Archive for September, 2008

Investment Property 101 Seminar

[ October 21, 2008; 6:30 pm to 8:00 pm. ] Have you always thought about buying investment properties? Have you read all the books, bought all the tapes and watched all the infomercials, but still can’t seem to get started with investment real estate? Attend this FREE one and a half hour seminar. There is no charge at all, no contracts you sign with us, [...]

Have you always thought about buying investment properties? Have you read all the books, bought all the tapes and watched all the infomercials, but still can’t seem to get started with investment real estate? Attend this FREE one and a half hour seminar. There is no charge at all, no contracts you sign with us, no consultation fees, no hidden agenda. The seminar simply will be an excellent opportunity for you to learn more about our process and meet a team of investment real estate professionals that can hold your hand through the finding, financing, buying, renting and owning your first investment property.

Let our experience get you started!

Register for the seminar by filling out this quick registration form or call 612-281-5419 for more information.

Tricky Clause in Fannie Mae Foreclosure

As I have said before, I have sold many, many REO properties in the last 12 months. Every single one of these deals requires that my customers sign a bank addendum once the offer is accepted. It is the bank’s way to get all their legal language into the transaction to protect themselves. (If you [...]

As I have said before, I have sold many, many REO properties in the last 12 months. Every single one of these deals requires that my customers sign a bank addendum once the offer is accepted. It is the bank’s way to get all their legal language into the transaction to protect themselves. (If you think about it, a bank is selling foreclosed properties in probably all 50 states; it would be impossible for them to be fluent in each state’s real estate laws and customs)-this addendum helps them normalize all their REO transactions.

Last week, I was reviewing a bank addendum on a North Minneapolis property that my customer had just purchased.  While most of these addendum read like they were written by the same attorney (despite being from different banks), I came across the following clause (sorry for the poor quality):

The clause prohibits you from buying the property with Rehab Financing, selling it within 3 months, transferring it to another party within 3 months, or refinancing it within 3 months.  Wow.  Many of my customers are using rehab financing to buy the property, rehab it, and then refinance into a permanent loan at 75% LTV.  This clause prevents that.

Never seeing this type of clause before, I quickly called the listing agent.  She informed me that this is standard language on all Fannie Mae Foreclosure properties.  I was stunned.  I was amazed that after all the REO properties I had sold, I had never seen this before.  The listing agent also informed me that we can’t remove or change the clause.  If my customers didn’t like it, they would have to simply cancel the purchase agreement and find another property.

I guess the moral of the story is to read all the docs in an REO transaction, even if they look the same as the other 50 that you have seen!

Have you always wanted to buy investment property, but never knew where to start? Don’t Wait! Get Started now.

Save Money in Taxes When You Sell

What can a 1031 Exchange Do for You?
by By Jeff Peterson
When you go to sell your appreciated property, it would be a real waste to give away much of your hard earned equity because of capital gains taxes. A 1031 exchange appeals to only one kind of investor: The investor who wants a [...]

What can a 1031 Exchange Do for You?
by By Jeff Peterson

When you go to sell your appreciated property, it would be a real waste to give away much of your hard earned equity because of capital gains taxes. A 1031 exchange appeals to only one kind of investor: The investor who wants a better investment without getting socked with unnecessary capital gains taxes!

Lets face it, real estate is an incredibly versatile investment. You can rent it, improve it, leverage it, cash out—you name it, someone has probably done it. But not all real estate is created equal. At some point you may want to cash in on your equity in a piece of investment property without actually getting out of real estate. By re-investing your equity from your old investment property into a new like-kind property, you can use a 1031 exchange to defer the taxes.

Why defer taxes?
Let’s start out with why you would want to defer taxes in the first place. Some investors might be thinking, “If I have to pay them, I may as well pay them now and get it over with.” Not necessarily!

Suppose you have a duplex rental unit across town. A four-plex down the street goes up for sale. You could sell your duplex, pay the capital gains tax, and then buy the four-plex down the street. But using a 1031 exchange will roll your profits into your next real estate property without the tax bite. The tax is not forgiven, just deferred indefinitely—but you conserved your equity by not having to pay taxes on your net profits. Buying the four-plex keeps your money working for you, which compounds and builds your wealth faster over time.

Another reason to defer tax is that there may well be a better time to pay tax. An important principle in tax planning is to defer taxes when you have a high income and pay taxes when you have a lower income. One popular strategy is to cash out after you retire when you are in a lower tax bracket.

A third reason to defer tax is to manage your estate planning. With appropriate estate planning, you can simply keep exchanging properties, which will defer the taxes on the gains indefinitely. Meanwhile, the properties can continue to generate income. Let your heirs worry about the tax on the gains! Defer, defer and die. Under the current tax rules, your heirs will get to “step up” the basis in the property, effectively wiping out the deferred tax liability that you carried with you thought your life. This step up in basis law may be changed in 2010.

Finally, the age-old important and fundamental principle of the “time value of money” tells us that that a dollar in your pocket today is worth more than a dollar you will receive tomorrow. That is because if you have a dollar today, you can use it today—you can invest it, build more wealth with it, which means tomorrow you will have your dollar plus a day’s growth or interest. That’s not a lot if we’re talking about an actual dollar, but it’s a lot if we’re talking about, say, a small apartment building you’ve owned for a few years.

Suppose that if you sell that apartment building, you would realize a tax liability of $100,000. If you were to roll that $100,000 into an investment that appreciated 4.5% annually (a pretty conservative rate of appreciation), at the end of three years, the $100,000 would be worth $114,117. The $100,000 today has a future value of $114,117. So what is the future value of $100,000 today? Asked another way, how much do you have to invest today at 4.5% to have $100,000 in three years? About $87,630. If you had the choice today between $87,630 and $100,000, you would choose the $100,000. If you had the choice three years from now between $100,000 and $114,117, you would choose the $114,117.

In other words, you would choose to preserve the entire gain on that apartment building.

Is a 1031 right for me?
As I said, a 1031 exchange is right only for the investor who wants a better investment. Now let’s look at a few examples.

Suppose you have a parcel of raw land. It’s doing nothing for you—just sitting there, not producing any income. You might want to exchange this property for another property, one that would provide you with some cash flow and deductions (such as depreciation).

Suppose you own a property whose appreciation has leveled off. Maybe you own some rental housing in a once-hot, now-cold neighborhood. You can do a 1031 exchange to acquire a property whose value will continue to grow.

Suppose you own a management-intensive commercial property that is becoming more trouble than it is worth. Use a 1031 exchange to shed the headaches and obtain a more worry-free property.

Executing a 1031 exchange requires faithful adherence to the IRC regulations. You want to work with a company that fully understands the parameters and deadlines of the regulation. Commercial Partners Exchange Company specializes in the 1031 exchange. We offer Qualified Intermediary services and can help you determine if a 1031 exchange is right for you.

Jeff Peterson is President of Commercial Partners Exchange Company. His company is a facilitator of standard deferred 1031 exchanges, build-to-suit construction improvement exchanges, reverse exchanges and aircraft personal property exchanges. Mr. Peterson is an adjunct professor at William Mitchell College of Law and a frequent speaker and CLE presenter throughout the Midwest for various business and professional organizations on numerous issues related to 1031 exchanges.  Jeff can be reached at 612-643-1031 or jeffp [at] cptitle [dot] com or check out www.jeffpeterson.name or get more information on 1031 exchanges at www.1031podcast.com

Screening Your Section 8 Tenants

As a landlord, if you have not worked with Section 8 before, it can seem a little overwhelming.  There really isn’t anyone that can walk you through the process and no good information exists on-line (except maybe the Section 8 posts here).  And to top it off, the Section 8 tenants don’t know much more [...]

As a landlord, if you have not worked with Section 8 before, it can seem a little overwhelming.  There really isn’t anyone that can walk you through the process and no good information exists on-line (except maybe the Section 8 posts here).  And to top it off, the Section 8 tenants don’t know much more about the program than you do.

A common question is “How do I screen Section 8 Tenants”.  That is pretty simple.  You screen Section 8 tenants just like screen tenants that do not have subsidized rent, with a couple changes:

• Most Minnesota Section 8 tenants have to pay a small percentage of their rent (10-25%).  Very few have their entire rent paid by the government.  Consequently, the tenant needs to have some other source of income.  Where are they going to get the $100-250 per month that they have to pay out of their pocket?  Plus, how are they going to pay for utilities, if they are not included in the rent?  Weigh your decision heavily on the fact that a large portion of the rent is guaranteed from the government, but be concerned about the remainder.
• Call their Section 8 coordinator to confirm they are able to rent your apartment for the proposed rent.  Confirm they are able to move from their current residence.  You don’t want to make the same tenant screening mistake I made.
• If their credit is bad or non-existent, confirm that they have income to pay their portion of the rent and then consider waiving that requirement of your rental criteria.
• Confirm they are able to pay the damage deposit upon move-in.  They may need to go to emergency assistance to get the deposit, so have them get a letter to confirm the subsidy.

Screening Section 8 tenants is just like screening anyone else with a few additional steps.  There is no need to over think the process.

Do you want to work with a mentor to help you succeed at owning investment property?  Call Scott now!

Calling All Landlords!

Why aren’t you calling me?
I lose 8-12 tenants per year (both by my choice and by their choice).  In the last 4 years, that I have owned the majority of my properties, I have probably turned over 40+ tenants.  It dawned on my the other day that despite that volume of prior tenants, I probably [...]

Why aren’t you calling me?

I lose 8-12 tenants per year (both by my choice and by their choice).  In the last 4 years, that I have owned the majority of my properties, I have probably turned over 40+ tenants.  It dawned on my the other day that despite that volume of prior tenants, I probably receive 2-3 rental check calls per year for previous tenants.

I can understand why I may not get a rental reference for a tenant that I evicted, but I don’t get calls for my best tenants that just moved out at the end of their lease.  Interesting…

I was always taught as a landlord to call the previous 2 tenants when you are doing your tenant screening process.  (You call both in case the current one is trying to get rid of the tenant.  The one from a year or so ago will give you the real story.)  Therefore, by my estimates, each year, I should be getting 16-24 rental verification calls (ie:  previous 2 years worth of former tenants).

Have my fellow landlords gotten too busy to make a simple phone call to check up on their prospective tenant?  Do they just not care?

Using a screening service is a must, but it only gives you part of the story.  They may look great on paper, but have been a nightmare tenant.  Many landlords don’t file evictions if the tenant just moves out, therefore, you won’t see a problem on the rental screening.  Maybe they are very noisy or have lots of parties or fix their cars in the front yard; all items that may not show up on a paper report.

There is no better information about a tenant than to talk to your fellow landlord and find out exactly how these people have been while they lived in their property.  You need to ask them at least the following questions:

• Were these people living in your property from xxx date to xxx date?
• Did they pay their rent on time?
• Did they give you proper notice to move out (in fact, did you know they are moving out!)?
• Have you had any complaints from the neighbors or any police calls to their apartment?
• How does their unit look after they lived there?
• Would you rent to them again?
• Do they owe you money now?

When you ask the questions, listen for any subtle clues or hints that the landlord is trying to give you about the tenant.  Are they dying to give you the dirt on this tenant?  I bet they are.

I understand that many landlords or bigger complexes will not return your calls or answer your questions (or tell you the truth), but I have found that many will.  You need to try.  Call me, I will take your call and tell you the truth.

Loan Modification

Not that it has evolved to a cocktail party conversation, but I hear more and more about loan modification.  A loan modification is where you work out new financial details of the current mortgage that you have with the current mortgage company.  It is typically done instead of selling the house in a short sale [...]

Not that it has evolved to a cocktail party conversation, but I hear more and more about loan modification.  A loan modification is where you work out new financial details of the current mortgage that you have with the current mortgage company.  It is typically done instead of selling the house in a short sale or letting it go into foreclosure.  Just like it sounds, it is modifying your loan.

Rob Bonahoom over at www.InvestmentMortgageGuy.com posted a great article about how you get it done.  Check it out at Investment Mortgage Guy.com.