The Real Reason You Are In The Commercial Real Estate Business (And it’s not what you think)

One of the first articles on a website should arguably be some of the best. The main reason of course is because you want to make sure that you do not bore the reader right off – not good for a website review or getting all the articles read. So, the first articles should contain some revelations in it, some possible life-alerting message, a profound paradigm shift. Of course I’m being a bit sarcastic but I am also making a point.

I am going to share with you the most profound discovery I have had that has my business to where I wanted it to be in the shortest period of time possible. This advice will yield huge returns for those commercial investors that really use it and implement it. Here is the thing too. It doesn’t matter where your market is, what kind of market you work with, what kind of property you may specialize in or who your tenants are. Whether you work mainly corporate commercial real estate or apartments – Doesn’t matter. Here it is:

YOU ARE NOT IN THE COMMERCIAL REAL ESTATE INVESTMENT BUSINESS – YOU ARE IN THE MARKETING OF YOUR COMMERCIAL REAL ESTATE INVESTMENT BUSINESS…


Stop right now and really think about what you have just read. As a matter of fact please read it again so you can really understand what I am telling you here.

Why is this the case? Why am I telling you that you are not in the commercial real estate investment business?

Here is why: you may be the best negotiator, the best financial analyst of commercial real estate, the best manager, have the greatest sales personality BUT – If you cannot get qualified tenant prospects in your door, prospects to call you and want to do business with you in the first place, NONE OF THIS DOES YOU ANY GOOD!!

So you see – the goal is to get business through the door in the first place because without a constant stream of business calling you, wanting to do business with you — your commercial real estate investment business will fail.

So, from this day forward your mindset needs to change to one of a marketer of your services vs. a doer of your services.

Don’t worry, I can hear your skepticism already.

Yes – you do complete real estate transactions, call tenant prospects, advertise your properties for lease through whatever media, etc. I know that you do this. Don’t get caught up in that part of it though. I know all of those things are important for your business.

But, Do Not skip over this.

Do not get confused that opening your mail and typing letters on your computer vs. developing systems that bring tenants in the door are of the same degree of importance for your business. They are not. Those that get this confused are losing money. A lot of money.

Once you adopt this “marketing your services attitude” you will notice all kinds of things happening including more investment dollars and more market share coming your way. More opportunities, more free time.

Sounds strange doesn’t it? Believe me, it’s not.

So, in summary, your goal is to work on getting as many qualified customers and tenants to come through your door, to call you, and want to do business with you in the first place. This is where we start, but how do we get the phone to consistently ring with qualified customers and tenants? We’ll talk about that in my next article…

Steps for the Beginning Real Estate Investor

In all my searches for information on real estate investing, I have not found many articles about what it really takes to become a “real estate investor.” There are lots of ads, and lots of people who want you to attend their classes while taking large chunks of your money, and then of course the personal mentoring, which takes even more of your money. Now that we have jumped into the field, I want to share our observations and lessons learned. It’s important to do your homework: research all the different avenues of education, decide how much money you have to invest (yes, you do need to have some cash, despite what all those “teachers” say), decide how much risk you can tolerate, because investing in real estate is not like purchasing $1000 in stock. You are purchasing a high-ticket asset, with value anywhere from tens of thousands to upwards of millions of dollars. And last but not least, you must be prepared to work hard and be persistent. It is not a part-time gig, no matter what those multi-gazillionaires claim. Following are four basic requirements that you will need in order to be successful.

You must have a desire for learning and continuing education, in whatever form it may take.

It is extremely important to take classes, attend seminars and read, read, read! Lots of people have followed teachers like Robert Kiyosaki, Donald Trump and Carleton Sheets. They all have powerful information to offer. But remember: giving us this “education” is their business. They are making money doing those seminars and boot camps, and making tons of it. You need to know that there are several different methods to make money in real estate (wholesaling, retailing, rehabbing, buying/selling contracts, renting, property management, commercial, etc.) Remember, each teacher has a different angle and each made their money in different manner. You need to decide which avenue is the most comfortable for you and go from there.

The Learning Annex provides good exposure to several different methods of making money in real estate and you can pick and choose whose methods you would like to learn more about. It is much easier to get into the business by focusing and learning one method at a time, and then move on to other avenues if you wish. You will only get overwhelmed trying to do everything at once.

It is also important to look at different types of education, including college courses and the internet. The single best tip you can follow is to join your local Real Estate Investment Club. To find your local club, go to www.creonline.com. This is a low cost way to start your education and also build contacts, which is extremely important in this business.

You need to have some cash to start.

Part of the hype from teachers of real estate investing is saying you can get into this business with “zero money down” or no money out of your pocket. The truth is, you really do need to have some cash in order to begin investing. Not only will you need some kind of down payment (anywhere from $500 to $5000), you will also need seed money for starting up your business. Remember, the days of 100 percent financing of properties is gone. You most certainly will need to come up with a down payment for your first investment property. Additionally, you’ll need money for starting your business. You might need to purchase equipment – both for your office and to do rehabbing. You will need professional consultants, an accountant and a lawyer. If you have left your J-O-B to pursue this business full time, you will need to replace your income until you get another income coming in. And don’t forget the cost of the education, classes seminars etc.

You need to have a comfortable tolerance for the “risk” you are taking on in this investment.

Buying and selling real estate is a risk – make no mistake, and it is a very LARGE risk at that. Part of the problem with the real estate market today is because [mostly novice] “real estate investors” rushed to cash in on rapidly escalating prices of real estate. Econ 101 – supply and demand. They bought recklessly, not intelligently, and now find themselves stuck with properties (whose values are resetting just as quickly) that they can’t unload. You must be aware at all times that any purchase you make, you must be prepared to hold if necessary. This is investing 101. Pay attention to the market.

You must work hard and persevere.

When it is all said and done, real estate investing is work. If you are coming from the corporate world where the work day is very structured and organized, working for yourself as an investor may come as a culture shock. Again, real estate investment teachers will tout “work for yourself” and “work your own hours.” They give the impression that you can come and go as you choose and work when you want. While this is partly true, you must also possess the self-discipline to sit down and perform the work you need to do in order to accomplish your investment goals. It is not as easy as it sounds. There is lots of research, the attention to business details such as book-keeping and stocking your office, searching for, then working the deal, completing the details of the deal (contracts, lawyers, titles, etc.) and then of course rehabbing the property, (or hiring and supervising rehabbers) if you intend to keep it.

Just as Murphy’s Law states, you will inevitably encounter road blocks along the way, some minor and some major. It is important not to give up or allow set backs to derail your progress.

The investing mantra is “Buy low. Sell high.” Current market conditions make it one of the best times ever to invest in real estate. Just remember, nothing is as free or easy as some “teachers” would like you to believe, all while they take your money to the bank. Just do your homework, choose intelligently and spend your money wisely. Learning Real Estate Investing can be overwhelming, but it is worth all your efforts.

Real Estate Tax Strategies And Forming An LLC

The 1st step in doing any real estate investments is to start a business. There are different types of business entities: sole proprietorship, Limited Liability Company (LLC), Series LLC (only in certain states), Limited Liability Partnership (LLP), LLLP, S-Corp, C-Corp. Series LLC can be set up in following states: Delaware, Iowa, Oklahome, Tennesee, Utah, Wisconsin.

Each of them has its advantages and disadvantages. The only true flow through taxation entity and the most beneficial in terms of holding real estate is Limited Liability Company. Limited Liability Company allows you to pay for business related expenses with pre-tax dollars. It is very important to understand that when you get paid and receive your paycheck, your taxes are already deducted and all your expenses whether they are real estate or business related are deducted on AFTER-TAX basis. When you have an LLC, you take all business expenses, deduct them, and pay income tax on what is left over. LLC does not require records and minutes of meetings. Filing paperwork is limited to articles of organization that lists LLC members. Tax Advantages: LLC is a pass through entity and if it is a single member the entity is considered disregarded by IRS. A corporation is subject to double taxation where not only the profits are taxes but also distribution in the form of dividends are taxed as well. The other advantage is flexibility in terms of LLC ownership transfer. LLC ownership is guided by Operating Agreement, which is an internal document. In order to change ownership all that needs to be done is the Operating Agreement and no filings are required besides updates with IRS for given tax ID number. LLC is the only entity that is NOT subject to loss limitation! It also has less filings than an S-Corp and very easy to maintain. If you have multiple properties, have them each in LLC and have one LLC to be your holding company that would own all the other LLCs. For tax purposes your main holding LLC will be a sole member LLC for the other ones and you will need to file only one tax return. In addition to the tax benefits LLC also allows you to have a basic level of asset protection. If your business owns the assets, they are separated from your personal assets and in case of a law suit they can not be touched. Please, note that LLC is a BASIC level of asset protection and if the opposing party has a good attorney there are many ways how your personal assets can become a part of a law suit. It is called piercing corporate veil. For example, you are required to have a separate bank account for an LLC. If your LLC owns your property, then all property relates income and expenses have to come out of that particular bank account. If this is not done, the LLC status can be disqualified and your personal assets become part of the lawsuit. Your LLC must be in good standing with the state and your must have adequate information on your article of organization. The purpose of the business must be clearly stated with no exclusions and you must file amendments when necessary. If you buy real estate, you should say that you buy, hold, rent or lease residential real estate; if you sell, you must state that you buy for the purpose of resale for profit, etc. In some states it is necessary to publish LLC in a local newspaper, and it can get very expensive; in other states like Maryland you need to pay annual fee, which is currently $300 a year. You need to check on your state requirements and guidelines and always be in good standing with the state.

Primary Residence. If you have an LLC, you might need an office and conveniently enough it could be in your personal residence. According to IRS Code 288G, you are allowed to deduct rent payments for your office space in your personal residence.

Depreciation. It is the most beneficial deduction in real estate! While your real estate is appreciating, you are allowed to depreciate it over the life of the building, which is 27.5 years and take the deduction against your income. However, depreciation is allowed only against the building, land can not be depreciated. For example, if you own a house thats worth 100,000, the value of the building might be only $80,000 and the value of the land is $20,000. Thus, you are allowed to take depreciation expense against the value of the building only.

Accelerated Depreciation. You might have heard from your accountant that accelerated depreciation is not allowed against real estate, and it is true, but there is a way to make improvements deducted in prior years and it all depends on how they are classified. For example land improvements such as curbs, sidewalk, and landscaping are depreciated over 15 years; personal property is depreciated over 5 years. Items that are considered personal property according to IRS code 1.48-1(c) must have one of the following features 1. accessory 2. function 3. movability. Basically everything that is an accessory, functions or movable is real property. If you are doing a rehab and can install movable walls, you can deduct the cost of improvements over 5 years. If they are not movable, then you will have to take 5-6 times less deduction for improvements in the next 5 years. Make everything you can either function, be an accessory or make it movable! One commercial developer built his office building with light weight movable walls and was able to deduct $80,000 that same year.

DEALER status. When flipping properties it is important to avoid “DEALER” status. In some case it can be avoided by flipping properties through different entities, in some cases by doing a few transactions, but the easiest “investor friendly” way is to simply state your INVESTMENT INTENT. If you state that your investment intent is buy, hold, lease, and rent properties unless forced to sell under certain conditions like need for working capital, you can get away with not being considered a DEALER.

IRS Red Flags. There are also certain things you should not do that would raise red flags to IRS and you might get audited. First, do not report too much rental income loss, there are plenty of expenses you can find to reduce your pre-tax income. Second, do not over complicate your asset protection structure. Having too many business entities on top of each other, or having domicile headquarters in Las Vegas, NV, tax free state could be a red flag. Reporting losses for more than 2 years always raises red flags. The common sense behind it: “if you do not make money why are you still doing business?”. Reporting excessive donations, high expenses vs high income can also cause an audit.

Property Taxes. Real Estate Investors are subject to a number of taxes including property taxes. Assessed value and market value of the property always have a gap. In 2007 assessed value was normally lower and in 2010 it is 99% of the time higher than market value of real estate. The taxes are not always reassessed depending on the market cycle and it is your responsibility to dispute them. In state of Maryland it is allowed to dispute personal property taxes within 60 days off settlement date or file before the end of the year for the next year hearing. Even though taxes are a deduction against income, they are not a tax credit, and the more you can minimize your expenses the more profit you will end up with. In order to successfully dispute your tax bill you would need to show the comparables and recent sales prices of real estate in your area. You will also need to compare the real estate that was recently sold to your property in terms of structure, number of bedrooms, bathrooms, square footage, amenities, etc.

Capital Gains Taxes. This type of tax is imposed only when you sell the property. The difference between purchase price and sales price is subject to this tax. There are exemptions to homeowners who lived in the property for at least 2 years and the amount of profit. There is a way to defer capital gains taxes by doing a 1031 Exchange. Make sure that you contact an escrow company and do everything within IRS guidelines. According to this IRS rule you can sell your property, find another property, make an offer within 45 days and settle on a new property within 6 month and defer paying capital gains taxes. According to the IRS tax rules, the property you are buying must be “likewise” property, meaning it does not matter if it is bigger as long as it is “investment” just like the one you just sold. So you can buy a single family house and buy an apartment building as long as both were investment properties.

What is essential to know before setting up an LLC?

The NAME. Your business should be in the name of your LLC. Most companies name LLC by the street address, for example 17 Lexington Ave LLC…I prefer to name them by the number and street name only without St..Ave..Ct.etc For example 17 Lexington LLC. It is just easier to remember and shorter to write. When you get a number of LLCs set up it starts getting confusing which one was St or Street or Ave, and the correct spelling of the LLC is essential in absolutely everything you do.

CHECKING NAME AVAILABILITY. Once you pick the name, you need to check the name availability with the Secretary of State Office. In many states in could be done online, and if you go to Secretary of State Office, they can check it there for you as well. I like to go in person to file all paperwork just because I can get everything done right there and get all paperwork in my hands the same day. In state of MD it costs extra for expediated service but it is worth paying because you need to get your bank account and everything else straightened out right away.

ARTICLES OF ORGANIZATION. Articles of Organization is the name documents that lists members and managers of the LLC. It does not have to be registered with the state, at least in MD and NY.

REGISTERED AGENT OR RESIDENT AGENT. An LLC requires a resident agent to serve on behalf of the LLC. It can be a business entity or individual that resides in the state where LLC was formed. For example, if you live in state of New York, you can list your name and address as a registered agent, or hire a company to represent the LLC. If the LLC is formed in another state, it is necessary to have a registered agent in that state.

LLC organizer. Members of LLC or somebody authorized to register LLC.

EXISTENCE of the LLC is perpetual and does not end with the death of its members.

WHAT MISTAKES TO AVOID WHEN SETTING UP LLC:

1. Start without a budget. It is necessary to incorporate budget for setting up LLC, which includes filing fees, fees to maintain LLC (in state of Maryland department of assessment and taxation required $300 annual payment just to maintain LLC in good standing), fees that accountant will charge extra at the end of the year to file taxes, some states require LLC to be published and it might be VERY costly (e.g. in New York it can cost a couple thousand dollars, but Maryland does not require publishing at all), initial contribution requirement needs to be met, annual fee to resident agent, separate bank fees might be charged for an business account like checks, monthly service fees.

2. Neglect to check the name availability. It is absolutely crucial to check the name availability for LLC before filing and paying the fee that might be non-refundable! Not only that, if you file paperwork, you wil probably have the same LLC name where the title is transferred to the property and it can become a problem.

3. Always hire an attorney. It is not true that only an attorney can file paperwork and write up documents. Anybody can be qualified to file on behalf of LLC, and in many cases it is unnecessary to pay attorney fees.

4. .Neglect the other paperwork. It needs to be checked what paperwork is required and needs to be filed in each state, and it is YOUR responsibility to check even if you hire a professional to do it for you.

5. Contribute lots of Caputal-might not be a good idea. Each state has a minimum amount required to be contributed to the LLC. Only this amount or what you need is necessary to contribute, because if you need to withdraw funds it becomes distribution of capital which is a taxable event in the eyes of IRS.

6. SKIP over BUY-SELL agreement. It is necessary to have an exit strategy, especially when LLC is a partnership because you never know what can go wrong and it is always better to have everything in writing.

7. Get tax ID later is not a good idea because it is better to get everything right away including a bank account. Without tax id you cant have a bank account and without a separate bank account IRS can disregard LLC as a business entity

8. Just ballpark the income tax. Never estimate what your income and expenses are and keep accurate records of everything. If you have a separate LLC account for the property, write checks from that account for all expenses including maintenance, state fees, property taxes, management fees, advertising fees, and all other expenses related to that property.

9. USING LLC account for personal benefit is absolutely unacceptable and can be VERY COSTLY. If you ever get in a lawsuit, the other party may sephina bank statements. If LLC account was not used solely for the purposes as stated in operating agreement and contain unrelated expenses, the status of the LLC can be disregarded and you can become personally liable for the law suit.

Real Estate Downturn Will Create 360,000 New Jobs

Many of the challenges we face in the real estate sector are merely a repeat of what we experienced in the late 80s. What no one is talking about is the tremendous opportunity we have to create over 360,000 new jobs in our struggling economy over the next 12 to 18 months.

The domestic real estate industry represents $1.6 Trillion or 8.5% of the U.S.’s Gross Domestic Product. The global capital crisis is impacting all aspects of the real estate market including brokerage, development, asset management, lending, and the countless support industries to the real estate sector.

Background Information

As background, during the early 1980s, Congress granted the Savings and Loan (S&L) industry new powers. Among others, these powers included lower reserve requirements and the ability to expand lending products and invest in real estate ventures. It wasn’t long before Congress corrected this mistake and tightened regulations, but for many S&Ls, it was too late. In 1989, the Federal Government had to step in and bail out the S&Ls by forming the Resolution Trust Corporation (“RTC”). The RTC was charged with liquidating these financial institutions and disposing of failed real estate assets and mortgages from the S&L industry. By the time it all came to an end in 1995, 1,043 Institutions with more than $402 Billion in assets (much of it in commercial real estate loans) failed. This cost the United States taxpayer more than $153 Billion.

During the bailout, the Federal Government spent over $400 Million in administrative costs that were not billed back to individual receiverships. According to the GAO, those bill-backs plus the administrative costs totaled over $87.9 Billion. Data is not available on specific breakdowns, but it is reasonable to assume that these bill-backs included all kinds of service fees to vendors including lawyers, property managers, brokers, and countless vendors supporting the property disposal activities.

What we are experiencing today makes the S&L crisis pale by comparison. Guarantees and cash payments by the Federal Government now exceed $7.5 Trillion. So far in 2009, 45 financial institutions are now in the hands of the FDIC with assets exceeding $11.94 Billion as compared to 2008 where 25 banks failed with over $17 Billion in assets. Another 114 financial institutions have taken TARP money totaling over $168 Billion more. It has been estimated that hundreds of additional banks will fail over the next 12-18 months.

At the same time, both commercial and residential real estate values continue to fall in many markets around the country. CAP rates in many markets for high quality investment product are up over 300 bps from levels of just six months ago. This increase alone wipes out any equity from commercial borrowers utilizing traditional leverage ratios. Coupling this fact with plunging tenant demand and falling lease rates means that even high quality real estate assets are in trouble.

In the current real estate downturn, it is likely that commercial loan failures will follow a similar pattern as to the residential failures we are already seeing. Unlike the 1980s though, it is expected that the magnitude of failures we are anticipating will dwarf what we experienced during the RTC bailout.

Although many lenders still have performing loans in terms of debt service payments, it is likely that many will find that their borrowers are in violation of loan covenants due to declining real estate values. How these lenders treat these activities on the commercial side remain to be seen. Federal regulations dictate that when a loan is in default, lenders must set aside cash reserve at substantially higher levels. With cash in short supply, lenders will be challenged with developing a strategy that may include utilizing TARP funds.

Opportunity

After researching past history and integrating current challenges, we believe that the opportunity exists to generate over 360,000 direct and indirect jobs to deal with the disposition of problem loans on both the commercial and residential side during this down cycle. These new job estimates are supported by the over $42 Billion in estimated fees that will be paid for services required to work through the problem loans and assets that will be paid for services required to work through the problem loans and assets that we anticipate will be coming back to financial institutions.

Direct jobs are estimated to total over 145,000. Many of these jobs are high paying – including advisory, legal, property and asset management, appraisal, underwriting, and numerous other real estate-related jobs. Additionally, utilizing real estate industry multipliers, it is believed that another 210,000 jobs can be created that benefit from the spending generated by the direct job sector. These jobs include countless categories occupied by people who provide goods and services to the new consumers that the primary sector jobs will create.

It is not known exactly how many jobs were created during the RTC crisis. We can only surmise by reviewing the available government data that a large portion of the $87.6 Billion in RTC administrative costs related to industry jobs. With the Trillions of dollars in hard cash outlays and government guarantees, it is difficult to imagine that the size of the real estate challenges will not be substantially larger than during the S&L crisis. Therefore, we feel our assumptions are likely conservative.

Our hope this time, is that the Federal Government takes a different approach to disposing of the real estate assets that will be coming back to the lenders. Rather than creating new government entities and jobs to work through troubled assets (FDIC and a potential new government agency), it appears to make much more sense to take advantage of an experienced and existing distribution network (our existing banking systems) specifically those who have received TARP funding.

As taxpayers we have already invested in TARP funds to banks plus the takeover costs of over 70 financial institutions in the last two years alone. With an estimated investment exceeding $200 Billion, It seems to make sense to utilize, that infrastructure, to work through the problem loans and assets. The $42 Billion in estimated fees will go a long way to stabilizing these banks and helping them repay some or all of the debt they have borrowed from the American taxpayer.

Some may believe that Government has all the answers. But, there are many others who have faith in the ingenuity of American business and the entrepreneurs that are out there, working every day, creating private sector jobs. A wonderful opportunity exists for the Federal Government to take advantage of our existing real estate and banking infrastructure to put countless people back to work.

Financial Overhaul Bill and Real Estate

Recently, our congress successfully passed new legislation, courageously recomposing century-old U.S. financial rules. It seems our buddies in D.C. have acquired great economic know-how, unseating 80 years of financial thought in a single, 24-hour session. The method of attack dealt with added regulation in derivative trading, and more specifically – Credit Default Swaps. Today, I will explain CDS’s, their influence on U.S. real estate, and how this new legislation will drastically affect everyone from the mighty real estate investor to the common renter. So, get involved and find out how this revolution to financial rules will affect both your personal and professional world.

Quick Hitters: side-effects of new bill

-Slow, steady increase in size of middle class

-Fewer home purchases

-Decrease in American home ownership -Increase in the renting community

-Increase in rental prices

-Critical paradigm shift in banking

Most critical to the real estate market is how the bill imposes derivative regulation on all U.S. banks. Certain types of derivatives, Credit Default Swaps, are used by banks to hedge or protect against the risk of default or non-payment on loans. In essence, CDS’s reduce some of the risk associated with providing loans, and for our purposes – mortgages. A third party will offer a bank to pay the amount left on the loan if the borrower is no longer able to make the loan payments. To make the third party willing, the bank will pay a premium to the third party, similar to premium payments to insurance companies. Here is an example:

Bank A decides to provide Minesh the Borrower with a 30-yr fixed mortgage of $250,000 to purchase a home. Bank A cannot afford to lose $250,000 if Minesh is unable to pay, but the bank can afford to risk losing $100,000 of the principal on the mortgage. Now, since Bank A still cannot afford to lose the remaining $150,000, it offers to pay a third party company $1000 every three months if the third party company agrees to pay Bank A $150,000 in the event that Minesh Borrower is unable to pay his mortgage. It is similar to insurance, without the insurance regulations – a way for banks to hedge against financial loss from borrower default.

The added security of CDS’s to our mortgage lending environment instigates and encourages lending to home buyers, as mortgages protected with CDS’s are more likely to be issued, and are more marketable for re-sale. Anything that makes mortgages more appealing, facilitates mortgage approval, and thereby, makes home purchasing more frequent and attainable. In many situations, loans are not made without credit default swaps.

So, what does this all mean? The added regulation on CDS’s may remove their safety net from mortgage lending, increasing associated mortgage-default risk. In order to balance or reduce risk, costs to borrowers will increase. At times, the lack of CDS’s will lead to such an increased default risk that any prospects of bank profitability are eliminated, leading to declined mortgage applications.

Why are Credit Default Swaps the target of legislative assault? Large corporations exposure to certain CDS’s such as AIG- America’s insurance giant- led to corrosion of corporate balance sheets. AIG sold a number of CDS’s to banks all over the world, providing bank protection in the event of mortgage default. With nearly $440 billion of coverage provided in the form of CDS’s to banks, AIG faced a crises when the American people simultaneously began defaulting on mortgages, as the climbing of the federal funds interest rate provoked many newly issued floating-rate mortgages to blunder. Without enough cash to maintain its side of the CDS agreement to cover the loss on mortgage default, AIG liquidated many other, profitable assets out of necessity, killing the company’s financial well being. Unable to provide banks in need with the promised cash recuperation, and also unable to maintain the promise of a security blanket against default to other financial institutions sent the banking system into a frenzy. Now, banks had to deal with mortgage default losses alone, and banks not yet facings mass defaults were forced to look elsewhere to protect their mortgage assets against default; however, the protection was now significantly more expensive, considering the shift in the perceived risk surrounding mortgages. The poor investing of AIG funds corrupted its primary line of business – insurance, requiring government intervention, as too many Americans depended on insurance benefits from the giant corporation, requiring tax dollars to protect the insurance benefits, as the company was no longer able to secure funds elsewhere

How will all this affect the real estate market?

Wave good-bye to the ease once associated with CDS issuance and trading – bye, bye. Banks are no longer to engage in “risky” derivatives trading to prevent catastrophe exemplified by AIG – a situation relying on taxpayers for correction. Now that banks are no longer able to deal in potentially risky derivatives trading, the government is, in essence, lifting the ability of banks to offer mortgages to anyone other than the most capable home purchasers. Effectively, banks will only have the availability to approve mortgages with significant down payments (a minimum of 20%) and borrowers with outstanding credit. Such borrowers are not in need of any form of default insurance, considering the debtor’s financial strength.

The Mistake

The stated goal of those drafting our new legislation is to eliminate the use of Credit Default Swaps as a means of speculating the quality of a loan/mortgage, using the AIG example as the evidence of potential catastrophe with speculation in Credit Default Swaps. Oh no no no no, Barney! Mr. Barney Franks! Again you misinterpret the fundamentals of American financing, it was not bank speculation that led to the problem; it was the speculation of the companies investing in CDS’s like AIG who put the system in jeopardy. I submit that government regulation is imposing harsh regulation on a mistaken culprit. The banks simply use the vehicles to purchase security, but the companies supplying the CDS’s speculate that they will collect enough premiums to counterbalance any claims on defaults they may on day need to pay. There is no speculation on behalf of the bank, only hedging for safety measures. The regulation, if any, should be levied on private sale of CDS’s by companies such as AIG – regulating their exposures to certain derivatives trading would be more appropriate. AIG’s mistake was acquiring too many CDS’s of similar complexion, all with sub-prime borrowers, similar loan start dates, and floating interest rates. Such negligence left the company vulnerable to catastrophic loss. For AIG, the catastrophe was a progressive climb in interest rates. I submit that regulation preventing companies from pursuing too many of one category of CDS’s could protect conpanies, banks, and individuals from the risk of catastrophic loss.

As a result of the new legislation, the mortgage game will be more challenging, as a loan without the security of a Credit Default Swap is less marketable, and therefore, less attractive to banks. There is little money to be made off of non-CDS supported mortgages unless the borrower brings accompanying financial strength that dispels the need for added, hedged security. Also, the loans will only be designed with strength, including only financially strong debtors and loans built off strong equity positions (large down payments).

Who’s Affected?

Investors: the practice of flipping houses will no longer have short-term profitability, as the buyers market will be a fraction of it once was, and the frequency of real estate purchase will thereby decline. Real estate investment will shift from seeking gain on house value, to designing strong revenue from cash flow – income properties. With cash on hand and appropriate ratios of debt to equity, investors with cash retain access to low interest rates, unavailable to others, and should be able to use their cash-rich situations to design a cash flow from rent. Interest rates will remain low, as few will have access to the low rates, and with a small number actually able to take advantage, the widespread demand of borrowed money will never be great enough to quickly drive up interest rates. The wealthy will be able to borrow for cheap, and likely rent out the property at high returns, as home ownership will decrease dramatically, and the American dream of home-ownership will turn to distant fantasy

Renters: You will soon be greater in numbers, as many American will revert back from ownership into the conservative life of renting. Without available funds, young professionals will no longer be afforded the opportunity to leap into early home ownership. Furthermore, some home-owners of the past will be sent back to the minor leagues, presented with new obstacles on the path back to the top. As I’v mentioned before, increased renting will drive up monthly rent prices (another reason why the investors mentioned above may want to take advantage of income property).

Property Managers: prepare to expand your business at lower prices to your clients. In the coming years, an increasing number of houses and various other units will be used for rental activity. Form strategy on how to accommodate the new renting generation, as they will likely seek the quality of a home, in rental form. These are long-term renters with a likely heightened demand for quality. Keep the complexion of the incoming tenants in mind, and adjust your business plans to accommodate for the surplus in renters.

Real Estate Agents: Depending on your niche in real estate, you will likely need to alter your approach to profitability. The purchasing power will now rest primarily in the hands of investors, and after the houses on the market now are unloaded, there will be no quick turnover on homes as we have grown accustom to over the past 40 years. Ownership will remain constant, so it is important to focus sales efforts in cities with substantial investment capital and great rental demand, as housing purchases will come from investment for the purpose of generating cash flow, requiring a renting population. Personally, I suggest cities containing large colleges/universities. Next, you will likely need to incorporate property management into your business model, as it will be the best way to secure consistent income in the long-term. However, many agents will also shift into property management, so be sure to provide a competitive advantage – use new technology available to create an efficient management company. Remember, the current state of the industry has little technological influence, and requires too much leg work to function properly.

Forget the Advisers! Buy Commercial Net Leased Real Estate and Control Your Own Money

I am mad as hell at these Shylock’s such as Bernie Madoff, and several others, posing as ‘trusted advisers’,responsible for painting an entire profession with the broad brush of incompetency and thievery. The same goes for the Wall Street high rollers with million dollar salaries and bonuses taking risks with our money that we individuals would never dream of taking. I am a commercial / investment real estate professional with 30 years of experience and believe me it burns my butt. I’ve worked long and hard for my reputation and quite deservedly, it is solid. So, the question is, where do you invest that will keep you in control over your own money? OK, so what’s my answer? My suggestion is to buy commercial real estate, bricks and mortar.

Net Leased Real Estate

By purchasing a net-leased property you are accomplishing many things. First of all, you own the real estate fee simple, i.e. not through a stock such as a REIT or some other type of real estate fund that collects your money along with hundreds of others and buys what they feel will be in your best interest. YOU OWN it. These investments are called net-leased because the tenant pay most if not all of the real estate taxes, building insurance and common area maintenance such as snow removal, grass cutting and other building upkeep expenses. Thus, the monthly rental income received is Net to you. This type of lease is a triple net lease. A double net lease has the owner ultimately responsible for the roof and parking lot replacement and building structural integrity.

Most of the net-leased properties that are available for purchase today are brand new construction with leases anywhere from 10, 15 to 25 years in length. Surprisingly, most are with credit tenants and the leases are corporate leases, not guaranteed by an individual or a franchisee. The properties are located all over the U.S. and typically in growth areas – they are the retail tenants you see in your community such as drug stores, dollar stores, auto service and parts stores and bank branches. The majority of these investments are in the retail sector but some, such as FedEx Ground distribution properties can also be available for purchase. Medical buildings are very much in demand.

Cost and Financing

Be prepared to pay anywhere from $850,000 to $6,000,000. These are conservative investments and expect an after-tax return of about 5% to 6.5% based on 70/30 financing with interest rates in the mid sixes to mid sevens. And speaking of after-tax, many of these properties are what are known as passive investments that qualify for the advantages of depreciation and interest charge deductions. Of course, your tax adviser should be consulted when considering any investment. And yes, there is money available for these types of investments – quality tenants and qualified buyers with minimums of 30% to 35% equity.

Conclusion

If you are ready to take control of your own investment dollars you should consider net-leased real estate. The leases for these properties are long term and require little or no management time or talent. Most are new construction in good locations and leased to credit tenants. For an investor that appreciates an investment horizon longer than one or two years, these are great vehicles for growth.

To find a property that fits your needs and long term goals consult with a commercial real estate professional who will represent your interest in the transaction thus having no prejudice for one property over another. My business is exactly that. I will work on your behalf but you are in control of what, when and where you invest your money. If you, like me, are fed up with other people handling your money – allow me to find you a net-leased property.

International Real Estate – Buying A Home In The U.S If You Are Not A U.S. Citizen

I have mentioned it many times before. Often, my newsletter topics come from real-life situations and clients.

A few weeks ago, an agent who reads my newsletter came to me with a challenge. He represented a man from Japan, who didn’t speak English. This man is buying a non-warrantable condo, as a second home, with stated income, and his lender had just turned him down on the day of closing. He came to me and we got his loan closed.

He was very happy and he said, “Aaron, you should write a newsletter about Foreign National homebuyers, because not many people understand it.” He was right!

The American dollar is weak today compared to many other foreign currencies. In addition, American banks offer very creative loan financing and low interest rates. As a result, many foreigners are looking to invest their money in American real estate and Las Vegas is one of the most popular markets for them.

People who are not American or who are not legal resident aliens are classified as Foreign Nationals.

In Las Vegas, experts say the high-rise condo industry would not be able to survive without the Foreign National buyer. According to a recent article in Fortune Magazine, foreign buyers have purchased as many as 30 percent of the condo units in the new Mandarin Oriental, part of MGM CityCenter, that is supposed open in late 2009. The entire Mandarin Oriental building is nearly sold out.

Some people estimate that close to 10% of all purchases in Southern Nevada are Foreign National buyers. When you are talking about Florida, some say this number is as high as 15-20%.

These clients come to the States to purchase both Second Homes and Investment Properties. However, the recent challenges in the lending guidelines have made investment loans difficult for Foreign Nationals. However, primary resident and second home purchases are very easy for the borrower to obtain.

There is a real marketing opportunity for real estate agents who can promote themselves to this niche and you don’t have to be from their country to do so. It’s important to understand how they will secure financing however.

Although many loan programs have different requirements, here is a pretty standard list of what they will need:

o A credit score helps. Many companies now can offer foreign credit reports but if they have one domestically that will work too.

o If they don’t have a credit score, they will likely be asked to provide three letters of reference from financial institutions in their home country that shows they are in good standing. Or they can sometimes show one credit reference letter from a large internationally known banking institution that also attests they are a good client.

o A valid unexpired passport or visa. If the visa will expire within six months from the date of the loan application, they will likely have to provide a copy of their extension.

o Many banks want the borrower to have opened an account in a U.S. based bank and have at least a two month history there.

o Employment verification. This can be a very short, simple letter from a CPA or other third party in the borrower’s home country verifying the employment and line of work.

o If the property is being purchased as a second home, plan on a down payment of 20-25%. If it’s a primary residence, and he has lived here less than two years, plan on 20% down. If the he has already been living in the U.S. for at least two years, he may be able to qualify for up to 95% financing, regardless of country of origin. If he has lived in the U.S. less than two years and he is a citizen of Canada, UK or Mexico, he may be able to qualify for 90% financing.

It’s important to note that when a non-U.S. real estate owner sells the real estate he has bought here, the IRS requires that 10% of the sales price be withheld at closing for an estimate tax payment.

There are exceptions to this. If the non-U.S. real estate owner sells the property to someone who plans on using the property as his primary residence, and the sales price is $300,000 or less, the seller is exempt from the withhold. You can also request that less be withheld if you believe the tax liability at the end of the year will be less.

According to many experts, there are 10 things you will want to consider when working with foreign real estate buyers.

1) You need to be able to overcome the language barriers, if they exist. If you are marketing to European buyers or Canadian buyers, this won’t be as big a challenge however if you choose to market to other areas like Asia, the buyers may not speak fluent English. Plan on having an assistant who can speak the language of the area of the world you want to try and market or securing the services of a company like translators.com.

2) You should have a great understanding of the local market conditions and legal issues. These buyers are usually very well educated and successful in their country. However, they may not understand our market. They will look to you for your expertise.

3) Be very respectful, even when there are communication challenges, and be very careful not to demean or talk down to anyone.

4) Focus on a single country you want to market to when you first get started. It’s important that you become familiar with the culture in order to start to build a network of contacts and referrals.

5) Be patient. There are many cultures that believe that some important decisions require more time and thought.

6) Develop a networking group of resources for them to deal with on any of their questions like a group of tax experts, attorneys, lenders, escrow agents and others who understand the laws and intricacies of foreign ownership.

7) Understand the foreign currency conversion tables. Be able to tell the client that 300,000 U.S. dollars is 223,441 euro. And if you need help, use this website. http://www.xe.com/ucc/

8) Understand there could be challenges and delays. Not many lenders have experience in dealing with Foreign Nationals. Due to the nature of the documentation the borrowers are asked to provide, you can expect there to be more requests from the lender than normal. Because the client is sometimes out of the country and not readily available, this can create untimely delays.

9) Communicate the process. It’s important that you clearly communicate the entire real estate purchase process from start to finish. Its likely that our process here differs from that in their country and you want them to understand ours as well.

10) Stay on top of foreign currency exchange rates and market conditions. Let’s say you had a buyer from the U.K. who thought the $300,000 home you showed him last month was “a bit too pricey.” But let’s say that next month, the dollar drops further compared to the Euro and now this $300,000 is actually costing him $292,000 compared to the Euro, you may be able to make a sale without the market moving at all.

The National Association of Realtors even has a certified designation for international property specialists through their International Division. In today’s tighter market, it may make sense to expand your niche marketing and Foreign Nationals provide an area where there is not as much competition. How do you begin to find these buyers? Developing a presence in the international market can often start with local contacts.

In addition, the largest ethnic groups have a local Chamber of Commerce.

Finally, your Internet sites should definitely and prominently market your expertise in understanding and assisting the Foreign National.

Learn How to Purchase Real Estate in Any Market With None of Your Own Money

Introduction
Successful Real Estate Investors understand the need to have capital available in order to pursue investments that will allow for their continued business growth. However, this capital does not have to come from their own personal or business funds. The savvy Investor will use every method possible in order to get the most creative financing terms that will benefit them. Some of following methods will actually allow you purchase a property with little or no money down.

Warning
Due to the nature of putting creative deals together that may not conform to traditional lending procedures, it is strongly recommended to have your Attorney review any agreements or contracts in advance of you signing them. This will ensure your best interests are being protected.

Don’t Be Afraid To Ask!
The following information will provide an overview on ways to generate creative financing to provide funding for your real estate investments. One thing to keep in mind with regards to getting a seller to agree to creative terms is that if you do not ask for it you will never really know what could have happened. If you provide compelling reasons why your request for creative financing is a Win/Win situation, you just may convince them to look outside their normal comfort zone and do the deal.

Cash is King
When it comes to having a strong negotiating position with a seller, nothing compares to telling them that you are willing to pay them cash immediately. Cash is a powerful tool and it is one way to set you apart from the many investors that may be after the same deal. There are a number of ways to ensure that you will always have the capital available to negotiate your cash deals with motivated sellers. The following sections will provide a number of possibilities.

Borrowing from Friends, Family, and Professionals
Although at first you may have concerns about approaching people you know or who are family members to discuss borrowing money from them, keep in mind you are approaching them with a business opportunity, not a handout from them. Your success in achieving the desired results with these people will depend completely on how you present your opportunity. If you sit down with them not properly prepared without having any of the obvious issues or questions worked out, you will probably walk away without the cash. However, if you put together a project plan that will include an overview and most importantly a viable exit strategy (so they know how they will get paid back) there is a good chance you will be successful.

Once you have exhibited your ability to complete these real estate transactions with the anticipated results, you will have people coming to you as an investment option.

Bring in a Money Partner as a Joint Venture “Equity Sharing” arrangement
Another approach to locate capital is to add a money partner and do a Joint Venture with them. This technique is different than a traditional Hard Money loan because they may take on a more active role in the project and perhaps instead of a straight loan percentage they may take a piece of the profits. In addition, they are typically added as owners any mortgage notes and Deeds. Usually in this arrangement, there is a split of the investment profit and loss as well as tax benefits. Although the split is typically 50/50, it does not have to be and could be determined based on the amount of capital or other skills the partners are bringing into the deal.

Keep in mind that a Joint Venture relationship is usually put together with a specific project in mind. Once the project has been completed, the Joint Venture relationship may end. The specific terms of the joint venture are outlined in a Joint Venture Agreement, which will legally bind the partners to the project.

The Joint Venture approach is a great way to “Test the Waters” with the Partners in order to assess the viability of continuing this relationship on another project or to elevate the relationship to another business level like forming a entity (LLC, S-Corporation, etc,) with them. If you are going to find out that you have selected the wrong partners, it will be much cleaner to find this out when your relationship is only based on the one project.

Partner with the Owners
As another approach to shared equity, you may come across a situation where a seller is looking to sell a property that is in need of rehabilitation and also may be behind on their personal expenses. You could come in and bring the property up to market value by completing any rehabilitation it may require. In return, you would get a percentage or flat return on your investment once the property has been sold. Make sure you have a beneficial interest in the property either by being added to the deed or by issuing a note back to the seller.

This technique can be very advantageous for owners who are unable to pay the monthly expenses.

Buying Low and Refinancing High
Buying low and refinancing high is great way for you to “create” and utilize equity.
This technique works very well on properties that can be acquired far below market value or due to the current poor condition of the property. There is an ability to add value in the form of improvements. By purchasing the property and refinance with a cash out, you can recoup the capital you gave the seller and repeat the process on the next property. This is a great way to leverage the same funds over and over again. In some cases, you may be able to allow the seller to hold the mortgage until you can refinance. One word of caution using this method, make sure you fully understand your ability to get a loan based on the property and your credit qualification. Keep in mind that banks have LTV (Loan to Value) limits on how much they will loan based on the appraised value of the property.

This is a True Story!
On one of our rental properties we purchased we had some very motivated sellers that had a property that would not qualify for traditional financing due to its condition. We were able to negotiate a deal where they would hold a mortgage while we rehabilitated the property. At the end of the mortgage period, we were able to refinance and pay off the owner financing creating a win/win situation.

Sale-Lease Back
Another twist to owner financing is a Sale Lease back. With this technique, the seller will provide financing for the sale and you will lease back the property to the seller. You can give either full or partial credit towards the fair market rental value. This arrangement could be a great win/win strategy. The seller’s benefits are highlighted as follows:
* Eliminate the need to maintain the property, this could be very helpful if they are elderly or have an illness.
* The seller will receive an income stream to help pay for their expenses.
* Allows the seller to stay in the home, which can have powerful emotional benefits.
* The seller may benefit from a lump sum of cash from the down payment.

Doing a “Subject To”
The concept of a “Subject To” deal is that you will take title on a property subject to the existing mortgage remaining in place. This technique is different than assuming the loan because with an assumption, the loan is “transferred” to the new buyer. With a Subject To, you will pay the mortgage on behalf of the current owner. A Subject To deal is usually applicable when the property is not a candidate for a Short Sale. On a Subject To property there usually is significant equity in the property as apposed to a Short Sale that may not have any or negative equity.

Home Equity Line Of Credit (HELOC)
A HELOC is a great resource to have when you need capital to fund your next acquisition. How this type of loan product works is fairly straightforward. If you currently own property that has equitity (the difference between the market value and the total amount of all mortgages), you can use that equity to secure a line of credit. A line of credit is a perpetual loan meaning as you use the line and pay it back, you can borrow it again. A HELOC usually comes with check writing capabilities so you can fund deals as soon as you locate them. Lenders will have underwriting guidelines that will limit the amount of equity they will allow you to pull from the secured property.

You should exercise when considering using this type of loan product. Remember, if your project fails and you can no longer make loan payments, the bank will foreclose on the property that held the security and it may be your home.

Using Credit Cards
There may be instances where you may need quick cash for a short period of time. Don’t discount using your credit cards and requesting a cash advance. Although this option may cost you in terms of the high interest rate payments, it can be a viable approach to get you out of a jam with your cash flow or to raise capital for the acquisition of properties. If you have very good credit, I’m sure you are continuously bombarded with credit applications. Perhaps you should apply for a few of them and use the cash advance as another capital generation tool. Remember, most credit cards are free so if you do not use it, it will not cost you anything.

Assuming the Existing Mortgage
Assuming a mortgage is a great way to avoid dealing with all of the cost, time and underwriting criteria you may encounter when originating a new loan with your bank.
Basically, when you assume an existing mortgage, you are replacing the current borrower and stepping in and assuming all of the terms of the existing mortgage. Although at first this may seem like a great option, make sure you fully understand all of the terms and conditions of the loan. Many of these loans were originated when the interest rates were not as favorable as they are by today’s standards.

The following list will summarize the key points you need to review before agreeing to assume the loan:

* Interest rate and any adjustments that may occur
* Any balloon payments
* Prepayment penalties
* Assumption fee
* Term left on mortgage
* Assumption qualifications

Owner Holding a Mortgage
One of the most effective ways of doing creative financing is when the current owner is willing to hold a mortgage for you. This method is clearly a win/win situation. The following highlights will summarize the benefits of this approach:

* The seller could benefit from reducing their Capital Gains tax resulting from a traditional transaction. In addition, they will receive monthly payments that will generate an income stream at a good rate of return.

* With potentially reduced closing costs, the seller may attract more buyers

* Rates and terms are negotiable

* Since institutional banks are not involved, the transaction can close faster which could benefit the seller.

* Property condition is not a problem because you will not have a bank underwriting the loan with specific guidelines regarding the condition of the property.

* The seller may get a higher sales price because some buyers will be willing to pay a premium for this benefit, especially if they are not currently a good candidate for traditional financing

* If the subject property is commercial and not performing well due to poor management or vacancy issues, a lender may not write the loan. Lenders are very sensitive to the Debt Service Coverage Ratio (DSCR). See “Performing Financial Analysis on Investment Properties” handout for more information on this topic.

Once you have convinced the owner to hold a mortgage for you, your next objective is to work out the best terms of the loan. During the terms negotiating, there are a number of techniques you may want to consider to optimize the situation for you. The following will highlight some of the things you may want to negotiate with the seller:

* Defer the start of the payment cycle until you can generate income from the property.
* Have the interest rate on a sliding scale so that the early years have a lower rate than the later years. This could be beneficial in an appreciating rental market.
* Request interest only payments with a balloon payment due at some future point in time.
* Giving the seller a higher sales price in return for no or low interest rate.

Substitution of Collateral
A substitution of collateral basically means that you will use another property to secure a mortgage other than the property you are purchasing. For example, you can attach the mortgage to your primary home leaving the investment property you just purchased free of any liens. This technique will allow you to sell the investment property without having to satisfy the mortgage and leveraging the additional capital you will receive from the sale.

Options
Perhaps the most powerful technique in creating deals is using the concepts of Options. Basically, an option is a formal contract between a buyer and seller that states that the seller will agree to the sale of the property at some point in the future for a pre-determined price and the buyer has the option of moving forward with the sale. For the privilege of having the option to purchase, the buyer will usually be required to pay an option fee upfront and if they do not “exercise the option”, the fee will be surrendered to the seller. Typically, these option fees are held in escrow and will be managed in accordance with the options contract. Keep in mind that with these types of transactions, the seller is required to sell but the buyer has an option to purchase.

What the options technique allows you to accomplish is to have control over properties with very little money in the deal. Your only risk will be the loss of your option fee. During the option period, you will not be required to manage or provide capital for the underlying property including insurance or taxes.

A property owner usually retains the right to sell to someone else other than the purchaser of the option. However, the option will still survive the sale and just like a lease, the new owner must accept the terms and conditions of the option agreement.

Option Terms
Option terms are completely negotiable and usually no two deals look the same. The length of the option period can be anywhere from a few weeks to a number of years. Usually the shorter option periods are used when a buyer has determined that there is currently substantial equity and/or cash flow and need some time to either raise capital or locate another buyer to flip the deal to. Longer option periods are typically used when the buyer is anticipating future equity and/or cash flow. It is recommended that you consider having a provision in the contract that will allow you to extend the option period if it expires. This is referred to as a rolling option. Having the ability to extend the option period will usually cost additional option fees, but may be worth it if the property has the value you are anticipating.

Assignment of the Option
It is recommended that you add an assignment clause in the option contract that will allow someone else to walk into this contract. Consult your Attorney on the development of this document.

Lease Options
A variation to the option technique is a Lease-Option. This technique combines a typical lease with a purchase option. Unlike a straight option, the lease-option will shift the responsibility of property management to the leaseholder. With this technique, you will benefit from any cash flow and also tax advantages if this is a rental property.

Second Mortgages
Another technique to finance your acquisitions is to take a second mortgage out on a property you currently own. If you feel you will need these funds for an extended period of time, this could be a better solution than a HELOC loan because many of these loans are interest only and if you hold the property for an extended period of time, you would not be reducing the principle amount.

Using Signature Loans
If you have a good credit score, you may want to consider taking out a signature loan to help fund your acquisition Capital. This type of loan product is not secure by real estate and is based solely on your ability to pay. These types of loans can typically have a higher interest rate than a secured loan due to the higher risk levels the lender is accepting. In addition, there are limits that banks are willing to lend on an un-secured loan. A technique to provide a private lender more security on these types of loans is to take out a life insurance policy for the amount of the note and interest and make the lender the loss payee.

Tap Your Life Insurance Policy
There are some life insurance policies that will accumulate a cash value, this cash may be available to the policy owner in the form of a loan or cash value reduction. See your Insurance Broker for more details on this method.

Self -Directed IRA’S
You may want to consider using a Self-directed IRA to fund your investment capital needs. Self-Directed IRA’s have become extremely popular in recent years due to their flexibility with investment options. However, make sure you fully understand the specific rules and requirements of your plan with regards to the capital moving in and out of you account. There are limited custodians that offer the Self-directed IRA. See the workbook module “Reference Information List” handout for contact information.

Transactional Funding
Transactional funding can be an outstanding method for you to financing some of your deals without any of your own capital. A transactional lender will provide extremely short term financing in order to complete the sales transaction and the term of the loan is usually one to a few days. This type of financing is only suited for certain types of real estate transactions like Flipping where in the course of a day, you will close on the purchase side and re-sell it to your buyer. The fees associated with Transactional Funding can be high (2-4% of the loan amount) plus a few points or processing fee. However, when these costs are considered and the transaction is still viable, it can be a great way to complete another deal with other people’s money.

Using Your Company Sponsored Retirement Plan
Another technique to raise capital is to take a loan out on your retirement plan. For some, this can be a great way to leverage your money and earn even greater returns than you are currently receiving. The benefits of the approach are summarized below:
* Approval of the loan is usually very easy
* You are paying yourself back with interest instead of another bank or investor with hard money.
* Payments are usually made through payroll deductions making it very convenient.
* Interest rates are lower than hard money (be cautious with this method regarding your monthly payment because with the shorter loan terms typical of this product, you will be paying a higher monthly premium).

Other People’s Money (OPM)
When talking about creative financing techniques, you will hear many references to “OPM”. The concept of using other people’s money is a sure fire way for you to get into a deal with little or none of your own capital. The many different ways to use OPM is limited only by the creatively of the people putting the deal together. By definition, creative financing does not have any hard rules. The level of creativity is usually directly proportionate to the motivation of the parties involved.

As an investor, there are tremendous benefits to you using OPM. These benefits are summarized below:
* When you rely solely on your own capital to fund a project, you are limiting your acquisition plan due to your capital being tied up until your current deal completes the exit strategy. In addition, you will be limited on the scope of the project based on your available funds. However, when you leverage the use of OPM you are effectively creating an endless supply of required capital. This leverage will allow you to attain your financial goals in a more effective time frame.
* If you do not have any capital of your own to invest with, this method may be the only way you may be able to enter the real estate investment business.
* If you have poor credit, conventional financing may not be possible.
* Allow you to shift some of the financial risk to someone who will be benefiting by receiving a good return on his or her investment.

Using Personal Property as Down Payments or Collateral
In some cases, you may be able to offer your personal property as either a down payment or collateral. The seller for example may be willing to take ownership of your car as the down payment. This option offers many interesting possibilities.

Using Hard Money to fund your deal
Using Hard Money to fund your capital needs is a very common financing approach that should be considered. This method of financing is a great win/win strategy. As part of the development of your Success Team, you should have a number of Hard Money Lenders on-line ready to provide you the required capital. One of the benefits of using Hard Money Lenders over other ways of raising capital (like asking your family and friends) is that there is no emotional connection in the deal; either the deal makes sense or not. The criteria that Hard Money Lenders have are usually fixed with little room for negotiation.

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

Reed City MI Real Estate- Buy A Home Even With Bruised Credit – Or Sell Your Home On Terms Or Cash

Maybe you would like to buy Reed City MI real estate, but think that you are only dreaming, because of past credit issues. Maybe you are trying to sell Reed City Michigan real estate and tired of waiting….and the payments are killing you.

In both cases, Reed City MI real estate investors like us can help.

First, a bit about the area…

Reed City is located in the southwest corner of Osceola County at the intersection of highways 131 and 10. Within an hour’s drive of Grand Rapids, Traverse City and Midland, it is “close-in”, but still provides a “small-town feel.” For the outdoor enthusiasts, two of the major trails in the Rails-To-Trails system intersect in Reed City. Rails-to-Trails is a country wide program which converts unused railroad tracks into comfortable paths for hikers, bikers, horse-back riders and snow mobiles.

The Pere Marquette Snowmobile Club maintains and signs the trails in the area. They plan to use the soon to be constructed Reed City Railroad Depot for meetings and events. Reconstruction of the depot is part of the city’s plan to develop the downtown area, attract more tourism and thus improve the value of Reed City, Michigan real estate. Similar plans have been successful in other small towns and cities throughout the country.

Currently the median price for a home is Reed City is $69,500, much lower than in most areas of the state. Reed City MI real estate is often advertised as “country living”. Many properties include five acres or more. Some have barns and are ready for the horses.

Most people realize that buying is better than renting for their long-term financial future. But, because of problems with their credit, many people cannot qualify for traditional financing.

With the lease option program (aka rent to own) offered by experienced Michigan real estate investors, homeownership can be closer than you think. If you are currently employed, have some motivation and a few thousand you can afford as a downpayment, you can qualify for our unique program.

Changing employment opportunities in Michigan left many people without a job. Whether a regular paycheck is coming in or not, the bills don’t stop. Even one or two late payments can negatively affect a person’s credit score. Once the employment situation is corrected, the credit score does not automatically correct itself. If your credit has been bruised, you are not alone in Michigan.

In some cases, a person’s credit score is not a true indicator of their “credit worthiness”, but it is the only factor that many lenders consider. Many responsible people got hit by the bad economy in Michigan. These are good people who want to buy a home and are sick of renting but don’t see a way out.

But we have the solution. In a unique system called the Locator program we can put you into a home on a rent to own basis and you can begin to build equity and own your own home. Bad credit is not a problem because you don’t need bank qualifying for this program.

The Reed City Michigan real estate listings are appealing for many reasons. The low prices, the large lots, the country atmosphere, the large number of outdoor activities, etc, etc…but, even if you are more interested in another area of the state, the lease option program that we offer can work almost anywhere.

It is highly likely that the Reed City MI real estate values will increase over time. If you begin now, with a lease option, you can watch your investment grow and add financial security to your future.