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.