NEW: Article on Multifamily Property Investment Benefits

An article entitled “The Benefit of a Multifamily Property Real Estate Investment” has been written and posted on the ProAPOD Real Estate Investment Software website.

The article explains why some real estate investors prefer multifamily income property over the other types of real estate investment properties. Here’s an excerpt:

“Although each type of property share many of the same characteristics common to all investment real estate, it is also true that many real estate investors strongly favor multifamily property above the others as their investment of choice.

So it seemed like a good idea to suggest why that might be the case. Okay, but first let’s make sure we understand a couple of things about multifamily property.”

The article is free to read courtesy of ProAPOD Real Estate Investment Software.

The ‘One-Page’ Marketing Package

market package

Once a real estate broker successfully obtains a listing to sell a rental income property, the next crucial event facing the broker is to get it sold. This is typically done using a marketing package that highlights all the important data related to the property so colleagues and potential real estate investors can preview it.

Though both of ProAPOD’s investing software solutions include a multi-page presentation typically referred to as an “Executive Summary”, they also include a one-page summary simply called the “Marketing Package” (illustrated below).

market package

The benefit of using this “one-page” marketing package is that it is very easy to distribute to colleagues at venues like real estate investing clubs. It provides more than enough property data for a real estate investor or agent to determine whether or not to pursue the property without having to carry a stack of multi-page reports.

So You Know

ProAPOD Agent 6 and Executive 10 real estate investing software solutions both create this one-page marketing package automatically…you simply enter the property data into the appropriate forms and print when you’re ready.

Why Sell Real Estate Investment Property?

james kobzeffReal estate agents commonly come to a crossroads during their business activity that concerns real estate investment property. It goes something like this:

“Should I start servicing other real estate besides the residential properties I’m already comfortable with and venture into servicing real estate investors and rental income property, or not?”

In other words, the realtor is really contemplating whether it would be worth the effort to expand his or her business activities to include selling real estate investment property along with single-family homes, or just to dismiss the notion altogether.

Fair enough. When I first became a realtor I also came to that same crossroad. But in my case, I guess I didn’t over think it and simply accepted the idea that any closed transaction (regardless) meant more commission and a bigger paycheck.

As it turned, I was right. It did mean higher commissions to sell real estate investment property; in fact, I liked the result so much that I devoted the following thirty or so years of my real estate career listing and selling investment property exclusively and never sold residential property again.

Okay, but I’m getting ahead of myself. I’m not suggesting that brokers and agents should give up their residential property business. Hey, there are home buyers that rely upon your expertise and service.

I’m simply suggesting to you (real estate broker and agent) that you are probably missing out on a great opportunity to increase your income by neglecting to list and sell real estate investment property. Think about this.

  1. You don’t have to be an expert. Whereas commercial real estate requires expertise, residential income property does not. With only some minimal preparation almost any realtor can sell apartment buildings.
  2. The listing and sale function is similar. Other than some nuances that we’ll discuss in a moment, it really boils down to just locating a property that meets the buyer’s criteria.
  3. You probably already know some investors. Chances are good that many of the customers you’ve sold a house to are ready to also make an investment in rental income property. So you may hit the ground running.

So how do you prepare?

  1. Foremost, understand that real estate investors buy cash flow, and are not necessarily interested in the amenities the way a home buyer is. A sale will depend on whether the rental income property is profitable, not whether it’s a nice place to raise the family. So think in terms of presenting numbers to your customer.
  2. Acquaint yourself with a few returns and reports associated with real estate investment property. Two of the more popular are Cap Rate and APOD. So make it your first assignment to learn about these.
  3. Research your local market. Look for what’s currently available from duplexes to larger apartment complexes. Pay particular attention to what financial data is presented to get an idea of what’s expected.
  4. Find a friendly colleague already engaged in real estate investing. Perhaps over a cup of coffee he or she will be generous enough to share some insights about real estate investment property with you.

 

Understanding the Depreciation Recapture Tax

If you’re about to sell a rental income property that you’ve owned for more than one year then prepare to pay the Feds a depreciation recapture tax to spare yourself an unpleasant surprise at tax time. Because most real estate investors will have to deal with it once they sell their investment.

It seemed needful, therefore, to discuss depreciation recapture for those of you who are new to real estate investing and might not be aware of how the Internal Revenue Service will impose this tax upon you following a sale. We’ll consider the meaning, method and rationale used by the IRS to impose it.

What It Is

Depreciation recapture is the procedure used by the IRS to “recapture” income tax on a gain realized by a real estate investor when he or she disposes of a rental property that had previously provided an offset to his or her ordinary income through depreciation.

In other words, it’s a tax associated with the “depreciation allowance” write-off that you’ve been enjoying at tax time for each of the years that you’ve owned the property.

How it Works

When you sell an income property you’ve owned longer than one year and have a recognized gain, the feds will tax you for the accumulated depreciation deductions you’ve taken during the years you owned the property.

Their contention being that since you were able to realize a capital gain by reducing your tax liability with allowable depreciation deductions while you were holding the investment, the Feds expect you to pay some of it back now that you’re disposing of the investment.

Their rationale is fairly straightforward.

The IRS does not want to allow you to simply pay the generally more favorable (15-20%) capital gains tax rate on your entire gain, but instead, also wants to collect the currently higher recapture tax of 25% on a portion.

Let’s do some math to show how this could impact your tax obligation.

Let’s say, for example, that you sell your rental property after owning it for five years and realize a gain of $1,959,420 of which $609,860 is attributable to the depreciation you’ve taken during that holding period.

sale with depreciation recapture

click to enlarge

Okay, now let’s assume a depreciation recapture tax rate of 25% and a capital gains tax rate of (say) 20%.

1. If your entire $1,959,420 gain were merely taxed at the capital gains rate you would owe the Feds (1,959,420 x .20), or $391,884 .

2. Because of recapture, however, your accumulated depreciation of $609,860 gets taxed at the higher 25% rate and only your adjusted capital gains of $1,349,560 (1,959,420 – 609,860) gets taxed at the lower 20% rate. In this case you owe the Feds $422,377.

In other words, thanks to the depreciation recapture tax you wind up owing the IRS $30,493 more in taxes than you would have had the tax not been imposed.

So You Know

ProAPOD Real Estate Investing Software automatically calculates depreciation, recapture tax, capital gains tax, and tax obligation.

 

The Truth Agents Should Hear About Selling Rental Property!

selling rental propertyReal estate agents who sell rental property routinely guard the truth about selling investment property and thereby any advantage to work with real estate investors.

As one who was actively engaged as an apartment specialist with Coldwell Banker in both, Claremont and Costa Mesa California, and later with Prudential Real Estate Professionals in Salem, Oregon, I understand.

After all, who in their right mind (especially a real estate agent competing for business) would be foolish enough to share with others (especially to friendly competition) the benefits a real estate agent receives by selling rental income property?

Of course, you probably guessed it, none would.

Fair enough.

But my DNA also makes me a teacher at heart, so after over thirty years experience selling multi-family properties, I feel that its time to spill the beans.

In this article, I want to reveal the truth about selling rental property as well of the subsequent benefit real estate agents receive by jumping in and getting involved with rental property and working with real estate investors.

The Money

Selling rental property can be one of the most financially rewarding experiences any real estate professional can encounter during his or her career.

Okay, maybe aside from the residential mansions in Beverly Hills where prices are easily in the millions, apartment buildings are commonly sold at prices that exceed residential property prices in most market areas. Thus, apartment buildings are typically going to generate more commission dollars for agents than residential property.

It’s not unlikely, for instance, that in a market where the average sales price of a house is $180,000 that a ten-unit apartment building one block over may sell for two-to-three times that price.

And when you do the math based on a six-percent commission, well, you do the math. It means you get a more substantial payday on every transaction you close with rental income properties and investors.

Repeat Business

Another unsung advantage associated with selling rental property comes in the form of what might be called “the real estate investor psyche”.

Once you sell a house it’s probably safe to say (barring something irregular like a job transfer or change in finances) that the buyer is no longer a potential customer for about five years.

On the other hand, since it is “investors in real estate” who purchase income property, you are always faced with the potential that your customer might want to invest in more rental property; or given the right set of circumstances may even want to exchange one investment property for something larger.

In other words, when you sell investment property, you work with investors who are always buyers and sellers (and therefore by association) you are always in the right position to acquire repeat business and maybe reap the benefit of additional commissions.

This was true with the first investment property I ever sold to an investor, and in most transactions I was involved during the years since.

Why, because real estate investors (by their very nature) are always looking for a property (or another property) that will make them money. And this means repeat business for you, and as a result more commissions earned.

Referral Business

The prospect of getting referral business from colleagues in the office or elsewhere is never lost or taken for granted by any real estate agent.

We love referral business. And the truth is that agents who work with income property do get recognized by agents who do not; and the result routinely equates to referrals.

How to Make the Transition

Fair enough, but you can’t enter the income property arena thinking like a residential real estate person. There are a few things you need to understand about real estate investing protocol to be successful at it.

When you sell rental income property, you need to present the numbers. It’s not enough to simply point out the on-suite bathroom and large walk-in closet because real estate investors are only interested in the bottom line: “How much money does it make me?”

You must present the cash flows, rates of return, and profitability numbers for every rental property to your investors otherwise you could merely “pound sand” and lose the opportunity. This is not difficult with good real estate investment software.

It is also a good idea to become familiar with some of the essential returns real estate investors look for to make investment decisions; otherwise you will appear less-than-capable of working with rental property and can lose credibility with the customer.

So it’s not a free ride.

You will have to make enough of a commitment to do some homework and invest in the proper tools. But it is neither really that difficult nor costly. And at the end of the day, you will reap the rewards.
 

Agents Must Earn (Not Expect) the Respect of Real Estate Investors

Real estate agents (for better or worse) have come to anticipate respect from colleagues based upon their long list of awards, accolades, and performance. Fair enough. Brokers are smart to award the top producers in their office, and colleagues are normally going to put those earning the type of money they could only dream of on a pedestal.

In the real world, though, real estate investors are not persuaded by wall-to-wall awards or certificates, the agent’s office size or staff, or by the agent’s clothes or model of car. Sure, investors can be impressed by an agent with a large office who wears Armani and drives a Mercedes, but I’ve never met an investor yet willing to make an investment decision solely because an agent has panache; or for that matter, the lack of it.

Over the course of my real estate career I have successfully serviced investors with and without the trappings. And I can tell you honestly that neither my successes nor failures were dependent on the “stuff” I brought with me. It was never about me, it was always what I brought to the table for the investor that mattered.

Here’s my point. You can expect applause and respect from those that surround you, but don’t expect it from anyone about to invest a large amount of money in a property simply because you are the one making the presentation. Remember, it’s not about you. What matters most to the real estate investor is whether or not the investment makes money; and any hope you have about earning an investor’s respect rests upon your ability to present those investment opportunities correctly.

1) Foremost, care whether or not a purchase or sale is in the best interests of the investor. Giving sincere advice about whether or not an investment decision is in fact a prudent choice goes a long way for agents because it will cause investors to trust you rather than to hold back or shun away because you appear to be more concerned about your well-being than theirs.

2) Understand what investors really care about. Unlike a home buyer who is primarily interested in nesting a family, real estate investing is about profit. So avoid trying to sell a rental property because it has good curb appeal, large kitchens, or is located in a particular school district; unless the amenities can be shown to translate into rental dollars, they matter little. What matters most to investors is the bottom line. Is the rental property profitable? That’s what you must be prepared to tell the investor; otherwise you might be perceived as one without income property understanding. You know the adage, “If it walks like a duck and quakes like a duck…”

3) Make meaningful presentations to assist in the investment decision process. This way you convey to an investor that you know what you’re talking about. Yes, a comparable market analysis counts, but it’s not enough. Remember, it is more than price or price per square foot that will persuade an investor. For example, a seller wants to know what price his or her property might sell for based upon average market cap rates for similar properties and the sale proceeds they could receive after taxes in the event of a sale. Whereas buyers would want to know the cash flows, rate of return, overall profitability, and potential sale proceeds that could be collected in the event of a subsequent sale.

We can go on, of course, but hopefully you get the idea. When you work with investors, don’t expect loyalty because you have had successes with home buyers. You must earn their respect by walking the walk and talking the talk in matters that they care about most.

Why Investors Should Turn to Real Estate Agents

Anyone who wants to sell or buy rental property would be wise to consider using the services of a real estate professional to assist them. I know, it sounds strategic, but my intention is not to dissuade real estate investors from selling or buying rental property on their own, or to promote any real estate service.

My intention is merely to offer investors an insight often overlooked about ways a real estate professional can be of benefit inside the sale and purchase aspects of investing.

1) You Want to Sell Rental Property

In this case, you have two concerns: You don’t want to set a price so low that you lose money (of course not), or too high that the property just sits on the market and collects dust. Your objective, of course, is to close the transaction as quickly (and profitably) as possible so you can collect your money and move on to the next investment opportunity.

Here’s how a real estate professional can assist you.

They understand the market where your property is located and have a number of resources generally at their disposal that can help you set the correct market value for your income property. As a member of the local MLS, they would have easy access to Sold, Pending, and Expired data, so they can tell you at what price other properties have been selling or not selling.

Real estate agents also commonly have open dialogues with local real estate appraisers. Why is this important? They would have reliable, first-hand information about the cap rate and cost per unit that income properties similar to yours recently sold. This is especially helpful for those transactions that were not listed in the MLS, and otherwise not so readily available to the public.

Simply by virtue of their profession, then, real estate agents have a better understanding of the local market than a layperson, and thus better prepared to suggest a true fair market value for your apartment or commercial building.

2) You Want to Buy Rental Property

Fair enough, you want to purchase investment property, but where do you look to find one? For unlike residential properties, commercial property owners typically are reluctant to openly expose the fact that they are selling the property; fearing that it would be a disruption to their tenants and could cause vacancies. So you have to rule out the classified section of the local newspaper and For Sale signs. Consequently, unless you personally know of someone selling rental property, you might not find anything to purchase.

Here’s how a real estate professional can assist you.

They might be aware of a “pocket listing” on a rental or commercial property. That is, they are privy to a property wherein the owner has expressed an interest to sell but not formally “listed for sale”. This is very common with commercial property, because as stated, owners tend to hold their cards close to their chest and seldom openly broadcast their intentions around town.

Bear in mind that real estate agents rub elbows with investors and others who deal with investors. After all, this is the nature of their business. Therefore by turning to them to become your eyes and ears in circles where you are otherwise excluded, chances are good that they could turn you on to investment opportunities few others ever will learn about.

More can be said how you can benefit from a real estate professional, of course. We just touched on two aspects of the process, and just barely. But hopefully you get the point. If you are serious about building and growing your real estate investing business, and currently making decisions about selling or buying, by all means, work with a competent professional. At the end of the day, you will be glad you did.

The Costly Misconception Agents Have About Selling Income Property

Many real estate agents who sell residential property exclude the potential to list and sell rental income property (at least correctly) because they accept the misconception that income-producing property has little or no part in their residential business. And as a result are costing themselves multiple opportunities to close more deals and to increase annual revenues.

Here’s how that misconception plays out.

1) When residential real estate agents do list income property for sale they regularly omit crucial financial data such as net operating income, cash flow, and rates of return. They present no APOD, Proforma income statement, or marketing package to those who inquire about the property. Mostly, they are content to let the selling agent run the numbers. But here’s the problem.

When you fail to make even a minimal effort to present income-producing property correctly, you appear as one with little regard for real estate investing and instead come off as one who simply “throws it up on the wall and hopes it sticks.” And this approach not only can cost you ample recognition from your colleagues that could later result in getting income property referrals, you probably will also fail to give investors any motivation to work with you further.

2) When residential agents aren’t prepared to service income property on a moments notice they typically lose an opportunity to capture additional rental property business. I cannot tell you how many agent-colleagues I have known who lost huge opportunities to create investment real estate business during their floor time merely because they were not prepared for the inquiry. Bear in mind that you have a small window of opportunity to win the trust and loyalty of a customer, but when you stutter or delay you chance to lose that customer to a competitor forever.

3) When agents do not become proactive with real estate investing they lose any opportunity to convert their house buyers into real estate investors. Bear in mind that every person you sell a house to could also be in the market for rental property. In fact, considering the fluctuations in our economy, it would not be surprising to discover that more than a few of your homeowners are ready to pull their money out of Wall Street and put it into income-producing property on Elm Street. Naturally you won’t know unless you ask, but you undoubtedly are not going to ask until you make some commitment to sell rental property.

Okay, now ask yourself this: Why wouldn’t you want to supplement your residential business with a rental income property business? After all, you’re already in a very good position to actively list and sell rental properties because you’re already selling real estate. Plus, there is real estate investment software available that make it easy to create an APOD, Proforma, and other reports with the numbers you need to make presentations that are both informative and impressive without costing you an arm and a leg.

Here’s the bottom-line.

Make the commitment to work with investment real estate. Next, obtain the right tools to run the numbers and create your presentations. Finally, devote a sliver of your time proactively pursuing investment property opportunities. If done diligently you will make more money.

The Top 5 Inspections You Must Address When You Sell Rental Property

If you’re a real estate agent about to start selling rental property and fortunate enough to enter an escrow either as the listing or selling broker, it might help you to know what physical inspections of the rental property are typically required during escrow plus some possible outcomes and things you must do to address them.

1) The Walk-thru Inspection

A “walk-thru” inspection is where the buyer gets to physically enter and examine all the units in the rental property with an eye on the over-all condition and quality of the carpets, appliances, fixtures, and tenants. This inspection regularly takes place during escrow because sellers are reluctant to disturb or alert tenants about a sale until they are satisfied with the buyer’s ability to make the purchase and have an accepted signed-around offer.

In this case, the buyer will either approve the inspection, choose to renegotiate their offer, or simply walk away altogether. Just be sure that as the selling real estate agent to include a clause something like “subject to a walk-thru and buyer satisfaction of all interior units” in your buyer’s offer to purchase because it’s not granted by default.

2) The Infrastructure Inspection

This is where the buyer typically hires licensed contractors to make inspections for such things as pest and dry rot, plumbing, electrical, roofing, and maybe even mold. Obviously these inspections will be a cost to the buyer so they shouldn’t be ordered until the walk-thru inspection is approved.

As before, the buyer will either approve the inspections, try to renegotiate their offer, or terminate the offer. As the selling real estate agent always include a clause something like “subject to the buyer’s approval of pest and dry rot, roof, and (other inspections the buyer requests)” in your buyer’s offer to purchase.

3) Inspection of the Repairs

In this case, when repairs are required then documentation from the contractor(s) who made the repairs stating they were made and all problems corrected satisfactorily must be obtained for the buyer’s approval and then later presented to the lender. In some situations, the buyer might even want to physically inspect and approve the repairs. Just be sure to include all of this as a contingency of sale in the buyer’s offer to purchase.

4) The Appraiser’s Inspection

Upon the buyer’s approval and satisfaction of the repairs (not before), the buyer will order (and pay for) a bank appraisal so an estimate of the income property’s fair market price and over-all condition can be submitted to the lender. The appraiser will conduct his own inspection of the exterior and interior of the property and might want entry into some units (if not all units).

As the selling agent, be sure to make your buyer’s offer to purchase contingent on the buyer’s approval of the appraisal.

5) Re-inspection of the Units

This last inspection of the units is not as common as the other inspections but it’s a good idea to include it in your buyer’s offer to purchase. One final walk-thru of the units maybe a week before closing just so the buyer can be sure that nothing has dramatically changed since the initial walk-thru inspection (perhaps weeks or months earlier).