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Sensationalism is everywhere and it's hard to know what's real, anymore. The economy is tanking, the marketing noise is deafening, and you just don't know what tomorrow will hold. This site is dedicated to a no-hype retelling of what's working for me in real estate, business, and life. Welcome.

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Emily is available for speaking appearances and flat-rate consulting on the topics of personal finance and real estate. Please fill in the Contact Form for more information.

Archive for March, 2008

Mar
31

Do "Go-Zone" Investments Make Sense?

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In recent weeks, I have been studying the investment opportunities available in the southern Gulf Coast states like Louisiana, Mississippi, and Alabama.   It seems that in the wake of Hurricane Katrina, there were a lot of homes destroyed.  According to my research 40,000 people are still living with friends and family and 30,000 people are living in FEMA trailers.  The rebuilding of homes is just now starting (all the builders have been busy for the last few years on bigger commercial projects) and as an incentive to investors from across the country to participate in the re-building effort, the federal government has created a number of tax incentives for investors who choose to invest in real estate in these areas.

A number of real estate agents, educators, and investment consortiums have begun investigating cities along the Gulf Coast within the Go-Zone region and packaging investment opportunities for those of us living outside the areas, and providing tours, research and other due-diligence to help us make a decision about investing there.

The biggest tax-incentive available through Go-Zone designation is the ability to write-off 50% of a building’s depreciation in the first year of ownership.  However, this deduction is only available to people claiming "real estate professional" status on their tax returns.

How the Depreciation Works:

Usually, residential rental property is depreciated over 27.5 years.  The "phantom expense" of depreciation can create large write-off losses which reduce your taxable income and therefore the income tax you owe each year.

However, these tax losses can lose a lot of their value if

  • You’re not a qualified "real estate professional" for tax purposes,
  • You already have a large number of tax write-offs and are therefore in a low income tax bracket or have very little taxable income, or
  • If you’re being hit with the nefarious AMT (households with a gross income above $150,000 are at risk!) which gives you a different formula for computing your taxes altogether… one which does not allow you to take so many write-offs!

 

On the plus side, in the case of the massive first year 50% tax write-offs for go-zone investors, you can carry back these depreciation losses on 5 years of previous years tax returns… reducing your taxable income in prior years and entitling you to an immediate tax refund.  You can also carry the tax losses forward for up to 15 years, so if your situation changes in the future, you’ll be able to take advantage of the depreciation at a time when it’s more useful to you.

Other Go-Zone Incentives for Real Estate Investors:

Other incentives to attract real estate investors are being seen in some areas.  For example, the MDA programs offer a "quick build" incentive ($9,000 purchase credit) for completing new construction quickly, and forgivable loans which give you up to $27,500 in debt forgiveness over 5 years on a single family home.

In exchange, though, to qualify for the MDA, you have to make your unit available at "affordable housing" rental rates (which may be below regular market rent levels) for five years.  Overall, you’d probably break even… you get your $27K in debt forgiveness, but you lose about that much on your rental income.   If you do a duplex, though, the numbers could work a little better, you’d get $55K in debt forgiveness (twice the amount for two units going up) and only have to rent out one of the units at below-market rental rates.

Some Benefits of the Debt Forgiveness Program Are:

  • You’d get your money back sooner (from forgiveness of debt over the 5 year period and not having to wait to make all the money on the rental cash flow)
  • You’d fill properties more quickly and have fewer vacancies because of your low rental rate, and
  • You were participating in the program and not trying to charge full-price for your rent, you wouldn’t suffer as much from downward pressure placed on the market from your neighbors participating in the program and offering rents lower than yours.

 

Overall, I would say these incentives are "attractive" but their relative value to different investors could easily be overstated and oversold by real estate groups promoting property in this area.

In my opinion, tax incentives alone are rarely a strong enough incentive to invest, and are certainly NOT of uniform value to every potential investor.

The fundamentals of the investment – including cash flow, cash on cash return, projected appreciation, etc. still need to be in place in order for the investment to be sound.

That being said, many of these areas are expected to do well in the regrowth period.  Biloxi and Gulfport, MS have projected growth due to the casino industry expanding there.  Mobile, AL has been named as Forbes #1 small city for business growth due to its small-business friendly environment with expanding job opportunities in a variety of industries.

Both are on my watch list… but I won’t be jumping in blindly with both feet just because the government and a salesman has told me it’s a good idea to invest there.

 

Emily

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Mar
28

An Insider Report on a Private Fund Raising Campaign

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Greetings!

I know one of the reasons you may have subscribed to this blog is to get a "look over the shoulder" of how commercial real estate investors like my partners and me do business when it comes to raising the buckets of private money we need to fund our deals.

It has been a busy week in the world of fund raising, and this time around I want to share an update on the process we’ve been using for our private money raising efforts for a $1.2 Million loan we’ve been funding for 34501 Quincy LLC.  You can use this same process when you’re raising funds for your next deal, be it an $80,000 rehab house or a $10 Million Apartment complex like the one we’re looking at in Texas right now.

(Some of my students in Team Gold Mine are doing their first fund-raising project for a $500,000 residential development project in Colorado and I am so excited to be able to coach them through this process!)

Where we stand with 34501 Quincy LLC

As a recap, Quincy is a large 955-acre commercial manufacturing and office space complex which we purchased a year and a half ago with a 3-5 year hold plan.  The bank financing we used to purchase the property has a 2-year balloon on it, so as we approach the 2-year mark, we’ve been looking at refinancing the property with the same lender, paying off a portion of the loan balance (10%) and getting some additional working capital – that’s why we’re raising a million dollars this month.

A few months ago, we decided to do a $1.2 Million fundraising project and started working with our attorney to draft the appropriate documents.  According to our company Operating Agreement, we have to give first priority to the current owners/investors for any new private loans made on the property.

We opened up the opportunity to our Class A shareholders with an informative email letter and a Q&A phone call to make sure everyone had the opportunity to learn about the investment and decide whether they wanted to participate in the loan.

After we gave all the Class A investors their chance to invest, we were able to open up the opportunity to people outside the company. 

  • We’re offering great loan terms in order to make the loan attractive and get the funds together quickly and easily. 
  • We also put a deadline on the submission of the funds – April 11th – to encourage people to get their funds in promptly.  People who submit funds after this date will not qualify for the higher interest rate investors get if they invest before this date.
  • To increase security, we are positioning this loan (and collateralizing its payback) in front of all our Class A investors, so the loan money is actually very safely positioned.

After deciding what we were going to offer for terms, and getting commitments from people about what they’re going to invest, (We’re up to $920,000 in verbal commitments on our $1.2 Million goal), we continue to follow up with people personally to make sure that they’re still feeling comfortable with their decision to invest, have read over and signed the paperwork we need, and are sending in their funds in a timely manner.

We also continue to approach new investors to get additional commitments.  We still have $270,000 to go on our raise, so the show’s not over yet. 

It’s not as hard as you think!

However, raising the funds is just not as difficult as we always thought it would be before we got started.  Just last week, one of our board members was talking about the fundraising project in one of his mastermind groups and garnered a $200,000 verbal commitment from someone in the group as a result of the conversation!  Wow – talk about having some good wealth lifelines created there.

It just goes to show that you never know who might be interested in investing until you start to share the project. 

So, the next time you raise funds remember:

  1. Put together a secure and attractive offering to raise funds quickly.
  2. Have your attorney do all the paperwork (this took us some extra time to finish, this time!)
  3. Start talking up the deal and generating interest.
  4. Follow up with interested parties to make sure they follow-through.

It’s not rocket science, but it does take work!  The first time you raise funds is always the hardest.  We have a strong belief system around here… We know we can do it easily, but we have to do the work to make it happen!

If you are interested in getting more information about future private investment opportunities, make sure you’re on the list as one of our approved private investors.

Emily

P.S. One thing about our deals is that we always make the numbers and security good enough that we feel confident putting our own money into the deals.  We not only invest our own funds, but encourage friends and family to invest as well.

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It’s time for another update on my progress with the purchase of a bank-owned property in Charlotte, North Carolina.

For those that don’t remember, I was buying this home for $130,000 (previously listed at $170K) to rent out for approximately $1200/month.

For those that missed it, you can read Part 1 and Part 2 here.  I promised to pick up with a discussion of the due diligence that went into researching the property after it was under contract.

The main thing you want to find out about in the Due Diligence Phase is "what could go wrong after I buy this property?"  You want to uncover the skeletons in the closet BEFORFE you buy, so that if there’s anything bad about the property, it doesn’t surprise you in the form of a nasty bill/loss of profit after it’s too late to do anything about it.

We did the following due diligence:

  1. Appraisal – the bank required and we wanted, a full-blown professional appraisal on the property.  The appraisal came in at $145,000 which had been the listing price of the home before we put it under contract.  It wasn’t as high as we had hoped, but considering the low contract price on the property, it wasn’t a big surprise that it came in this low. Cost: $450
  2. Property Inspection – We also hired a professional inspector to come in and generate a floor to rafters inspection of the property.  Even though the house was newly built – 2001 – you never know what could be wrong with it, especially a foreclosure.  He documented all the major systems – roof, walls, foundation, electric systems, plumbing, heating, etc. to make sure it was all in working order and generated a list of items that he thought needed to be repaired to make the home more live-able and/or to keep it in good shape.  Cost: $300.
  3. Property Comps for Sales and Rent.  We also had our realtor visit the property and take pictures to send us.  She also took pictures of the neighborhood so we could get a feel for the area around the house.  She ran comps to show us what other homes in the development were renting for and selling for.  Since the realtor obviously has a vested interest in telling us what we wanted to hear, we also ran her rent comps by our property manager to make sure they weren’t way off base.
  4. We got a contractor to do a bid for all the work that needed to be done – everything on the Property Inspection and everything else he could find or think of, so we’d know how much the repairs would cost.
  5. Finally, we had a title report done, and got title insurance.  This is pretty standard when you’re buying a property with new bank financing, but it is another form of due diligence.

The biggest thing that we didn’t do, that we should have done, was to visit the property.  We’d visited the CITY of Charlotte over Thanksgiving, but we hadn’t looked at this particular property then, as we didn’t have it under contract at the time and we were visiting other homes that we were also making offers on.  That will be a good TO DO item the next time we’re in town.

Stay tuned for the next installment where I talk about "FUN WITH THE CLOSING."

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I just put the finishing touches on an email going out to our private investors list offering a 12-15% rate of return on a cash-flowing loan.  Just before I sent it out, I got an email from my partner Steve, informing me that this opportunity was for "accredited investors" only.

If you’ve never heard the term before, the Accredited Investor designation is something that the SEC dreamed up to regulate who is allowed to participate in certain types of investments. The Securities and Exchange Commission (SEC) is best known for reigning over the stock market and those pesky insider trading allegations (right, Martha?) but they also have jurisdiction over private securities and loans offered by little old you and me. :) 

There are several ways you can qualify as an accredited investor, but the most common are:

  1. Having a net worth in excess of $1 million dollars.
  2. Having an income of $200,000/year if single or $300,000/year if married.

Once you meet these requirements, you are deemed to be financially "sophisticated" by the SEC and can then begin to participate in what may be viewed as "high risk" investments that are not offered to Joe-on-the-street by his stock broker or investment advisor.

It’s frustrating to me when my company puts together great investment opportunities and we want to offer them to all the people we know, but we can’t because the government (and our attorney…) won’t let the "little guys" participate.

Technically, we can find ways to include non-accredited investors in many of the projects we do, but the considerable added red tape and bureaucracy makes it inefficient, expensive, and impractical.  The challenge with the accredited investor rules (another example of the government protecting people from themselves) is that they prohibit a lot of smart (but not yet rich) investors from taking part in lucrative investment opportunities. 

What You’re Missing…

While my friends and I are busy participating in projects like this $1.2 Million loan to 34501 Quincy, LLC where we can earn a 12-15% rate of return on our money, Joe-on-the-street is limited to putting his money in "investments" like savings accounts, CD’s and money market accounts (currently earning 3% interest) or the stock market (haven’t checked today, but not having a good year).

People who run the numbers know that it’s worthwhile to find investments that earn an above-average rate of return in a relatively safe environment.  The stock market is great, but it’s not EVERYTHING.  We’re told to diversify, but then not allowed to participate in great projects outside the mainstream unless we are already wealthy.

It’s frustrating. 

The solution I have found is to take the bull by the horns and participate in putting together my own projects.  I don’t have to be an accredited investor if I’m a founding partner in my deals.  However, not everyone has that luxury, putting together commercial deals is time intensive!  And that’s why passive investments can make so much sense if you’re in a position to take advantage of them.

If you are an accredited investor and you’re not taking advantage of the many opportunities available to you off the beaten track, consider talking to friends who invest, and learning more about the pro’s and con’s of diversifying your portfolio a little bit.

If you’re not an accredited investor yet, keep learning, earning, and investing so that when that designation is one day suitable to you, you’ll be in position to take advantage of it.

If anyone would like to join my company’s mailing list of private investors (you can join whether or not you’re accredited), you can start to see what types of opportunities present themselves, and begin to educate yourself on what good opportunities look like.  I’ll keep sending out emails about opportunities – some for accredited investors and some available to everyone, and I hope that one day I’ll hear from you when you’re ready to take advantage of them!

Today I received a call from someone who I pay a mortgage to each month.  They usually receive their payment from my Washington Mutual checking account on the 25th of the month.  To have the check still not received over 10 days later is alarming.  I can’t write them a replacement check because the funds have already been debited from my account.  As I write this I’m on hold with the support line for online banking.

I’d like to think this is an isolated incident, but this is the second time something similar has happened with my online bill paying.   My word to the wise – be careful with online bill pay and don’t trust your critical transactions to this service!

If anyone knows of another great way to transfer funds to people on a regular basis – an Electronic Transfer Service  of some kind – please let me know!

Emily

Categories : Family Budget
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About Emily Cressey

Emily Cressey is a real estate investor and licensed real estate agent living in Seattle, Washington. After graduating Phi Beta Kappa with an Economics degree from UNC-Chapel Hill (Go Tarheels!) her focus has been on building business for cash flow and investing in real estate for wealth. If you have questions about real estate investing, personal finance, or would like some flat-rate, affordable advice on one of these topics. Please fill in the Contact form.