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4 | think realty magazine :: september - october 2022
FROM THE EDITOR
Industry Trends and Membership News
umbers don’t lie. That adage rings especially true in the current real estate market in which rates fluctuate daily. Where are we headed, and how should real estate investors be prepared to pivot? N
Our Government Relations Committee is putting in the hours working hard for you. Our virtual Day on the Hill will be Sept. 20. Among the possible topics to be discussed are eviction
moratorium and its impact to small housing providers; hedge fund and iBuyer issues regarding entry and their impact on affordable housing and housing inventory; HOAs preventing housing providers from purchasing properties in their neighborhoods; and state-level “anti-speculation” (flip) taxes. Our November/December edition will center around the progress made in these meetings with legislative officials. With a heavy heart, we’ve also included a special tribute (page 84) to longtime friend and legend in the real estate investing arena, Aaron Norris. The impact Aaron created and the legacy he leaves is to be admired. Although our hearts are truly broken, we will use the energy from his infectious smile and can-do attitude to continue making forward progress for real estate investors. Aaron’s dedication to legislative efforts, education, and elevating the standards of the industry are all reasons to continue to honor his name. With that in mind, Think Realty will be naming our GRC after him and creating the Aaron’s Impact Award to our Think Realty Honors Awards in 2023. •
Personally, I’m a complete data nerd. I enjoy interpreting the numbers and seeing where the trends are heading. Real estate as a whole ebbs and flows. It amazes me that the slightest change in numbers can drastically effect investments, which is why it is so important to know the numbers and stick to them. Although there is much to be learned from the data, interpreting it can be challenging. Trends and variances will tell you when to make some of the most crucial decisions in business. Check out our cover story on page 22 to learn what data analysts at Auction.com are predicting, given the current market. We just wrapped up our Think Realty Tampa Conference and Expo. Our first year in Tampa was a success. More than 200 savvy real estate investors networked and educated themselves on topics and trends affecting the Florida market. We have solidified our dates for our 2023 Houston conference. Go ahead and mark your calendars for March 23-24, 2023 and stay tuned for details on what we know will be a sold-out event.
Here’s to your investing!
CARMEN FIELDS, MANAGING EDITOR
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CONTENTS
INSIDE THIS ISSUE
22
COVER FEATURE
How Veteran Investors Are Responding to Market Shifts by Daren Blomquist
From the Frontlines
6 | think realty magazine :: september - october 2022
INVESTMENT STRATEGY
58 There’s No “Magic Hour”
36 Real Estate Investing Versus 401(k)
Now is not the time to sit on the sidelines in the Southwest Florida market. by Robert Knight
There is a reason more millionaires have been made through real estate than any other investment. by Zach Lemaster 40 Is It Time to Switch from Home Investing to Commercial? A changing market demands new investment strategies. by Neil Timmins 42 3 Things to Remember in a Volatile Market Patience, considering new markets, and staying open to new strategies are key. by Rob Fuller 44 Home Ownership: An American Pipe Dream? For many Americans, the possibility of buying a home is becoming increasingly unattainable. by Taylor Miller
8 Change Brings Opportunity Follow these three strategies to find the good deals in a marketplace that’s transitioning. by Romney Navarro
60 5 Trends Shaping Multifamily Investing Today These trends point to multifamily as a prudent investment—in the right markets. by Grant Cardone
12 4 Ways to Protect Your Investment in Recessionary Times
Following these tips will give you peace of mind as well as leverage for future
64 Will 3 Current Real Estate Investing Trends Hold for the Future?
opportunities. by Arianne Lemire
Successful investors are aware of the latest trends and know how to adapt. by Greg Slaughter
14 Become a Strategy Savvy Investor Understanding four basic strategies will help you tackle any situation you encounter. by Suni Goff
66 6 Reasons to Consider Michigan for Your Next Investment
Michigan is still a solid investment choice. by Jeff Roth
16 Fix and Flip: A Practical Guide for Investors in 2022
Real estate investors who acknowledge shifting market conditions and manage their spending can still achieve ROI on fix-and-flips. by Susan Naftulin 18 Are Series LLCs a Good Choice? As you contemplate series LLCs, be aware of some notable issues. by Garrett Sutton 20 What Is Legacy Investing? This growing trend is redefining the modern investor. by Kurt Coleman 28 Should Investors Be Alarmed About Recent Market News? Not if you use it to make smarter investments! by Jason Engelman 30 What You Need to Know About the “Value-Add” Buzz The success of a real estate investment comes down to deal analysis, data, and numbers. by Kyle Jones 32 The Evolution of the American Dream: From Buying to Renting Several factors have converged to make renting more attractive than purchasing a home. by PlanOmatic
68 Heating and Cooling Trends Across the Country Job creation is necessary for supporting strong home prices. by Ingo Winzer 70 Inflection Point: What Sudden Housing Market Changes Mean for Investors There are still opportunities in 2022 and 2023 for investors who do their homework. by Rick Sharga
LEGISLATION
46 September Update from Government Relations Committee by Glenn Stromberg
DESIGN
48 13 Best ROI Updates for Flippers Today’s buyers appreciate extra space and an up-to-date look. by Luke Babich 50 Get Decked Out! Decks can be an all-around great investment for any home. by Michele Van Der Veen
76 3 Investment Trends for the Second Half of 2022 Be prepared for what’s coming. by Tom Olson
OPERATIONS
82 Paid Search: Your Bidding Strategy to Lease Up in Q4 Affordable and effective digital marketing tools can fill vacancies in your portfolio. by Jenifer Calandra
MARKET & TRENDS
56 5 Expected 2023 Rental Property Investing Trends
The coming year will offer many lucrative opportunities for investing—as long as investors analyze the market, use reliable data, and follow recent developments and forecasts. by Daniela Andreevska
SPECIAL TRIBUTE 84 Remembering Aaron Norris by Katie Bean
thinkrealty . com | 7
INVESTMENT STRATEGY
FINDING GOOD DEALS
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ccording to an old Chinese proverb, “The best time to plant
season, or market cycle as they’re called in real estate, one thing remains constant: It will change. Unlike the seasons, however, real estate market cycles can only be predicted; you can’t “set your clocks to them” as you can for the seasons. Things don’t just go from cold to warm to hot every three or four months in real estate. Sometimes you are in a market cycle for a few months and
sometimes you are in a market cycle for several years. Currently, in 2022, we are fresh off the heels of an historic run up in appreciation that most living generations have never seen before. The period is historic in terms of both size (gains) and length (time). Since the end of the Great Recession of 2008-2010 (except for a minor blip in 2015 brought on by rising interest rates), the real estate
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a tree was 20 years ago. The second- best time is now.” This is true about so many things in life, especially investing in real estate. In a changing market, however, many people might challenge that advice. Like the seasons, all markets change. Sometimes the markets are hot, sometimes cold, and sometimes “just right.” But whatever the
8 | think realty magazine :: september - october 2022
For starters, when a market cools, buyers tend to retreat. Like so many things that involve financial risk, many people play the game only when they know they have a hot hand. This results in less compe- tition, which generally translates to more opportunity, including no longer needing to overpay for these highly coveted assets. Second, unlike in a hot market where deals are gone before you know about them, in a slower market, good deals get marketed. An active real estate investor will begin to see them marketed more widely. Following are three sure-fire ways to find deals in a down market. We have seen these play out firsthand over two separate market cycles— the Great Recession of 2008 and the 2015 mini-blip. Though different in size and scale to anything the experts are predicting in this market cycle, both slowdowns taught us valuable lessons on how to keep the pipeline full. That’s because both cycles involved many of the same obstacles we are dealing with today: uncertainty and availability of capital (or a tightening lending market).
market in the United States has been on fire. But, things are starting to change. With interest rates rising and inflation affecting consumer sentiment, things are beginning to cool off. Gone are the days of massive bidding wars based on insanely low interest rates and low levels of housing stock (inventory). Although I am not predicting the next season, I do know we are entering a market cycle vastly different than many have grown accustomed to over the last 10 or so years. With this imminent change upon us, the question is: “Is now the right time to invest in real estate?” “Yes!” I am not alone in this sentiment. Most experts agree that real estate, although it goes through down cycles,
has historically been an appreciating asset class—and is expected to be going forward. Assuming this is accurate, how does a potential investor find a good deal in a shifting market? Let’s unpack that. FINDING THE RIGHT DEAL During the last few years, you could buy a home in several markets across the country, and based on appreciation alone, it would increase in value by 10%, 15%, or even 20% with no effort on your part. Buyers simply needed to let the market do its thing. A lot of people have made fortunes during this run, but how do career real estate investors (and even new investors) find winners in today’s market cycle?
1. START A CLUB Many of us are familiar with
the REIA (Real Estate Investment Associations) and REIG (Real Estate Investment Groups) model. These groups are generally lead funnels for real estate investors. By bringing new people to the group, real estate inves- tors have the benefit of hearing about some of the best deals in their local markets firsthand, without having to ask, because the networking alone brings the deals to the surface. As an added benefit, often the people who form these groups (for better or worse) are considered an
thinkrealty . com | 9
authority, attracting deals before they hit the general population. Imagine if a wholesaler (someone who contracts a property well under market value and then sells it to an investor at a slight mark up, leaving enough profit in the deal for the investor to see value in it) approaches you, the founder of the networking group, and says: “Who do you think this deal would be a good fit for?” This is what happens when the club is yours. You get dibs, which is always good. If you feel overwhelmed with the amount of time, energy, and pro- motions required to launch a group, consider starting one with a group of people who can also bring value. A great starter pack would consist of a wholesaler, a lender, a realtor, an attorney, and a mortgage professional. Through their diverse expertise and industries, each brings value, deal flow, and services to the group. More important, more people translate to more promotors; more promotors should translate to more new leads. If you want to try something similar but face-to-face networking is not your thing, consider launching something like this on social media.
modifications to joint ventures to mandating a sale. Before it gets to the final, critical stage of foreclosure, every lender wants to rid its books of bad assets (nonperforming loans). One way to do so is by introducing new investors to these nonperforming loans. The drawback is there is no silver bullet strategy to acquire these assets; instead, there are many approaches (e.g., buying the note, partnering with the existing borrower, partnering with the lender, etc.). But the positives often far outweigh the drawbacks because the lender’s primary objective is receiving its principal and doing so quickly. So, get out there and meet some lenders. Always ask them: “Is there something I can take off your hands?” I assure you that once the door is opened and the conversations start flowing, you will be surprised at what will pop up. 3. BUILD YOUR LIST AND BE THE AUTHORITY Assume you now have an active real estate club and a list of lenders in your market a mile long. What next? In the days of social media and in the days of influencer marketing, one “ancient” medium remains very active and very profitable: email. Any good businessperson knows your email list is an asset because your email list is a captive audience—and people pay for captive audiences. So, my final tactic in a down market is to build your list. You meet people all the time, so why not save their email addresses and contact information? You have earned the right to communicate to them. A caveat: Though bigger lists may sound better, that is not always the case. Good, clean, vetted lists (not just large lists) are the goal. If you get
Romney Navarro is the CEO of Streamline Funding, where he focuses on the company’s long-term growth initiatives. Navarro is also a partner at Noble Capital, Streamline’s parent company, and oversees the company’s marketing initiatives. A member of the American Association of Private Lenders, Navarro has participated in the origination of more than $1 billion in nonconsumer investment loans throughout his career. In 2015, Navarro launched the Investment Real Estate RoundTable (a Texas-based investment club with over 5,000 members) and in 2018 was the host of the highly-acclaimed Firestarters Podcast, known among real estate investors and developers as a premier source for those looking to scale their businesses. Above all else, Navarro believes mastery can be achieved through repetition and continuously strives to lead his team to be masters of their respective crafts so they can provide the best possible experience for borrowers. In 2019, this philosophy earned him and the firm the prestigious Think Realty Private Lender of the Year Award. all four of those, however, you get a highly curated audience that is built for and waiting to hear from you. Now how do you capitalize on it? Let’s start with what not to do. Do not spam! Conversely, all of us have had an email hit our inboxes that we not only appreciated but often looked for- ward to. So why not mirror that? Your key to getting your recipients to look forward to and open your email is content. Make your content unique. Don’t expect to get a high open rate on an email that is the same old mumble jumble that everyone is putting out. Stand apart from the rest. People love to know you; they love unique perspec- tives. As you market to your email list, don’t be afraid to be the most highly concentrated version of you. Like all good things, these strategies require work. But, these strategies also “work” if you put in the time and focus. The upcoming real estate cycle could be the start of your next big push. This real estate cycle will be ripe with opportunity—some of the biggest gains are created in a downturn. •
2. KNOW YOUR
LOCAL LENDERS There’s an adage that suggests the best deals are distressed. One of the first places to look for distressed deals is at banks. Banks, private lenders, and mortgage professionals all have obligations to write good loans that “don’t fail”; however, in a slowing market, that’s not always the case. Before a deal goes to foreclosure, a lender will run the loan through a pre-foreclosure process that consists of many strategies, ranging from payment deferrals to loan
10 | think realty magazine :: september - october 2022
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thinkrealty . com | 11
INVESTMENT STRATEGY
RECESSION PROTECTIONS
4 Ways to Protect Your Investment in Recessionary Times FOLLOWING THESE TIPS WILL GIVE YOU PEACE OF MIND AS WELL AS LEVERAGE FOR FUTURE OPPORTUNITIES.
by Arianne Lemire
s Warren Buffet said, “The first rule of an investment is don’t
At times, the values rose much faster than the cashflow the assets provided. Unfortunately, that has caused some newer investors to think values just continue to go up and that’s how you make money investing. More experienced investors know that the most stable source of income from real estate is it’s cashflow. Cashflow ultimately comes from having strong and sound operations. What systems and processes do you use for your properties? Do you have an efficient system for leasing units? How about your system for turning units between one resident to the next? These seemingly boring day-to-day questions are what makes or breaks your cashflow. Make sure to tighten and strengthen operations right now, so even if the economy gets a little worse, you are well-positioned to capture all the income you can. 3. INVEST IN AREAS WITH POPULATION GROWTH AND JOB GROWTH Real estate prices and rent prices are affected by supply and demand.
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1. MAINTAIN A HEALTHY LEVEL OF LIQUIDITY Investors and business owners are at risk of losing their investment when they run out of cash or liquidity to pay their necessary expenses and debt payments. You could have the best investment in the world, but if you don’t have enough cash in the bank to sustain operations during a few turbu- lent months, you’ll be in trouble. Strive to maintain a “safety net” of at least 6-12 months for your personal expenses in cash or a similarly liquid (easily convertible to cash) account like a line of credit. And aim for enough cash or liquidity to maintain 3-12 months of expenses for each of your businesses and real estate investments. If you can do that, you won’t need to worry if you face a situation like what happened in March 2020, when income was delayed for a while. Instead, you can calmly assess the situation and make the necessary adjustments because you have a safety net in place. 2. STRENGTHEN OPERATIONS A lot of money has been printed during the last two years, causing asset values to rise extremely fast.
lose money. And the second rule of an investment is don’t forget the first rule.” The financial markets are in distress. Stock market values are down significantly year to date. Cryptocurrency values are down even more. Everyone is talking about how stressful times are with gas and food prices so high. In times like these, investors are wise to include hard assets in their investment portfolio, because they typically hold sustained value during the most turbulent markets. Real estate, especially residential real estate, whether single- or multifamily, is one of the most tried-and-true investment vehicles. Housing is a basic human need, after all. When 100% of the popu- lation needs—not wants—your asset, there is significant pricing and staying power. Even though real estate holds intrinsic value, we still need to be vigilant in how we invest, so we don’t lose money. Here are four considerations for protecting your investment even in recessionary times.
12 | think realty magazine :: september - october 2022
estate is a basic human need, so there is always demand. And we also know demand far exceeds supply. But no one has a crystal ball that reveals exactly how real estate values are going to play out. That’s why it’s important to invest in real estate that can cashflow, so at the very least it can pay for its own expenses and debt payments to weather any economic storm or recession. Recessions come and go. If we position ourselves with enough liquidity and cash flow to survive the hardest economic times, then at the other side of that pain is a lot of opportunity. Unfortunately, many investors who do not have liquidity and are investing simply for appreciation (that may not come soon enough) will be forced to sell their assets prematurely; otherwise, lenders will take those assets back. If you can survive a rough economy, you will have your pick of the best real estate when we emerge on the other side. •
Arianne Lemire is a former speech language pathologist turned real estate investor who has rehabbed and wholesaled more than 500 single-
The more demand for rental housing, the higher rent goes. With many would-be homebuyers getting pushed out of the market due to high interest rates, the demand for rent has increased. This is especially true in areas with population growth and job growth. Real Estate is local. In the U.S. where there is negative population growth and job growth, rent prices stagnate and can decrease. This is because the supply of housing exceeds demand when there aren’t enough people moving to an area.
Home prices also stagnate and decrease in those areas. But in areas with strong population growth and job growth, demand continues to grow—and supply can only grow so much. Investing in these strong population and job growth areas will help protect your investment. 4. INVEST FOR CASHFLOW AND COUNT APPRECIATION AS A BONUS We are in turbulent and unprec- edented times. Yes, we know real
family properties. She has ownership in more than 2,000 multifamily rental units in the Southeast with partner investors. Her financial freedom has allowed her to travel several months a year to spend time with friends and family. During her travels, she realized she wanted to share that freedom with others. As a result, she launched WealthGym, a community that helps busy professionals create time and financial freedom so they can retire within a few years. Lemire spends her free time at her “Ask Arianne” YouTube channel, where she creates free educational videos on money, investing, and real estate to inspire others to achieve financial freedom early. You can reach Lemire at www.wealthgym.com, www.youtube.com/AskArianne, or https://www.instagram.com/theariannelemire.
thinkrealty . com | 13
INVESTMENT STRATEGY
NAVIGATING OPPORTUNITY
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We’ve all done it. At some point, we’ve driven by the house with the abandoned vibe and thought, “Man, somebody should buy that and turn it into a (insert: restaurant, boutique, salon, office, remodel, etc.).” Some of us may even have momentarily considered doing it ourselves. That’s the voice of our inner real estate investor talking. Most people continue down the road, but a few special people will listen to that voice and attempt to act. How do we make this dream a reality? Most real estate investors either empty out their savings or apply for a loan at the local bank. But what happens when you don’t have adequate savings or credit for bank loans? Do you walk away from what could potentially be a very good real estate deal, leaving it for someone else to come along and profit from? The strategy savvy investor won’t let less-than-ideal circumstances stand in the way of achieving their goals. There’s a lot to be said for unwavering determination. Diligently working one or two investing strategies will definitely pay your bills, but it won’t make you rich. But, that’s the route most would-be investors take when learning how to navigate the world of real estate. Because every situation is different, a savvy investor needs to
be familiar with and confident about these basic strategies: 1. Wholesaling 2. Lease options 3. Retailing 4. Owner financing If you have a clear understanding about how they work, you will be able to tackle any situation you come across.
or let it go back to the bank through foreclosure. Although Mary doesn’t have the desire, money, or knowledge to deal with being a landlord, she doesn’t want to ruin the good credit score she has worked hard to build. Many people across the country face similar situations every day, but who helps people like Mary Smith? A savvy real estate investor knows all strategies and understands how to make them work out for a win- win-win situation when the average investor would just walk away. As Mary researches her options, a website ad catches her eye. Laura Phillips, a local investor, claims to be able to help people in Mary’s situation. The content on the site is professional and relevant to what Mary is dealing with, so she decides to give Laura a call. After meeting with Mary and evaluating the home, Laura presents her with two separate offers. Mary accepts Laura’s lease option offer of $195,000 with zero down and $1,400 a month for a one-year term. Laura agrees to be responsible for maintenance and repair costs during the option period. Mary is able to move on without the worry of covering her mortgage payments or being a landlord.
THE STRATEGY SAVVY APPROACH IN ACTION
Here’s an example of the Strategy Savvy approach that I’m referring to. Mary Smith bought her home two years ago for $215,000. The company Mary works for closed its doors last month, so she’s out of a job, with no prospects in sight. With her savings depleted, she can no longer afford the payments on her home and needs to sell quickly or face foreclosure. She now owes $195,000, but with the recent plant closings and general economic downturn, Mary’s home is only worth $200,000 now. The average real estate investor won’t help her sell it because of the narrow profit margin. Mary has two obvious options: She can either rent out the home
14 | think realty magazine :: september - october 2022
Since Laura doesn’t plan to occupy the home, where does she have room to profit in this deal? Laura has a pool of potential buyers and sends the house information to a few she thinks might be interested. Jack and Lois Lehman fall in love with the home and settle on terms with Laura: $200,000 purchase price with $5,000 down and $1,600/month for a term of one year. They agree to be responsible for maintenance costs and repairs, and there is no early cash-out penalty. The situation is ideal, as Jack just got a job transfer from their hometown two hours away. Lois and the children can move to the new house with Jack immediately while they wait for their old house to sell, and they don’t have to worry about short-term renting or long commutes for Jack. Once the sale of their old home is complete, they are able to qualify for a bank loan on the new house and close well before the one-year term is over. Win-win-win. Mary received a fair price for her home, and she doesn’t have to deal with landlord headaches or foreclosure. Laura receives a $5,000 down payment and $200 a month in positive cash flow. The Lehman family moves into their new home on terms that give them time to get things in order for a bank loan that will cash Mary out. LEARNING SAVVY STRATEGIES Someone with the right knowledge can apply the overall concept illustrated in this example to almost any property situation. With the crazy real estate climate and barrage of reality “fix-and-flip”
real estate investing shows, more budding entrepreneurs are looking at investing in real estate as a viable way to expand financial portfolios and satisfy their dream of becoming the boss. For those considering taking advantage of the opportunities to be found in every town across the country, there is no shortage of education available for getting started on the road to real estate investing. Almost every method of delivery is available—from books and digital media to live seminars and one-on- one coaching. The majority of these resources tend to focus on teaching one or two strategies, however, leaving large gaps in a prospective real estate investor’s training. Outdated information can lead to legal difficulties and cost thousands of dollars in “learning curve” losses. In addition, not knowing all the strategies available and how to properly execute them can result in deals slipping through the cracks, relegating what could be a rewarding career to a hobby.
Suni Goff’s passion for real estate remodeling design and talent for insightful, well-researched writing are the cornerstones of a prolific, successful career spanning 20 years in the real estate marketing and rehabbing world. She’s also ghostwritten numerous professional articles, educational programs, and books for 11 best-selling authors. Fortunately, savvy investors have a valuable resource available, right at their fingertips. REIPro Investing software is the premier one-stop-shop for all aspects of real estate investing. With a vast education library and tools to help determine the perfect strategy for virtually every property situation, it’s designed to guide and streamline the process for all real estate investing experience levels. Knowing how to properly execute all strategies and how to decide which is right for each situation ultimately determines the level of success an investor will achieve. If you take the time to become Strategy Savvy, the future of real estate investing looks bright indeed. •
thinkrealty . com | 15
INVESTMENT STRATEGY
FIX-AND-FLIP
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by Susan Naftulin
ver the last decade, investors have flocked to fix-and-flip
Nowhere are supply chain issues more acute and long-lasting than in the construction industry, where key materials and products like rubber roofing, caulking, pocket doors, pull downs, and other items have been chronically scarce or back-ordered. Affected items have changed over time, but currently (and depending on the manufacturer) delivery of cabinets can take six to 12 weeks; doors and windows up to 27 weeks; and siding, 12 weeks. A timeline is critical to all con- struction projects, but particularly for fix-and-flip borrowers. Loan terms give borrowers a firm timeframe for turning around property renovations and repaying the lender—typically 12 months. We have seen the average pay-out time of borrowers increase as a direct result of supply chain issues holding up a renovation. Although some lenders will honor a request for a loan extension, having an extension granted is a rarity. At the very least, borrowers can expect to pay hefty fees on loan extensions. Anyone planning to rehab a property must build in a time buffer for materials impacted by supply chain issues. Borrowers should start ordering materials immediately after the loan agreement is signed. In most cases, this is the window when you’d be waiting for construction permits to be issued. Also take into
account whether you plan to get the home on the market in time for the spring season. Be sure to choose reliable vendors who will be clear about expectations regarding material delivery. Better yet, prepurchase materials wherever possible. Be flexible on colors and brands. COST CONCERNS With global inflation, we know the cost of just about everything has increased, including most housing materials. Thank an increased demand/lack of supply as more homeowners have pursued renovation projects over the past couple of years. Eye on Housing estimates that prices have risen more than 40% since January 2020 and have increased 5.4% since the beginning of 2022. This includes gypsum, paint, ready-made concrete, and more. There are, however, some exceptions and a reason to be hopeful about the outlook on this front. Lumber and panel prices have gone down over the last 60 days, and the timing of price increases is slowing altogether. In 2022, lumber prices dropped more than 6% to $829 for 1,000 board feet. The cost decrease is a response to higher
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properties, which primarily delivered healthy margins in relatively short order in a booming market. ATTOM estimates that house flips accounted for 4.9% of all home sales in the second quarter of 2021. In 2022, the picture looks quite different. With supply chain slowdowns, inflation-driven materials prices, slowing or stalled home sales, and the rising cost of labor, is the fix-and-flip still a great investment? The answer is yes, but the savvy investor must acknowledge that with shifting market conditions, the rules of the game have changed. With that in mind, let’s consider some current concerns and how to address them while minimizing financial risk. As with all real estate issues, the degree to which these issues affect investors may vary from region to region. MIND THE SUPPLY The last two years have no doubt revealed the weaknesses in our global supply chain. In part, these problems were due to the work stoppage and health of workers during the global pandemic. Natural disasters, manufacturing slowdowns, logistical tangles, and general labor shortages also played a role.
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mortgage rates and a general slowdown in renovations, as well as an opening up of the supply chain bottleneck that had slowed lumber delivery through 2021. Keeping to a budget on a renovation project is more important than ever. Given the leveling out of home prices, there is less of a buffer to count on; therefore, it will be key to build in contingency plans and dedicate a higher reserve percentage to potential unforeseen costs and shifts in the housing market. (As anyone who has rehabbed a property knows, there are always unexpected twists and turns that can derail a budget.) In the past, a 10% contingency reserve might have been the standard; we suggest allowing for more in 2022. Labor will likely continue to be expensive, because the labor
shortage has hit the trades especially hard. Finding laborers in a time crunch is also challenging. If you are skilled at making home repairs, consider whether you can go the DIY route and save on cost. ON THE FLIPSIDE We are already seeing home prices level out and fall in some cities, while inventory continues to sit at a record low. Homebuyers simply need more habitable properties on the market. Given that values are likely to rise slowly, investing in a fix-and-flip is still profitable, with the profit margin for flips at the end of 2021 averaging 32.3%. For investors that have the ability to buy discounted properties, it’s possible to expand profit margin now if costs can be tightly controlled. Overall, rehabbing a home continues
to be less expensive than buying an updated home. We don’t expect that to change any time soon. To those real estate investors who know just how satisfying it can be to bring new life to a property, we say keep calm, mind your spending, and carry on. •
Susan Naftulin founded RFG with partner Jeffery Goldberg in 2009. In addition to serving as president of RFG, Naftulin serves on the American
Association of Private Lenders’ Ethics Advisory Committee, where she continuously upholds the real estate industry’s values and supports professional conduct in private lending. Prior to becoming president of RFG, Naftulin held several senior management positions in the mortgage industry, including general counsel, managing attorney, chief operating officer, and senior vice president for both privately and publicly held mortgage lenders. Before entering the mortgage industry, Naftulin was a creditors’ rights attorney with the Philadelphia law firm of Fox Rothschild LLP.
thinkrealty . com | 17
INVESTMENT STRATEGY
SERIES LLCS
Sponsored Content
Are Series LLCs a Good Choice? AS YOU CONTEMPLATE SERIES LLCS, BE AWARE OF SOME NOTABLE ISSUES.
by Garrett Sutton
n 1996, Delaware introduced the series LLC. As one of the newer entity choices, series LLCs are an
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interesting creation. The idea was derived from Delaware’s statutory trust law, which was popular with mutual funds. Under this law, an investment company could form a trust with separate series, each with their own investors. The implementation of the series LLC gave mutual funds the option to use an LLC instead of the statutory trust, which was a much more flexible and desirable option. And it allowed for one Securities and Exchange Commission (SEC) filing, with each fund conducting its activities separately. The idea evolved into other industries, such as real estate investing. It has also spread to other states. Today, 23 states allow the formation of series LLCs. (Other states may not allow the formation of series LLCs, but many will allow a series LLC to register as a foreign entity doing business in the state.) A series LLC consists of a “master” or “umbrella” LLC and “series” (sometimes referred to as “mini-LLCs”) established under the umbrella LLC, usually through the operating agreement. Each series is treated as a separate entity for limited liability purposes, even though only one LLC is actually formed. The series LLC is an attractive option since a real estate investor, for example, could hold 10 properties in one LLC and each property would enjoy limited liability as if they were in separate entities. But is it too good to be true? Maybe. A series LLC certainly seems like a sensible option to achieve the goal of separating assets without having to form multiple LLCs. However, there are some notable issues with the series LLC.
will allow series LLCs to register to do business as foreign entities, they may not recognize the separation of assets as intended in the structure. Some states, such as California, have mandated that each series counts as a separate entity for franchise tax board purposes, thereby removing the cost savings incentive for using them. Therefore, if you do not live in a state that allows for formation of series LLCs or if you plan to work across state lines, series LLC may not be the best choice for you.
STATE-TO-STATE ACCEPTANCE First, as noted above, less than half of states allow for formation of the series LLC. And, although most states
18 | think realty magazine :: september - october 2022
Garrett Sutton is a corporate attorney, asset protection expert, and bestselling author who has sold more than 900,000 books to guide entrepreneurs and investors. For more than 30 years, Sutton has assisted entrepreneurs and real estate investors by protecting their assets and maximizing their financial goals through sound management and asset protection strategies. The companies he founded, Corporate Direct and Sutton Law Center, have helped more than 10,000 clients protect their assets and incorporate their businesses. With all the uncertainty and confusion still surrounding this new entity, we consider it advisable to stick with the traditional LLC for now. Even though you may need to pay filing fees for each entity, you will be assured that the IRS, banks, other institutions, and CPAs will be familiar with the structure. And, most importantly, you can be sure your entity structure will stand up to legal scrutiny—as long as everything is set up correctly and you have kept up with the corporate formalities. • LEGAL SCRUTINY Another issue with the series LLC is that it has not yet been tested legally, even in the states that permit them. That means there is no guarantee that limited liability protection will be extended to each series until each state rules on the subject. Do you want this type of uncertainty when you are trying to protect your assets? TAX QUESTIONS To make matters even more confusing, how to deal with the series LLC in business situations is unfamiliar territory across the board. The IRS isn’t quite sure how to deal with them yet and if your CPA isn’t well versed in series LLCs (many are not), you may find yourself in trouble at tax season. The series LLC is not yet recognized in the U.S. Bankruptcy Code, so it is unknown whether a series may file for bankruptcy on its own or the entire LLC must file for bankruptcy. ADDITIONAL CONSIDERATIONS Furthermore, people have reported issues with everyday tasks such as getting an EIN for each individual series and getting separate bank accounts for each series as banks are still unfamiliar with the structure. And when it comes to financing, banks have been known to gain security on all the series—and the umbrella itself—instead of the one series seeking a loan.
thinkrealty . com | 19
INVESTMENT STRATEGY
LEGACY BUILDING
Sponsored Content
What Is Legacy Investing? THIS GROWING TREND IS REDEFINING THE MODERN INVESTOR.
by Kurt Coleman
any of today’s entrepreneurs aren’t looking to start businesses just to make money; they are looking to make a difference while making money. For generations, the main reason for investment was to build wealth. M
And, if you were fortunate enough to achieve that end, a subsequent goal was passing that wealth on to heirs. Younger generations, however, are setting their sights on more than financial wealth. This new class of investors is merging the
classic profit mindset with a view to the future. They want to build a legacy, fortify society, and contribute to the overall well-being of their communities and the globe. This isn’t just philanthropy. Organizations with the primary mission of helping those in need have been around for decades. With legacy investing, individual entrepreneurs are still primarily focused on business and profit, but they are using these resources to affect real change. By marrying the tried-and-true methods of entrepreneurship and wealth accumulation to causes and resources that help their communi- ties and future generations, this new breed of investor is reimagining the potential of investment. A NEW WAY OF THINKING Everyone wants to build wealth and create more revenue opportunities, but is capital accumulation the only thing that matters? Legacy investing comes from an unconventional view of the world. The traditional mindset is simple: work hard, stay disciplined, and the fruits of your labor will carry you through your retirement. Most of us know that paradigm is no longer common. The digital age has disrupted industries. Stable employment that offers a 30-year career with benefits is extremely rare. Entry-level positions that once provided a clear path to
20 | think realty magazine :: september - october 2022
promotion and management have shifted to a more gig-based economy.
It all starts with knowing your “why.” There is no singular path to legacy investing. However, understanding your personal convictions will help inform your next steps. Find out what matters most to you; then explore what business opportunities fall in line with those priorities. One of the great things about legacy investing is you don’t have to be rich to do it—but you do need to have a plan. Wherever you are right now in your entrepreneurial career, you can begin using your resources to invest in things that matter beyond the balance sheet. CHARACTER MATTERS When it comes to legacy investing, building character is even more important than money. Self-reflection is key here. Take the time to consider your future and the kind of person you want to be. If you focusing on personal development and follow your purpose, regardless of how successful you are, you will never lose sight of who you want to become. After all, it isn’t the money; it’s the people who make a business great. Learning how to navigate the connections you make and the relationships that fuel your business is critical to your success. Thinking outside of oneself is the hallmark of a wise person, and the same is true in business. Your family and friends can’t inherit your job, but they can inherit your business and continue your legacy. Anyone with the right strategies can amass capital, but investing those resources in others and living in a way that leaves an imprint on the world is a truly incredible accomplishment.
LEGACY INVESTING WITH REAL ESTATE Real estate investing remains a lucrative vehicle for wealth creation. Finding ways to use real estate to generate profits while helping others is an area of significant market growth in recent years. Just one of the amazing ways that many entrepreneurs are now making a difference with their real estate investments is through shared housing. Similar to traditional rentals, investors buy, renovate, and rent their properties. But unlike traditional rentals, these real estate assets are combined with the income potential of a profitable business that generates cash flow. They are specialty homes that provide accommodations to groups like seniors, veterans, those in recovery, etc. And many of these homes are subsidized by substantial federal grants. Real estate generally appreciates over time, but real estate that generates significant cash flow is an incredibly valuable resource, and definitely an option worth exploring. Regardless of the path you choose, consider investing beyond personal financial gain. Build something that outlives you. A great way to create a legacy is to make sure that when you are investing your time, resources, and money, you get more in return than just money. •
Subsequently, young people have had to look for alternate
opportunities in sectors that were previously untapped. Through this process, many have opted not to settle for just a paycheck. They want more. They want meaning. Some claim that younger gen- erations are too shortsighted and self-focused. Yet, many entrepre - neurs from this group are making it their life’s work to build legacies that help their communities, create resources for those in need, and tackle the most pressing issues facing our world. They recognize that these challenges, while enormous, are not insurmountable. There are many ways to invest time and finances and myriad ways to make money. In the past, it often seemed like you had to choose between doing good in the world or doing well financially. But the two aren’t mutually exclusive. Traditionally, savvy investors analyze data, crunch the numbers, and weigh the pros and cons of every investment. Yet, many fail to account for the intan - gibles of investment returns. What if it were possible to do well financially while also doing good in the world? With so many unique investment options available today, this is not only possible but also preferred by many. Legacy investors want more than just a financial return on investment—they want to invest with purpose. After all, when people think about a well-lived life, they rarely conjure up images of healthy bank statements.
Kurt Coleman is the lead copywriter for RALAcademy team, a company in the residential assisted-living niche. He brings a wealth of skills and experience
to the company and enjoys sharing with investors how to use their skills and knowledge in the real estate industry. Coleman is a graduate of Arizona State University with several years’ experience as a team leader, systems developer, and writer.
GETTING STARTED How can ordinary entrepreneurs make an extraordinary impact and leave a legacy?
thinkrealty . com | 21
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