interest rate skyrockets, most of them are caught unprepared. The smarter and more conservative one invested in rate caps insurance since it was affordable then. The aggressive or less sophisticated Deal Sponsors decided not to buy rate caps due to ignorance or they even can’t raise the capital for equity. Most lenders will require rate cap purchases as a mandatory requirement. In the Houston Foreclosure case, looks like the lender didn’t require the sponsors to buy rate caps. Furthermore, Bridge loans were used for Deals that is not for value add. At Achieve Investment Group, James Kandasamy Texas, we are proud to say that we only have 1 bridge loan (with a rate cap of course) out of our 15 multifamily deals that we have and have done. Even that bridge loan is a true Deep value add deal. We could have done many more deals from 2020 to 2022 by taking Bridge Loans for all kinds of think upside deals as many passive investor capital were easily available. We were well aware that Bridge loans pose risk and need to be used appropriately for true-value add deals. I wrote about this on page 68 of my 2019 Bestselling Book “Passive Investing in Commercial Estate”.    Action Item for Passive Investors For passive investors, it is important to consider passive real estate investing as a potential option, Make a list of your investment to identify bridge loans, whether there are rate caps, when the rate cap expires, and whether the deal has a preferred equity between You (common equity) and the Senior Lender. I am sure you will be surprised! 

AI Investment Tools: Game-Changing Solutions for Real Estate Investors

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Artificial intelligence (AI) technology is now playing a pivotal role in transforming the multifamily housing market. This cutting-edge technology is improving efficiency, maximizing investor returns, reducing costs, and enhancing the overall tenant experience. As such, AI technology is changing the game for Real Estate Investors , passive investors, deal sponsors and operators as well as developers designing and constructing new community developments. Bear in mind, we have no relationship or conflict of interest in presenting these tools, they are simply programs we have witnessed emerging in the space and certainly new AI tools are coming online daily. Your own due diligence in use of any of these tools is advised. CONSTRUCTION AND DEVELOPMENT In construction and development, AI is improving efficiency by streamlining processes such as scheduling, budgeting, and project management. AI-powered construction management platforms such as Smartvid.IO provide easy access to critical insights, enabling developers to make more informed decisions and avoid potential delays. Another type of tool to expect more of is automated design and planning based on tracts of land, and what can be built. Should you build single-unit and ground floor only? Where might parking lots fit? Instead of replacing architects, these technologies can augment efforts and help move projects along faster with inspiration. For instance, one such tool is called ArchiGAN, which is a generative stack for apartment building designs. LEGAL AI technology is also changing the legal landscape for real estate. AI-powered legal services can help property owners and investors streamline their legal documents, such as leases, purchase agreements, and legal due diligence. Newly trained LLMs can even pass the Bar exam, and as an example, “DoNotPay” claims itself as “The World’s First Robot Lawyer”.  As a matter of fact, if you are searching for “Best AI Legal Tools 2023”, you will find an emerging industry that can save you money but should not replace your human legal team. However, services such as AI-powered contract review platform LawGeex allow legal teams to spend more time on higher-level work, reducing the time and cost of legal services. Again, for clarification, people and organizations should always consult with a qualified attorney before making decisions based on the information in this post or using any of the tools referenced herein. ANALYSIS AND DECISION MAKING AI technology makes it possible to leverage large amounts of data to gain insights that can inform decision-making. Investing in AI-powered tools like Google’s TensorFlow can provide data-driven insights that can direct decision-making related to rent pricing, marketing strategy, and property operations. Another example is Cody, an AI assistant. Cody is an intelligent AI assistant like ChatGPT, Bard, or GPT4 – with the added benefit of being able to train it on your business, your team, your processes, and your clients with your own knowledge base. Use Cody to support your team, answer questions, help with creative work, troubleshoot issues, and brainstorm ideas. RESEARCH AI is also revolutionizing the research process in the multifamily housing market. AI-powered tools such as AssetSonar can gather and analyze a broad range of data on properties and neighborhoods, including zoning and demographic data. These tools provide investors, operators, and developers accurate and up-to-date information that informs their investments and development decisions. One such example is turning your PDFs into chatbots, then simply asking your PDF questions to get answers summarized and delivered instantly. Some tools you might try are PDF Analyzer, ChattyPDF, or Ask Your PDF. For instance, why scour for details about K1’s when you can let a chatbot explain the intricate details in a simplified, quickly understood format? Or, simply use it for effortless organization and watch your document transform into a structured outline automatically. MARKETING AI technology also plays a significant role in the marketing of multifamily housing offerings. AI-powered chatbots can provide an excellent tenant experience, provide 24/7 support, and answer tenant questions. AI-powered chatbots and tools such as Rentlytics can provide insights into the customer journey and help operators identify the most effective marketing channels. When it comes to executing marketing strategies that include graphics, audio, video, social media and more, it is actually difficult to keep up with so many tools coming online. Every day there are more and more powerful tools, and considering some like Adobe are trained on LLMs that feature copyright protected libraries, it is worth considering where your tools are pulling their “influence” from so you don’t end up drawing off scraped and protected art that can come back to you such as copyrighted works, fonts, etc. LEASING AI technology streamlines the leasing process by reducing the workload of property managers and leasing agents. AI-powered leasing tools such as Leasera reduce friction such as application processes and digital approvals, speeding up the leasing process. AI algorithms can analyze vast amounts of data to develop scoring for tenant applications, even conversing with potential new applicants via chatbots and SMS to ‘nurture’ them along as leads, such as LEA, the AI leasing agent. PROPERTY MANAGEMENT (PROPTECH) AI-powered property management systems can help property managers automate tasks such as maintenance requests and payment bills. Platforms like CBRE provide built-in AI-powered chatbots that can help reduce tenant turnover rates. Property management systems powered by AI such as Rentigo generate automated rent payment reminders to help ensure on-time rent payment by tenants leading to reduced late payments and better cash flow management for property managers. Another way to use it is implementing communications tools such as Fathom, which plugs into ZOOM, Google Meetings, Microsoft Teams and other video platforms to annotate meetings, create transcripts, and even summarize meetings with different speakers noted and highlighted meeting points of importance. Look for more multifamily Proptech tools using AI to: Manage your real estate portfolio Organize your rental property operations Manage rent rolls and finances Manage leases and affordability compliance Communicate effectively with tenants, managers, and investors MORE MORE MORE! There are just so many AI tools coming online, multifamily operators need to experiment and see what will work best for themselves.  In multifamily … Read more

The Investment Outlook For Multifamily Properties In 2023

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Multifamily Properties In 2023 The multifamily property market has been one of the most resilient sectors in real estate, even through economic downturns. However, with the current economic climate, there are concerns about the investment outlook for multifamily properties in 2023. Interest rate hikes, bank failures, and lower returns are all factors that could potentially impact the market. In this blog, we will explore the investment outlook for multifamily properties in 2023, including the trends, challenges, and opportunities that investors should be aware of , considering both the risks and opportunities. 1.    Interest Rate Hikes One of the biggest concerns for investors in multifamily properties is the potential for interest rate hikes. When interest rates rise, it can make it more expensive for investors to borrow money to finance their properties. This can lead to a decrease in demand for multifamily properties and a corresponding decrease in property values. However, it’s important to note that the Federal Reserve has indicated that any interest rate hikes will be gradual and tied to the strength of the economy. Additionally, interest rates are still at historically low levels, which can provide investors with opportunities to secure financing at relatively affordable rates. Investors should be cautious but not overly concerned about potential interest rate hikes in 2023. 2.       Bank Failures Another potential risk to the multifamily property market is the possibility of bank failures. If banks fail, it could lead to a decrease in lending, which could make it more difficult for investors to secure financing. This, in turn, could lead to a decrease in demand for multifamily properties and a corresponding decrease in property values. However, it’s important to note that the banking industry is heavily regulated, and many banks have taken steps to improve their financial stability since the last economic downturn. Additionally, the federal government has measures in place to help stabilize the banking industry in the event of a crisis. While investors should be aware of the potential risk of bank failures, it’s unlikely to have a significant impact on the multifamily property market in 2023.      3.     Returns Being Less Than What Have Been Another concern for investors in multifamily properties is the potential for lower returns. With property values and rental rates already high, it can be difficult for investors to find good deals that provide high returns. Additionally, increasing operating expenses, such as property taxes, insurance, and maintenance costs, can further reduce returns. Trends in Multifamily Properties One of the most significant trends in multifamily properties is the shift in demand. The COVID-19 pandemic has forced people to re-evaluate their living arrangements, with many opting for larger apartments or houses to accommodate their work and living needs. The rise of remote work has also contributed to the demand for larger living spaces, as people seek more room for home offices and other work-related amenities. Another trend in multifamily properties is the growing preference for sustainable living. Tenants are becoming increasingly environmentally conscious and are looking for properties that have energy-efficient appliances, green spaces, and other eco-friendly features. As a result, investors who incorporate green initiatives into their properties can benefit from increased tenant retention and higher rental rates. Challenges in Multifamily Properties Despite the positive outlook for multifamily properties, there are also challenges that investors should be aware of. One of the biggest challenges is the rising costs of construction materials and labor, which can drive up the cost of new developments and renovations. Investors may need to adjust their budgets or explore alternative building materials to stay competitive in the market. Another challenge is the increasing competition among investors. As more investors enter the market, the supply of available properties may become more limited, driving up prices and making it harder to find attractive investment opportunities. To stay ahead of the competition, investors must be vigilant in their research and evaluate multifamily properties.  Opportunities in Multifamily Properties Despite the challenges, there are also opportunities in multifamily properties. One opportunity is the growing demand for affordable housing. With rising housing costs and stagnant wages, many people are struggling to find affordable housing options. Investors who prioritize affordable housing can tap into a growing market and help address a critical social issue. Another opportunity is the increasing popularity of urban living. Young professionals and empty nesters are drawn to the convenience and amenities of city living, driving demand for multifamily properties in urban areas. Investors who can acquire or develop properties in desirable urban locations can benefit from higher rental rates and strong tenant demand. To be successful in multifamily property investing in 2023, investors must develop a solid investment strategy that aligns with their goals and objectives. One strategy is to focus on properties that offer sustainable features and amenities, such as energy-efficient appliances, green spaces, and access to public transportation. These features can help attract environmentally conscious tenants and increase the overall value of the property. Another strategy is to focus on affordable housing options, which can help address a critical social issue while also providing a stable source of income. Investors who can acquire or develop properties in desirable urban locations can benefit from higher rental rates and strong tenant demand.   Related: 2022 U-Haul Report Reveals Texas and Florida as Great Multifamily Investing Opportunities Investment Strategies for Multifamily Properties To achieve success in multifamily property investing in 2023, investors need to establish a robust investment strategy that is in line with their desired outcomes and objectives. A viable approach is to concentrate on properties that provide sustainable amenities and features, such as access to public transportation, green spaces, and energy-efficient appliances. These features can help attract environmentally conscious tenants and increase the overall value of the property. A different approach is to concentrate on making housing more affordable, which not only tackles a crucial societal problem but also creates a reliable stream of revenue. Investors who can acquire or develop affordable housing properties can benefit from government subsidies … Read more

Maximizing ROI in Real Estate: A Guide for Investors

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When you purchase a property as an investment, one of the most important metrics is the Return on Investment (ROI). The ROI tells you how much profit you’re making on a property. What is ROI? Return on investment is the money that is made through real estate investments. It is a measure of how much money has been earned compared to the amount of money invested. If a property earns more than its cost, you have an investment that provides a positive return. Conversely, if it costs more to own than what you earn, you have negative returns or losses. Factors that can affect ROI in real estate include property condition, location, market conditions, financing options, and property management. Therefore, real estate investors should consider all these factors when evaluating potential investments and aim to maximize ROI through careful research, strategic buying, and long-term holding. How to Calculate ROI in Real Estate? Return on Investment (ROI) is a measure of the profitability of an investment. For example, in real estate, the ROI is often used to calculate the profitability of property investment. To calculate the ROI on a real estate investment, you need to determine the property’s net operating income (NOI) and the total investment costs. Net Operating Income (NOI): NOI is the property’s income from rent and other sources minus operating expenses such as property taxes, insurance, and property management fees. NOI = Gross Income – Operating Expenses Total Investment Costs: Total investment costs include the purchase price of the property, closing costs, repairs and renovations, and any other costs associated with the acquisition of the property. Return on Investment (ROI): Once you have determined the NOI and total investment costs, you can calculate the ROI using the following formula: ROI = (NOI / Total Investment Costs) x 100 For example, if a property has an NOI of $50,000 and total investment costs of $250,000, the ROI would be 20% (50,000 / 250,000 x 100). Related: Cap Rates vs. IRR in Commercial Real Estate Investments How to Find Your Return on Investment (ROI) Finding your return on investment (ROI) in real estate can be more complex than other investments. However, here are the steps you can take to calculate your ROI on a real estate investment: Determine the property’s net operating income (NOI): NOI is the property’s income from rent and other sources minus operating expenses such as property taxes, insurance, and property management fees. To determine the NOI, you’ll need to know the property’s gross income, which includes all rent and other income, and its operating expenses, which include property taxes, insurance, and property management fees. Calculate the total investment costs: Total investment costs include the purchase price of the property, closing costs, repairs and renovations, and any other costs associated with the acquisition of the property. Make sure to include all costs, including financing costs, such as interest and closing costs. Calculate the ROI: Once you have determined the NOI and total investment costs, you can calculate the ROI using the following formula: ROI = (NOI / Total Investment Costs) x 100 Take into account the holding period: ROI is a metric used for short-term investments; for long-term investments, the internal rate of return (IRR) is a more appropriate metric. IRR accounts for the time value of money and cash flow over the holding period. Analyze the cash flow: Cash flow is the money left after paying all the property expenses. A positive cash flow means that the property generates more income than expenses, while a negative cash flow means that the property generates less income than expenses. Consider the appreciation potential of the property: Appreciation is the increase in the value of a property over time. Appreciation can be caused by factors such as improvements to the property, changes in the local real estate market, and inflation. Consult with a professional: It’s important to consult with a real estate attorney or accountant to ensure that you know all the legal and tax implications of investing in a property. They can also help you to calculate the ROI, IRR, and other relevant metrics for your specific investment. Various Methods for Calculating ROI in Real Estate There are different ways to calculate ROI in real estates, such as the Capitalization Rate (Cap Rate), Cash on Cash Return, Internal Rate of Return (IRR), Gross Rent Multiplier (GRM), Price-to-Rent Ratio, and Appreciation. Each method provides a different perspective on the performance of the investment and can be used depending on the type of investment and the investment goals. Capitalization Rate (Cap Rate): This is calculated by dividing the net operating income (NOI) by the property’s purchase price or current market value. A higher cap rate indicates a higher return on investment. Cash on Cash Return: This is calculated by dividing the annual cash flow generated by the property by the amount of cash invested. This metric is useful for evaluating the performance of rental properties. Internal Rate of Return (IRR): This is a more complex metric that considers the cash flow, the time value of money, and the investment’s holding period. IRR is often used to evaluate the profitability of multiple-year investments. Gross Rent Multiplier (GRM): This is calculated by dividing the property’s purchase price or current market value by the gross annual rental income. A lower GRM indicates a higher return on investment. Price-to-Rent Ratio: This compares the purchase price of a property to the annual rental income it would generate. A lower ratio indicates a better return on investment. Appreciation: This is the increase in the value of a property over time. It can be calculated by comparing the purchase price to the current market value or future expected value. Final Thought The ROI in real estate varies widely depending on the market and the property, but you can find a general benchmark by looking at investment property averages across the nation. By doing research in your area, you can determine if the numbers make sense for … Read more

2022 U-Haul Report Reveals Texas and Florida as Great Multifamily Investing Opportunities

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U-Haul ® is the largest rental truck company in the United States. The U-Haul Migration Trend Report: 2022 Edition is based on data collected by U-Haul International’s nearly 450 franchise dealerships and reflects more than 94 million moves handled by U-Haul during the past year. This Is Great News!  Key Findings From the Report Include: Texas was the No. 1 destination for one-way truck rentals from another state in 2022 — followed closely by Florida, California, and New York. Texas took top honors for moving into the state with Louisiana (No. 2), Indiana (No. 3), and Oklahoma (No. 4). Florida was also a popular destination for incoming one-way truck renters from other states, including Georgia (No. 5), South Carolina (No. 6), North Carolina (No. 7), and Alabama (No. 8). The U-Haul report shows that Texas and Florida have been consistently popular destinations for one-way moves due in part to their strong economies and growing populations. Other states that have significantly increased one-way truck rentals include Arizona, North Carolina, and Tennessee. Related: Austin Housing Market Predictions 2022-23 The report also noted that many of the states that have experienced the most growth in one-way truck rentals are located in the South and Southwest regions of the United States. This suggests that many Americans are moving to these areas in search of better job opportunities, lower costs of living and more desirable climates. The Top 8 Growth States For 2022 Are: Texas – 1,065,055 trucks Michigan – 918,188 trucks Georgia – 875,717 trucks Florida – 796,324 trucks California – 749,942 trucks New Jersey – 672,619 trucks North Carolina – 651,843 trucks Illinois – 536,043 trucks Bottom Line Overall, the U-Haul report provides valuable insights into the current state of migration in the United States. For example, it shows that Texas and Florida remain popular destinations for one-way moves, while several other states in the South and Southwest are also experiencing significant growth in this area. Higher populations and in-demand markets helps position more apartment demand and solid multifamily occupancy rates. Join Us For A Daily 60-second Coffee Break Series For Passive Investing In Commercial Real Estate With James Kandasamy, The Best-selling Real Estate Author And Mentor.

The Value-Add Strategy: How to Maximize Returns on Your Real Estate Investment

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Investing in real estate is a great way to build wealth, but it can be tricky. The key is to know where to invest and how much to pay. Value add properties are a great way to invest in real estate because they offer the potential for higher returns than other types of property. What is a Value Add Property? Value add refers to improving a property’s value through physical improvements and upgrades. In this sense, “add” does not mean increasing something’s size but rather it’s worth or value. Value-add homes are sometimes referred to as flip homes, fixer uppers, or teardowns, depending on the type of renovation needed. For example, if you buy a home for $100,000 and spend $20,000 on upgrades such as new appliances, updated paint colors, flooring, etc., you’ve added $20,000 worth of value to your property. Steps to Successful Value Add Property Here are a few steps to consider when investing in a value-add property: Identify the Opportunity:  Look for properties that have the potential for increased income through rent increases, increased occupancy, or a change in use. Conversely, properties that are underperforming or underutilized are often good candidates for value-add investments. Conduct thorough Due Diligence:  Before investing, it’s important to conduct a thorough due diligence process. This includes analyzing the property’s current financials, conducting a physical inspection, and reviewing the local real estate market. Create a Detailed Business Plan:  Once you have identified a potential opportunity and have conducted due diligence, you will need to create a detailed business plan outlining the specific value-add initiatives you plan to undertake, the costs associated with those initiatives, and the projected returns on investment. Related: How to Add Value to Multifamily Properties Raise Capital:  Value-add properties often require significant capital to fund the renovations or repositioning. Therefore, it’s important to have a solid plan to raise capital to fund the project. Implement the Plan:  Once the funding is secured, it’s time to implement the plan and execute the value-add initiatives. This may involve renovating the property, repositioning it for a new use, or making other changes to increase its value. Manage and Monitor the Property:  After the value-add initiatives have been completed, it’s important to manage and monitor the property to ensure that it performs as expected. This may involve adjusting the property’s operations, implementing new marketing strategies, or making other changes as needed. Characteristics of a Value Add Property Value-add properties are characterized by several key features that have the potential to increase in value through renovations, repositioning, or a change in the property’s use. Some of these characteristics include: Underperforming or underutilized: Value-add properties often need to be performing to their full potential. This could be due to poor management, lack of maintenance, or a change in the local real estate market. Potential for increased income: Value-add properties often have the potential to increase revenue through rent increases, increased occupancy, or a change in the property’s use. Potential for cost savings: Value-add properties may have opportunities to reduce operating costs through energy efficiency upgrades, building improvements, or other cost-saving measures. Potential for increased occupancy: Value-add properties may have the potential to increase occupancy through renovations, marketing, or a change in the property’s use. Location and demographics: Value-add properties may be located in areas with strong demographic trends, such as growing populations or increasing demand for certain properties. Construction and condition of the building: Properties that are older or in need of repairs and renovations are often good candidates for value-add investments. A change in use: A property currently used for a specific purpose may have the potential for a change in use. For example, a commercial building could be converted into residential units. The Bottom Line It’s important to note that a value-add property can be anything from a commercial building, an office building, an apartment complex, or a retail center. Each property is unique and requires a thorough analysis of the property’s current condition, local real estate market, and potential for increased income and cost savings. Therefore, a professional assessment of the property and the market is always recommended. Join Us For A Daily 60-second Coffee Break Series For Passive Investing In Commercial Real Estate With James Kandasamy, The Best-selling Real Estate Author And Mentor.

Passive Real Estate Investing Tax Benefits

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Passive Real Estate Investing is a strategy that seeks to create a stream of passive income by purchasing real Estate and renting it out. This is similar to Passive Income; however, in this case, you use your own money to purchase Real Estate instead of investing other people’s money. Passive real Estate investing involves owning rental properties and letting someone else manage them. You earn income from the rent payments, but you don’t have to do any of the day-to-day management of the property. The passive income tax benefits of investing in real Estate are substantial. Investing in real Estate allows you to deduct up to $25,000 from your taxable income each year. This deduction is called depreciation and can be claimed on residential or commercial property. Passive real Estate investing is often considered the simplest way to make money with your properties. It’s also much easier than buying a home, fixing it, and selling it. When you invest in a property as a passive investor, there are no repairs or improvements to worry about. Instead, you can find a good deal on a rental property, sit back, and collect monthly checks from renters. Passive Real Estate Investing Tax Benefits There are potential tax benefits to investing in real estate, including multifamily properties, through a passive income strategy. When you invest in real estate, not only do you receive a larger return on your investment, but you also have the potential to save money on taxes. The following are some of the more common tax benefits of passive RE investing: Tax Savings: When you buy real Estate as an investment, it may be taxed as ordinary income or as capital gains. No special tax breaks and deductions are allowed if it’s taxed as ordinary income. If it’s taxed as capital gains (which is usually preferable), then you can potentially save money by paying lower rates on long-term capital gains rather than ordinary income tax rates Mortgage Interest Deductions: You can deduct mortgage interest payments made on loans used to finance investment property; however, the limit is $1 million per year total across all mortgages Depreciation Deductions: You can deduct depreciation from your rental income before calculating your taxable income. Depreciation is an expense related to owning real Estate, but it’s not an actual cash outlay. Instead, it’s an allowance for the wear and tear on your property over time due to normal use, maintenance, and repair costs. You don’t have to pay taxes on depreciation because it’s not cashing in hand — it’s just an accounting method for tax purposes. Tax-deferred growth: When you invest in a traditional IRA, 401(k), or other retirement accounts, you defer taxes until withdrawal. However, with an investment property, you can defer taxes during the holding period and any improvements made to the property. You can also deduct depreciation on any major improvements made to the property or building. Losses and write-offs: When you buy a property, its value can change over time — sometimes quickly. Real estate investors may see their properties increase in value over time, but they must also be prepared for losses if the market turns worse. Fortunately, the IRS allows investors to deduct losses from their income taxes in most cases. Passive Real Estate Investing Tax Benefits FAQs What expenses can I write off as a passive real estate investor? As a passive real estate investor, you may be able to write off certain expenses related to your rental properties against your rental income. These expenses can include the following: Property management fees Maintenance and repair costs Insurance premiums Taxes and assessments Interest on a mortgage or other debt related to the property Legal and professional fees, such as for a property manager or attorney Utilities and other services provided to tenants Advertising and marketing expenses to find tenants Travel costs for managing the property, such as for inspections or meetings with tenants It’s important to keep detailed records of all rental property expenses, including receipts and invoices, to support any deductions you claim on your tax return. You should also be aware that there may be limits on the amount of expenses you can write off, and some expenses may not be deductible. Consult with a tax professional for guidance on the specific deductions you can claim. How do I calculate the depreciation deduction for a rental property? The depreciation deduction is a tax benefit that allows investors to recover the cost of a depreciable asset, such as a rental property, over time. To calculate the depreciation deduction for a rental property, you will need to determine the following: The property’s basis: The basis of a property is typically its purchase price, plus any additional costs, such as closing costs and improvements, that add to the property’s value. The property’s useful life: The useful life of a property is the amount of time it is expected to be used for business or income-producing purposes. The useful life of a rental property is typically 27.5 years for residential properties and 39 years for nonresidential properties. The property’s depreciation method: There are several methods for calculating the depreciation deduction for a property, including the straight-line method and the declining balance method. The straight-line method spreads the basis evenly over the property’s useful life. In contrast, the declining balance method allows for a larger deduction in the early years of the property’s life. Once you have determined the property’s basis, useful life, and depreciation method, you can use the following formula to calculate the annual depreciation deduction: Annual depreciation deduction = (Property basis) / (Property useful life) x (Depreciation method factor) For example, if you purchased a rental property for $200,000, with $20,000 in closing costs and improvements, for a total basis of $220,000, and you use the straight-line method with a 27.5-year useful life, your annual depreciation deduction would be: Annual depreciation deduction = ($220,000) / (27.5 years) x (1) = $8,000 Note that this is just an example, and … Read more

How to Boost Your Retirement Income With Multifamily Real Estate?

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When you are retired, you want to make sure you have enough money to live on for the rest of your life. While some people may continue working after they retire, others choose to stop working and focus on enjoying their retirement. To ensure that you have enough money in retirement, you must have a solid financial plan and save as much as possible. However, there are many other ways to increase the amount of money coming into your bank account. One way is through real estate investing. Multifamily real estate investments allow you to diversify your portfolio and create a more stable retirement income stream. Multifamily real estate investments are a great way to accelerate your retirement savings. The numbers don’t lie – multifamily real estate is a proven investment that can help you build wealth and achieve financial independence faster than other asset classes. Why Invest in Multifamily Properties? Multifamily property ownership can be a good way to earn passive income, and it can also help you build wealth through appreciation and tax benefits. The value of multifamily properties tends to appreciate over time, especially in areas with strong demand for rental housing. Multifamily properties can provide you with income in the form of rent payments, which means that your money is working for you instead of sitting in an account somewhere. The more units you have, the more rent you will collect each month. In addition, as long as your tenants pay their rent on time, your income is stable and predictable. Related: What To Consider Before Investing in Multifamily Real Estate Here are Four ways Real Estate can Boost your Retirement Income: Regular and predictable income: Multifamily properties often generate consistent and predictable rental income, providing a steady cash flow to support your retirement. Diversification of your investment portfolio: Real estate investing offers exposure to multiple asset classes like stocks and bonds, which are less volatile than real estate investments. This means that if one asset class experiences a downturn, other asset classes should perform well, so your portfolio does not suffer too greatly from any losses. Potential for long-term appreciation: Real estate prices tend to appreciate over time due to inflation and population growth, which means if you buy an investment property now, the value will most likely go up in the future, making it easier for you to sell when the market improves or even rent out your property. Professional management: Many multifamily properties are managed by professional property managers, which can reduce the time and effort required to manage the investment. This can free up your time and energy to focus on other aspects of your retirement plan. Bottom Line Multi-family real estate can be a great way to pre-fund your retirement. In this article, we will cover the ins and outs of how multi-family works and how you can get started investing with properties that could provide consistent cash flow while renting them out or using them as rental properties. Join Us For A Daily 60-second Coffee Break Series For Passive Investing In Commercial Real Estate With James Kandasamy, The Best-selling Real Estate Author And Mentor.

A Beginner’s Guide to Cost Segregation Real Estate

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Cost segregation separates the non-depreciable personal property from depreciable real property and assigns these items to different tax classifications. The purpose of cost segregation is to accelerate depreciation deductions on personal property items commonly found in real estate owned by businesses and investors. This accelerated depreciation can save taxpayers significant amounts of money in taxes over the life of their properties. Cost segregation can be used for residential or commercial properties; however, commercial properties tend to be more favorable because of the larger amounts of non-depreciable personal property found in these types of facilities. What Is Cost Segregation? Cost segregation is a tax strategy used by real estate investors to accelerate the depreciation of their property. This strategy involves identifying and separating the various components of a property, such as the land, building, and personal property, and assigning each component a different useful life for depreciation. Using cost segregation, real estate investors can take larger depreciation deductions in the early years of their investment, which can help reduce their tax liability and increase their cash flow. Cost segregation is a complex area of tax law, and it is always best to consult with a tax professional or a qualified cost segregation specialist before implementing this strategy. How does Cost Segregation Work? Identify the various components of the property: The first step in a cost segregation study is to identify and inventory all of the components of the property, including the land, land improvements, and personal property. This may require a detailed inspection of the property and a review of any construction or renovation plans. Determine the useful life of each component: The next step is to determine the useful life of each component. This is typically done using the Internal Revenue Service’s (IRS) depreciation guidelines, which provide standard useful lives for various property types. The useful life of each component determines how long the component can be depreciated for tax purposes. Calculate the depreciation deductions: Once the useful life of each component has been determined, the next step is to calculate the depreciation deductions for each component. This is typically done using the straight-line method, which assumes that the component’s value will decline evenly over its useful life. The total amount of the depreciation deductions can then be used to reduce the investor’s tax liability. Review and update the cost segregation study: A cost segregation study should be reviewed and updated periodically, as the components of the property may change over time. For example, if a component is replaced or removed, the useful life and depreciation deductions may need to be adjusted. Therefore, keeping accurate records and documentation of all changes to the property and its components is important. Why is Cost Segregation Used in Real Estate Investing? Cost segregation is used in real estate investing to accelerate the depreciation of a property. Real estate investors can take larger depreciation deductions in the early years of their investment by identifying and separating the various components of a property and assigning each component a different useful life for the purposes of depreciation. This can help to reduce their tax liability and increase their cash flow. Cost segregation is particularly useful for investors in commercial properties, which often have a large number of components that can be depreciated over a longer period. The key to cost segregation is understanding which building components are depreciable and which ones are not. The IRS has specific rules related to the classification of assets in a building and will disallow any reclassification that does not follow these regulations. When properly implemented, cost segregation delivers a significant tax advantage for investors compared to ordinary depreciation methods. Related: 5 Real Estate Investment Tax Strategies That Can Protect You From Inflation What are the Benefits of Cost Segregation? The main benefit of cost segregation is that it allows real estate investors to take larger depreciation deductions in the early years of their investment. This can help to reduce their tax liability and increase their cash flow. In addition, cost segregation can also provide other benefits, such as: Improved Cash Flow: By taking larger depreciation deductions, investors can increase their cash flow and have more money available to reinvest or use for other purposes. Enhanced Return On Investment: By reducing their tax liability, investors can increase their net return on investment. Enhanced Value of the Property: By identifying and separating the various components of a property, investors can gain a better understanding of the value of each component, which can help them make more informed decisions about the property and potentially increase its value. Accelerated Depreciation: Cost segregation accelerates the depreciation timeline for a building from 27.5 years to 15 years. You can deduct 20% of the building’s cost in your first year. It is important to note that the specific benefits of cost segregation will vary depending on the individual investor and their particular investment situation. The Bottom Line Cost segregation studies can provide an immediate tax benefit and increased depreciation within your real estate portfolio. In addition, in the event of a sale, you could generate cash from some of these improvements. First, however, you will need to know how to prepare these studies and then the necessary documentation required to allow your tax preparer to claim this tax break on your behalf. So let us arrange a consultation with our industry expert today! Join Us For A Daily 60-second Coffee Break Series For Passive Investing In Commercial Real Estate With James Kandasamy, The Best-selling Real Estate Author And Mentor.

Top 5 Ways That ChatGPT Will Improve ROI In The Multifamily Commercial Real Estate Market

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The multifamily commercial real estate market is one of the hottest industries in the country. According to data from Yardi Matrix, there are over 20 million units in this space, with more than $1 trillion in transactions taking place every year. This is a highly competitive field, so if you want to stay ahead of the curve, you must do everything possible to improve your ROI (return on investment). Thought you might find the answer interesting in terms of Ai trends in CRE: ChatGPT can potentially improve return on investment (ROI) in this market. ChatGPT is the new and improved version of the classic chatbot. It combines artificial intelligence and natural language processing, enabling it to understand human language and respond accordingly in real-time. ChatGPT provides an incredible ROI in the multifamily commercial real estate market by improving customer service, increasing business productivity, and reducing operational costs. The top five ways that ChatGPT will improve ROI are: Automated property management: ChatGPT and other AI technologies can be used to automate various property management tasks, such as rent collection, maintenance requests, and tenant communications. This can save time and reduce the need for human labor, potentially improving ROI by lowering operating costs and increasing efficiency. Predictive analytics: ChatGPT and other AI technologies can be used to analyze large amounts of data and make predictions about market trends and tenant behavior. This can help investors make more informed decisions about where to invest and how to manage their properties, potentially improving ROI by identifying opportunities for growth and minimizing risk. Enhanced customer service: ChatGPT and other AI technologies can be used to provide fast and accurate answers to tenant inquiries, improving the overall customer experience and potentially increasing tenant retention rates. This can lead to higher occupancy rates and rental income, improving ROI. Improved security: ChatGPT and other AI technologies can be used to monitor security cameras and detect potential threats in real time, improving the safety and security of multifamily properties. This can help protect investments and reduce insurance costs, potentially improving ROI. Better tenant screening: ChatGPT and other AI technologies can be used to analyze tenant applications and other data to identify the most qualified and reliable tenants. This can reduce the risk of defaults and evictions, improving the overall performance of multifamily properties and increasing ROI. Overall, ChatGPT and other AI technologies have the potential to improve ROI in the multifamily commercial real estate market by automating tasks, providing insights, enhancing customer service, improving security, and better screening tenants. However, it is important for investors to carefully evaluate the potential benefits and risks of using these technologies and make decisions based on their own goals and circumstances. Join Us For A Daily 60-second Coffee Break Series For Passive Investing In Commercial Real Estate With James Kandasamy, The Best-selling Real Estate Author And Mentor.