Real Deals | Real-World Tips & Insight
SENIOR HOUSING AS AN EMERGING ASSET
IS THE TIDE TURNING IN SAN DIEGO?
THINK REALTY: MORE TIME, WEALTH, PURPOSE SPECIAL FEATURE PAGE 36
Quest to Be the Best AREI'S CARL DEAN HAS HIGH GOALS AND A QUICK TIMELINE.
GROWTH EQUITY GROUP: PASSIVE INVESTING THAT PAYS OFF ADVERTISING SUPPLEMENT
What’s in your ? PORTFOLIO
702.739.9053 | IgniteFunding.com IGNITE FUNDING
TABLE OF CONTENTS
INSIDE THIS ISSUE
THE BIG PICTURE 14 More Choice, More Control
Are you taking advantage of the benefits of investing through your self-directed IRA? by Tyler Carter 18 Riches in Niches Consider the Shared Living Model—and rest assured, this is not your grandfather’s ‘rooming house.’ by Kelly Edwards & Chris Edwards 24 A Strategy for All Seasons Short-term rentals aren't just for summer vacationers anymore. by Rob Stephens UP CLOSE & PERSONAL 54 Anatomy of A Win-Win When confronted by the unexpected, simply change gears, and you can still come out ahead. by John Tesh 56 Loan Arrangers John Warren and Lima One Capital are leading the charge for sensible lending options for investors. by James Hart 60 Required Reading What are the three most important sources of information you read, watch or listen to every day to help you in your investing? 62 The Answer Man With 30 years' experience, Jeffrey Taylor has more than earned the moniker 'Mr. Landlord.' by Susan Thomas Springer 26 Buying By the Numbers Here are five efficient ways to find off-market house deals. by Danny Johnson
ON THE COVER
QUESTTOBE THE BEST
THE BIG PICTURE
SENIOR HOUSING AS AN EMERGING ASSET Baby boomers' housing needs present opportunities for investors.
TOO HOT TO HANDLE?
Worries of a bubble in San Diego are likely overblown.
4 | think realty magazine | mar :: apr 2016
NUTS & BOLTS 72 Need for Speed
Major banks and financial institutions often just don't move fast enough or lend large enough amounts for a fix-and-flipper. by Lawrence Fassler 74 Phone's Ringing ... Now What? Now that you're an investor looking to buy properties, getting the word out is just the first step in marketing. by Kevin Guz 76 The Basic Building Block Breaking up is not so hard to do, when combining ownership of property as a single-member LLC with a tenant-in-common agreement. by Stephen Hickox BYTHE NUMBERS 90 Just As We Predicted... Due to a calculation error, the Census Bureau has revised its residential improvement spending estimates. by Todd Tomalak 94 Falling Foreclosures 'Normal, healthy foreclosure activity' returned to many markets in 2015, according to a recent report. by RealtyTrac Build your investment team on a solid foundation of mutual trust and respect. by Abhi Golhar and Pavielle Dortch 78 Finding Common Ground
CARL DEAN has the next 10 years planned out for him and his company, American Real Estate Investments. "I want to create the largest single-family rental production company in the world."
by Robert Springer :: photos by Matthew Blackstock
NUTS & BOLTS
BY THE NUMBERS
INSIDE 46 Think Realty-It Can Change Your Life When Tamara and Jesse Tijerina turned to real estate investing, they gained value in time, wealth and purpose. The 'Think Realty' brand can do that for you, too.
UPS, DOWNS AND IN-BETWEENS
ENSURING LIFE AND LIMB
Focus on trees’ needs, to maintain beauty and safety of your property.
There's wide variety in Southern California's economic outlook.
thinkrealty . com / mag | 5
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6 | think realty magazine | mar :: apr 2016
FROM THE EDITOR-IN-CHIEF
This Magazine is One Piece of AVery Dynamic Puzzle
ersonal Real Estate Investor Magazine has a new look and a
But as a member of the Think Realty “family,” we can make a much bigger im- pact and help build an evolving archive of information and resources for you. The idea behind Think Realty is to bring together, in a central location, the many varied and interlocking resources an investor needs to be successful. In other words, ALL the pieces of the puzzle known as real estate investing. Content is just one of those pieces, which also include education, advocacy, networking, access to services and supplies, exposure to global markets and more. Lacking even one can put you at a competitive disadvantage. Membership in the Think Realty organization ensures you have it all: a subscription to this maga- zine, both in print and in digital format; access to RE Rights, our legal advocacy arm; discount pricing on goods and services through the Community Buying Group; networking and support via PREIMA; admis- sion to Think Realty’s regional expos and global con- ference; and access to a growing, dynamic archive of articles, tips and how-to information. Other benefits will be added as the portal continues to develop. More detail about Think Realty and why it can be a dif- ference-maker for you can be found beginning on Page 46. There’s also more information at www.ThinkRealty.com. We think you’ll agree it’s in everyone’s best interests. •
new name— Think Realty Magazine — to reflect the increased opportunities now available to help you grow your real estate investing pursuits. Our new name only further solidifies our
mission, which is and always has been to provide you with interesting, relevant and valuable content you can directly apply toward becoming a more successful and profitable real estate investor or service provider. To that end, we report on issues and trends—such as this month’s look at senior housing as an emerging asset class—interview industry leaders about what’s current in their areas of expertise, profile individuals and companies whose best practices can enlighten your own operations and provide case studies with useful how-to instruction. Perhaps the most valuable of all are the informational articles from your colleagues and peers who willingly share their knowledge and experiences so that you have an easier road to travel than they did. That is all in the interest of ensuring adherence to high standards and ethics and of moving the entire industry forward through a collective success. Of course, we can’t provide everything you need to know on a given subject or specific strategy in any single, individual issue of this magazine.
thinkrealty . com / mag | 7
TECH TOWNS TOP ‘BEST HOUSING MARKET’ LIST
ROBERT RAKOWSKI NEW VP OF MEDIA SALES FOR THINK REALTY/PREI
Denver, followed by Seattle and Dallas-Fort Worth, top the list of Top 10 housing markets for 2016, as predicted by Zillow. All are major tech towns— ideal for job growth. Other places that made the list are Utah markets Ogden and Salt Lake City, along with Omaha, Neb., and Boise, Idaho. “Trendy tech centers like San Francisco, Seattle and Denver hogged the spotlight in 2015. But this year, the markets that shine brightest will be those that manage to strike a good balance between strong income growth, low unemployment and solid home value appreciation,” Zillow Chief Economist Dr. Svenja Gudell said. To determine the Top 10, Zillow evaluated home value appreciation, unemployment rates and income growth. Those three variables then were scaled and combined to form a “hotness score.”
Robert Rakowski, longtime asso- ciate publisher of PERSONAL REAL ESTATE INVESTOR MAGAZINE , has joined AFFINITY REAL ESTATE MEDIA LLC and AFFINITY ENTERPRISE GROUP as Vice President of Media Sales. In his new role, Rakowski will oversee advertising sales for Think Realty Magazine (formerly titled Personal Real Estate Investor Magazine), among other responsibilities. “We are very happy that Bob has joined us,” said Matt Benson, Executive Vice President of Global Sales for AEG. “We are confident he will contribute significantly to the success of Think Realty Magazine and other future company initiatives.” Rakowski has deep relationships within the residential real es- tate investing space, extending even beyond his start with PREI in 2009. Prior to that, he owned a business working with land developers on zoning entitlements, which he began after a long career as a U S. Army Armor officer. “I really enjoy meeting people, bringing them aboard not only as clients but as partners, working with them to help them be success- ful,” Rakowski said. “I look forward to connecting themnot only to the magazine, but to all of the resources thatThink Realty offers.” A native of East Chicago, Rakowski earned his undergraduate degree from Purdue, and later a Master’s in Public Administration (focusing on urban planning) fromArizona State University. He can be contacted at RRakowski@affinitymediaservices. com or at 913-599-2020. SPENDING ONRENT SURGES FOR 2015 Americans spent nearly $20 billion more on rent in 2015 than in 2014 as people around the country set up 1.8 million new renter households and median monthly rents rose at a record pace, according to a recent Zillow rentals analysis. In all, Zillow said, renters spent $535 billion on rent in 2015 – nearly as much as the total budget of the Department of Defense ($575 billion). In 2014, they spent $516 billion. Renters of single-family homes and apartments spent about the same amount on rent in 2015, with apartment renters paying $239 billion and single-family-home renters paying $245 billion. Renters in the New York-Northern New Jersey metro area spent the most on rent in 2015—about $56 billion. Los An-
ZILLOW’S TOP 10 HOUSING MARKETS FOR 2016:
1 Denver, Colo. 2 Seattle, Wash. 3 Dallas-Fort Worth, Texas 4 Richmond, Va.
5 Boise, Idaho 6 Ogden, Utah 7 Salt Lake City, Utah 8 Omaha, Neb. 9 Sacramento, Calif. Portland, Ore.
SOURCE :: www.zillow.com/blog/hottest-markets-2016-190331/
geles-area renters spent nearly $35 billion, and San Francisco renters spent $17 billion. About two-thirds of the total rent paid in 2015 was spent in the 50 largest metros. Rental rates also continued their steady climb, growing 3.8 percent annually to a Zillow Rent Index of $1,382.
SOURCE :: www.zillow.com/research/2015-total-us-rent-paid-11528/
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vesting niche. The report incorporates the results of Corpo- rate Housing By Owner’s seventh annual survey of hundreds of managers and owners of furnished, monthly residential rental properties across the United States. The aim, said the company’s CEO, Kimberly Smith, is to enable those owners and property managers to capitalize on emerging trends and achieve greater success with their rentals. Among the report’s highlights: > As the real estate market stabilizes, new landlords are enter- ing the market—65 percent of respondents say they have been landlords of furnished monthly rentals for four years or less, and 28 percent have been landlords for one year or less, the highest percentage since 2011.
NEWNAME, NEW INITIATIVES FOR TEN-X AUCTION.COM has rebranded itself TEN-X , to reflect the com- pany’s transition into an online marketplace where buyers, sellers and the agents and brokers who represent them can interact to buy and sell high-quality residential and commercial real estate. Under the new brand, the company has three transaction platforms: Ten-X Commercial; Ten-X Homes, which will feature traditional, move-in ready residential properties; and Auction.com, which will continue to feature properties for residential real estate investors. In addition, Ten-X plans to launch and demonstrate new commercial and residential platforms—which will feature both auctions and more traditional transaction options—in March at the South by Southwest Interactive Festival in Austin, Texas. Both platforms will be optimized for use on desktop, tablet and smartphones. Ten-X Commercial is a national platform. Ten-X Homes will have a national footprint, but focus initially on four launch markets: Dallas, Denver, Miami and Phoenix.
> The majority of respondents (58 per- cent) report that they are landlords for “investment purposes.” > For the fourth year in row, more than nine out of 10 respondents report their properties are profitable or break-even.
WEB :: www.ten-x.com
> An all-time high (39 percent) report charging higher or much higher rental rates in 2015. The number has been rising since 2013. > Also an all-time high (92 percent) say they do all their property management themselves. > “Relocation” renters rose to 45 percent (up 3 percent from 2014). The survey also noted all-time highs in renters due to home remodels (30 percent), movies/entertainment (15 percent) and divorce (20 percent). > Six out of 10 respondents said their last tenant stayed for three months or longer. > The number of property owners who accept pets rose only slightly (38 percent—down from the all-time high of 50 percent in 2011).
TEXAS REAL ESTATE INVESTORS EXPO SET The 3rd Annual TEXAS REAL ES- TATE INVESTORS EXPO , sponsored by SAREIA (San Antonio Real Es- tate Investors Association), is set for May 21 at the Norris Conference Center in San Antonio. The all-day event features speakers, break-out sessions and a vendor marketplace,
focused on various strategies for wealth-building through real estate investing. For more information, call 210-501-0897 or email email@example.com.
WEB :: www.texasexpo.com
2015 CORPORATE HOUSING REPORTAVAILABLE
For information on obtaining the complete report: www.CorporateHousingbyOwner.com
The 2015 Corporate Housing Real Estate Report is now available, providing insight into this growing real estate in-
thinkrealty . com / mag | 9
search team and provide house hunters with key insights about the economy, housing trends and public policy. Prior to joining Trulia in 2014, McLaughlin was an assistant professor of urban and regional planning and director of the Real Estate Development program at San Jose State University. He also has worked as an assistant professor in urban and regional planning at the University of South Australia. MODEST INCREASE EXPECTED IN EXISTING-HOME SALES NATIONAL ASSOCIATION OF REALTORS Chief Economist Lawrence Yun is predict- ing that existing-home sales will expand at a more moderate pace in 2016, after one of the housing market’s strongest in nearly a decade last year. Yun pointed to pent-up demand, sustained job growth and improving inventory conditions as reasons for an expected gain (from 2015) in new and existing-home sales. But he said that rising mortgage rates, home prices that are still outpacing wages and shaky global economic conditions will likely hold back a stronger pace of sales.
PEOPLE IN THE NEWS RICK SHARGA has been promoted to chief marketing officer at TEN-X , formerly known as Auction.com. He will oversee the company’s marketing, branding and corporate communications efforts. Sharga previously was executive vice president at Auction.com. Prior to joining the company in 2013, Sharga worked for Carrington Holding Compa- ny and RealtyTrac. STEPHEN VLASAK has been promoted to partner in the alternative investment practice at accounting firm RICHEY MAY & CO. LLP . In addition to a focus on business development, Vlasak is involved on the audit side of the alternative investments practice and has more than 17 years of audit experience within the commercial and financial service industries. He advises clients on initial organizational structure, audit processes, the management of operational matters and regulatory needs.
MARCH 10-11 Crowdfunding & Marketplace Lending Forum for Real Estate (East) New York www.imn.org
MARCH 29-30 Real Estate Investors Summit
Miami Beach, Fla. www.opalgroup.net
APRIL 5-6 Real Estate Private Equity Forum: Land & Homebuilding Sponsored by IMN Miami, Fla. www.imn.org
APRIL 11-13 NARPM 2016 Broker/Owner Retreat Las Vegas www.narpm.org/conferences/
APRIL 13 REIT Symposium Sponsored by NYU Schack New York www.scps.nyu.edu
ANNA MILLS has been elected 2016 president of the NATION- AL REAL ESTATE INVESTORS
“This year the housing market may only squeak out 1 to 3 percent growth in sales because of slower economic expansion and rising mortgage rates," Yun said in a video highlighting his predictions for 2016. The video can be accessed at NAR’s
ASSOCIATION , the orga- nization has announced. Mills, currently president of the Toledo REIA, has been a Realtor in Ohio
APRIL 17-19 Real Estate Lending Conference Sponsored by ABA San Antonio www.aba.com
and Michigan for more than three decades. She also was NREIA’s president in 2002, is a past president of Ohio Real Estate Investors Association and is co-author of “The Landlord Tenant Handbook.” Housing economist RALPH MC- LAUGHLIN has been promoted to chief economist at TRULIA , where he will lead the company’s housing economics re-
APRIL 19-21 Urban Land Institute 2016
website, www.realtor.org. Yun continued: “Furthermore, the continued rise in home prices will occur due to the fact that we will again encoun- ter housing shortages in many markets because of the cumulative effect of homebuilders underproducing for multiple years. Once the spring buying season be- gins, we'll begin to feel that again.” •
Spring Meeting Philadelphia, Pa. www.uli.org/events
APRIL 22-23 Think Realty Expo Long Beach, Calif. www.reiexpo.com
10 | think realty magazine | mar :: apr 2016
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THE BIG PICTURE
TRENDS & ISSUES
Senior Housing as an Emerging Asset BABY BOOMERS’ EVOLVING HOUSING NEEDS PRESENT OPPORTUNITIES FOR INVESTORS.
and living longer, and their increased life expectancy means less turnover in the marketplace. It’s going to be a booming market, no pun intended,” says Rick Sharga, chief marketing officer of Ten-X (formerly Auction.com), an online marketplace for residential and commercial properties. Sharga adds that investors who get in now have an incredible opportunity to learn the nuances of senior housing and establish themselves before the market feels the full force of the Boomer generation’s impact. UNDERSTANDING SENIOR HOUSING Until recently, seniors had few housing options. They could downsize, moving into an active adult community for people 55 and over. Or they could cohabitate with a relative, usually one of their grown children. The final option was a nursing home. Today, senior housing options include: > Stand-alone properties: These small single-family residences, apartments or condos may be equipped with
by Teresa Bitler
and more, they are opting to rent rather than own. Eventually, some may need to transition to an assisted living or skilled nursing care facility. Across the board, what- ever housing type, there’s not enough supply to meet anticipated demand. But, aging Baby Boomers aren’t the only factor contributing to the increased demand, according to the National Investment Center for Seniors Housing & Care. Seniors are healthier
he senior population in the United States is skyrocketing. By 2030, one in five Americans will be age 65 or older, according to the U.S. Census Bureau, up from one in seven today. As the general population ages, housing needs will also shift. People in their 60s, 70s and beyond usually don’t need—or want— large yards or McMansions, often opting for smaller homes or condos in communities with neighbors their own age. And more T
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grab bars and other senior-friendly features and are geared to those who can live independently. > Active adult communities: Occu- pants of homes and condos in active adult communities usually must meet an age requirement but are still very active. Communities often in- clude amenities such as clubhouses, swimming pools and gardens. > Independent living facilities (ILFs): These facilities cater to seniors who are less active and may need some help with meals, housekeeping and transportation. Residents pay premium rents to cover these perks. > Assisted living facilities (ALFs): Seniors in assisted living facilities may require some additional assistance with daily activities such as bathing and dressing but do not need skilled nursing care. > Skilled nursing facilities (SNFs): Hospital-like, skilled nursing facil- ities provide residents with health care services, including medical care and rehabilitation, as well as assistance with daily activities. > Continuing care retirement commu- nities (CCRCs): A continuing care retirement community is a “one-stop shop,” offering independent living, as- sisted living and skilled nursing living arrangements within the same facility. PROPERTIES FOR INDEPENDENT SENIORS When most people retire, they can still care for themselves and want to lead active, independent lives. Later in life, they may need more help, leading up to skilled nurs- ing care. Based on that natural trajectory, the initial demand, as the population ages, will be for properties that can accommodate independent seniors.
That’s good news for investors because it isn’t much of a stretch to go from targeting singles and families to targeting seniors. You just need to think about their lifestyle and needs, says Manny Gonzalez with KTGY Group. Gonzalez specializes in building senior communities. Successful properties for independent seniors start with location, according to Gonzalez. Boomers tend to be active, so a property near restaurants, a neighborhood coffeehouse, parks and a grocery store would be desirable. Hiking and mountain biking trails nearby would also be a plus. Even active seniors, though, look ahead to when they may not be able to do as much physically, due to age or injury, so features like a walk-in shower, grab bars into the shower and ramps can be selling points. Also, living spaces should be on one level without steps—even a single step—up or down into a room. Gonzalez adds that Boomers love to entertain, so a large kitchen would be attrac- tive. Other popular features include storage space and pet-friendly amenities. These guidelines apply whether the prop- erty is a single-family residence or a multi- unit complex. With multi-unit complexes, though, seniors also look for a sense of community. Gonzalez recommends hiring a property management company that specializes in senior housing and can help foster that community through activities and social interaction. Historically, there have been few invest- ment opportunities beyond properties for independent seniors, but that is changing, according to Sharga, who sees a growing market in independent living facilities and assisted living facilities. Sharga says these facilities don’t have to be large or complicated to be profitable. You can purchase a single-family residence with multiple bedrooms and bathrooms and con- vert it into senior-friendly accommodations PROPERTIES WITH ASSISTANCE SERVICES
that offer simple housekeeping and meal services for five to 10 residents. Instead of receiving $1,500 per month for one family to live there, for example, you could collect $1,500 per tenant. There would, however, be additional costs for staff, insurance and other operating costs. And there are risks. Sharga points out that the industry is in its infancy, and no one knows for sure yet what the demand will be for this type of property. You also have to have some knowledge of the health care industry and local regulations pertain- ing to senior housing. “It’s less about knowing how to buy and renovate a property than it is about figuring out how to manage,” Sharga says. “This isn’t just collecting and cashing a check.” He suggests partnering on your first deal with another investor who has experience with independent living facilities and assist- ed living facilities and who can direct you to local property management companies that specialize in senior housing. PROPERTIES WITH SKILLED NURSING Your options may be limited when it comes to investing in skilled nursing prop- erties because they require a tremendous amount of cash to purchase and expertise to manage. For the average investor, real estate investment trusts (REITs) specializing in senior housing are usually the best route. But the demand for these properties will likely lag far behind the others. Ac- cording to a report issued by the Admin- istration on Aging, the majority of the nation’s senior population is projected to be relatively young (ages 67 to 74) until around 2034, when all of the Boomers will be over the age of 70.
> Continued to :: PG 96
BY TERESA BITLER Teresa Bitler is a regular freelance contributor to Think Realty Magazine. Contact her at teresa@ teresabitler.com
thinkrealty . com / mag | 13
THE BIG PICTURE
ARE YOU TAKING ADVANTAGE OF THE BENEFITS OF INVESTING IN REAL ESTATE THROUGH YOUR SELF-DIRECTED IRA?
More Choice, More Control
by Tyler Carter
are, bonds and other interest-bearing investments are offering paltry returns. These Boomers feel as though they’re trapped between a rock and a hard place. Should they assume more risk than they’re comfortable with in equities for some chance of a decent return? Or should they flock to the safe haven of interest-bearing investments and watch their principal erode due to inflation? The good news is that there’s a third option. I meet with thousands of real estate investors every year, and it always
amazes them when they learn that they can leverage their knowledge base in real estate to invest in something that excites them. In short, self-directed retirement accounts offer more choices and more control. Self-directed IRAs and 401(k)s allow for almost any type of investment, provided it’s passive and at arm’s length. Whether it’s for real estate—residential, commercial or agricultural—for cash flow or for capital appreciation, this
s April 15 approaches each year, most real estate investors spend
some quality time with their accountants or financial advisers. It can be a bitter- sweet time as they look over their real estate earnings and realize how much of it goes to the Internal Revenue Service. It has always struck me as odd that so many otherwise-savvy real estate in- vestors aren’t taking advantage of every opportunity to invest in real estate on a tax-deferred or tax-free basis. Most of them have an IRA, 401(k) or some other type of retirement plan that’s invested in mutual funds or another stock mar- ket-based investment. While it’s a little-known fact, you have a much broader scope of invest- ment options inside a self-directed IRA or an individual 401(k). If you’re not ex- cited yet, consider the fact that by virtue of being self-employed as an individual real estate investor, you may qualify for a retirement plan that allows you to sock away up to $53,000 on a partially tax-deferred, partially tax-free basis. That sure beats the $5,500 contribution limit for traditional and Roth IRAs. The self-directed retirement industry is growing rapidly. As an increasing number of Baby Boomers approach and enter retirement, they’re not enthused about living on a fixed income and watching their principal balance fluctu- ate with the volatility of the stock mar- ket. Historically, they would move into more conservative fixed-income invest- ments, but with interest rates where they
> Continued to :: PG 16
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strategy is possible with the assistance of an IRA administrator that allows alternative investments. Many real estate investors are more interested in lending money than owning physical property, and I can personally attest to their popularity at local REIA meetings. I have found they’re often easier to deal with than private money lenders. Whether you’re considering using your own IRA to invest in real estate or borrowing from somebody else’s, here are some tips and tricks of the trade you should know. 1 CHOOSE THE RIGHT ADMINISTRATOR An increasing number of companies offer self-directed IRAs. Make sure you spend some time doing your due diligence. Check online reviews and make a few test phone calls to get a feel for how long it takes to get in touch with a person directly. Call with a few questions and see how willing the person on the other end of the phone is to spend the time making sure you feel confi- dent in making a well-informed decision. Also, ask for a few references; quality service and speed of processing vary significantly across the industry. Some companies run a call-center-like environment, while others offer a more personalized experience. 2 BE FAMILIAR WITH THE RULES One of the major differences between a self-directed IRA company and your typical brokerage company (Fidelity, Schwab, Vanguard, etc.) is that self-di- rected IRA companies don’t provide investment advice or guidance. While they should be comfortable explaining what is and what isn’t allowable behav- ior in an IRA, it’s not their job to find or endorse any particular investment offer- ing. Make sure you speak with an IRA expert to ensure your idea follows the rules in Section 4975 of the IRS code.
Since you’re reading this magazine, I’m already confident that you’re inter- ested in real estate as an investment. While there are a number of trainers touting their expertise in seller financ- ing, creative deal structuring or deed- in-lieu investing, self-directed retire- ment accounts are the Swiss Army knife of real estate investing. I encourage you to review your retirement portfolio and then contact an expert to answer any questions about using tax-advantaged accounts to invest into whatever sort of real estate investment appeals to you. •
3 BE PREPARED TO STRIKE WHILE THE IRON’S HOT I field many phone calls every week from real estate investors who are excit- ed to take advantage of the tax-deferred or tax-free growth of an IRA. However, all too often, they’re shopping around for property while their IRA money is still tied up in mutual funds at anoth- er institution. There are times when a property is sold right out from under a prospective self-directed IRA inves- tor because he or she didn’t have an account established with funds available for a good-faith deposit. 4 BECOME AN EXPERT Attend as many educational events related to self-directed IRAs as possi- ble. More than $5 trillion in retirement plans is eligible to be self-directed. When you’ve established yourself as a savvy real estate investor and an IRA expert, people will flock to you with deal flow.
BY TYLER CARTER
Tyler Carter lives in Orlando, Fla., and works for NuView IRA. He has 10 years’ experience in the financial services indus- try, holds Series 7 and 66 licenses and is passionate about alternative investments of all types. Contact him at firstname.lastname@example.org or 407-716-3636.
16 | think realty magazine | mar :: apr 2016
THINK TIME. THINK WEALTH. THINK PURPOSE . With a “guru” and “big opportunity” at every corner, sometimes the noise in real estate is so loud you can’t even think. Wouldn’t it be nice if you could harness all the resources you need in one space? Welcome to ThinkRealty.com, a members-only organization for real estate investors to find all the tools they need to be successful. • Events • Education • Networking • Advocacy & Legal • Tips & Trends • Buying Power
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THE BIG PICTURE
Riches in Niches THIS IS NOT YOUR GRANDFATHER’S ‘ROOMING HOUSE.’
tion and wealth creation by acquiring, at a lower cost, single-family proper- ties and converting them into quality shared-living space. Before you jump to the assumption we are proposing a “rooming house of old” model and turn the page, let us assure you we are not. This effectively turns a traditional sin- gle-family house into a systems-based, scaled-down version of a multifamily dwelling, providing numerous benefits for both investors and occupants. The neighborhoods where we pur- chase such properties often are located in the path of a city’s plan for redevel-
by Kelly Edwards and Chris Edwards
investment will be defined as an all- cash purchase of a single-family house with a total cost landing somewhere between $30,000 and $60,000. This cost includes the investor outlay for acquisi- tion, closing and rehab expenses. This is a C to D Class two-bedroom, one-bath, 1,200-square-foot older home—built between 1900 and 1960. Understand that this range may vary depending upon location and many other factors. We will also presume that the investor is local and will self-manage the property. “the riches are in the niches.” For most business owners, mastering a particular niche can be quite profitable. But it takes a commitment of time and effort. In the New York Times bestseller “Outliers: The Story of Success,” author Malcolm Glad- well cites “the 10,000-hour rule” in posit- ing that the focused and diligent practice of one’s craft will ultimately make one an “expert.” Likewise, we contend (backed by our own experience) that focusing on a niche will increase the likelihood of success as a real estate investor. THE 10,000-HOUR RULE AND NICHE REAL ESTATE INVESTING As the often-repeated adage goes, THE SHARED LIVING REAL ESTATE MODEL One such niche is the Shared Living Model. This is one strategy that our company pursues in seeking diversifica-
s students of real estate invest- ing for the last 13 years, we’ve
seen—and participated in—quite a few strategies related to single-family and multifamily investing. We have learned a great deal along the way, but one timeless lesson remains far superior to any other: buy where the numbers work. Sounds simple enough, right? Sure, until the day you make that first offer. For a traditional buy-and-hold strat- egy, it seems logical to simply acquire the lowest-priced property in the best possible neighborhood and seek the highest rent the market will bear. Prob- lem solved, right? Again, not so fast. Experienced investors understand that, generally speaking, the lowest-priced properties typically do not return the highest rents, for many reasons. So what’s an investor to do? Let’s look at some viable options for building wealth by acquiring, rehabbing and managing the traditional low- cost property, often referred to as “the $30,000 house.” But be forewarned: This requires a wide-open mind and some “out-of-the-house” thinking. Are you ready? Let’s go! THE TRADITIONAL $30,000, BUY-AND-HOLDMODEL Much has been written about the upside as well as the challenges of investing in the prototypical low- cost property. For the purpose of this discussion, let’s set some parameters about our $30,000 property. A low-cost
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tached to the “rooming house” concept and the image of slums that it conjures for many. Unfortunately, even in our area there are some landlords whose property and behavior still fit that stereotype. But our company is seeking to change that. There also is a nice element of goodwill involved in our approach, as our properties provide a safe and clean place for applicants with limited housing options to call home. We often encourage local mentees or investor partners to drive by some of our properties and identify the ones that are part of our Shared Living portfolio. They are pleasantly surprised to see that,
opment and growth, or just ahead of the curve of currently high-appreciating areas. The suppressed prices are indica- tive of the location and condition. As an element of this strategy, such properties are held in our portfolio for an aver- age of three to five years, allowing the local wave of urban renewal to reach the subject areas and provide increased appreciation over a longer term. In so doing, we as local investors are able to purchase lower-priced properties and truly make the numbers work. Conceptually, the strategy is simple. Im- plementation, however, is more involved. We have been able to succeed by ac-
quiring low-priced single-family proper- ties and then using a very systematic and fairly automated process to convert each to a functional, code-compliant, small multifamily unit. That enables us to more than triple the gross rental income and subsequently provide a generous return on our investment capital. While the idea of room rentals may not sound appealing to some at first glance, there is remarkable potential to enhance one’s real estate portfolio.
TURNING THE TIDE To be certain, there is a stigma at-
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other than being situated in a particular neighborhood or area within the city, the character and condition of the houses alone are almost identical to our A and B Class higher-end rentals. Let’s take a closer look at the Shared Living Model and five reasons it is a via- ble investment option for the savvy real estate investor:
had a legitimate business model. Through that exercise, we have streamlined, automated or outsourced the following common tasks (in addi- tion to others) that are typically related to all single-family and multifamily rentals, but more specifically for the Shared Living Model: > All forms of communication (appli- cants, tenants and maintenance) > Documentation (operations manual, policies, checklists, forms, etc.) > Advertising and unit-showing process > Application and approval process > Lease signing > Rent and deposit collection (no rent closets or chasing money) > Move-in coordination > Unit inspection > Move-out coordination 2 SUPERIOR PRO FORMA RESULTS One of the more obvious benefits to the Shared Living Model is the relative- ly superior pro forma when compared
ket and competency. Results may vary, depending upon factors such as property location, owner-manager skill and compe- tency, among others.) TRADITIONAL LOW-COST MODEL In this scenario, assuming the $30,000 purchase price and additional closing and rehab costs, the total (all-cash) acquisition investment is $42,500. This property rents for $600 per month. Related expenses are shown in the chart. Many investors do not account for repair and maintenance (10 percent) expenses, and even more fail to allocate a reserve for capital expenditures. Such planned expenditures will cover the future replacement of a property’s aging components including appliances, roof, etc. In this example, we have allocated a fairly conservative 25 percent, or $150 per month. Based upon this pro forma, the cash flow results in a meager $144 monthly or $1,728 for the year. The cash-on-cash return of 4.1 percent isn’t the investment return one would hope
5 BENEFITS OFASHARED LIVINGAPPROACH
1 REAL ESTATE SYSTEMS AND AUTOMATION
In our experience, the key component of a successful Shared Living Model is a well-defined repeatable system. First, it’s important for investors to recognize that any business—real-estate-related or not—should be treated as a business. Whether a real estate investor owns one unit or 100, developing a system with repeatable processes is a necessity. Second, a system must be implemented to manage the business, or the business will certainly manage the owner! The business of real estate can get out of hand quickly and overwhelm even the most experienced investor. Trust us, we know this firsthand. It’s no secret that, generally speak- ing, lower-cost properties require more attention from the owner or manager. Through years of experience, just as we were able to do with our A/B Class portfolio, we analyzed each phase of the room rental cycle, from advertising and tenant screening to move-out and deposit disposition. The goal was simple. First, address each of the challenges associated with the standard rooming house such as tenant hassles, chasing rent, late-night calls, evictions, etc. Second, build a system that would mitigate as many of the issues as possible. Then, if the system worked, we
CONCEPTUALLY, THE STRATEGY IS SIMPLE. IMPLEMENTATION, HOWEVER, IS MORE INVOLVED.
to a traditional $30,000 buy-and-hold investment. To better understand the differences in cash flow and ROI, let’s analyze a pro forma of a property in our market, Raleigh, N.C., using actual numbers that work. The accompanying chart illustrates how three different strategies affect the numbers. (Note: Pro forma numbers in the chart reflect our current rental portfolio, mar-
to achieve. This scenario serves as an ex- ample of how many new investors can be surprised by the harsh reality and chal- lenges of acquiring $30,000 properties. SELF-MANAGED/SHARED LIVING MODEL The self-managed option is the sweet spot of the Shared Living Model for the fairly experienced investor. We suggest owner-managers have a minimum of
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THE REAL ESTATE RICHES ARE STILL IN THE NICHES – WITH THE RIGHT PROCESSES IN PLACE
How Savvy Investors Can Purchase $30,000 to $60,000 Properties Using A Systematic Approach
*ALL CASH PURCHASE PRICE CLOSING COSTS REHAB COSTS TOTAL
$30,000.00 $2,500.00 $10,000.00 $42,500.00
$30,000.00 $2,500.00 $15,000.00 $47,500.00
$30,000.00 $2,500.00 $15,000.00 $47,500.00
SQUARE FOOTAGE # BEDS (DOORS) # BATHS
1200 2 1
1200 4 1
1200 4 1
$600.00 $60.00 $540.00
$2,080.00 $208.00 $1,872.00
$2,080.00 $208.00 $1,872.00
GROSS RENT LESS VACANCY NET RENT
EXPENSES CAPEX RESERVES TAXES INSURANCE MANAGEMENT UTILITIES REPAIR & MAINTENANCE TOTAL EXPENSES
$520.00 $67.60 $62.40
$520.00 $67.60 $62.40 $0.00
$150.00 $66.00 $60.00 $60.00 $0.00 $60.00 $396.00
$312.00 $228.80 $208.00 $1,398.80
$228.80 $208.00 $1,086.80
MONTHLY NET CASH FLOW YEARLY NET CASH FLOW
CCR% (Cash on Cash Return) Monthly Gross Rent Per Door Yearly Net Cash Flow Per Door
4.1% $300.00 $864.00
19.8% $520.00 $2,355.60
10.1% $520.00 $1,203.60
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enter this market is substantially low- er—and for this reason, we favor buying low and renting high. 4 MINIMAL MARKET COMPETITION Let’s face it, playing in the C/D proper- ty class game is for experienced inves- tors—or it should be, in our opinion. For this reason, it’s safe to say that, on average, less competition exists overall. located, code-compliant, very clean, well-run, Shared Living space. Our longer-term, low-hassle tenant base reflects these conditions and amenities that are certainly unique to this age- old neglected asset class. Further, these residents often have limited options in finding a clean, habitable, safe environ- ment. Strict screening, application and income requirements play directly into the success of our system. It’s worth noting that we do not accept Section 8 vouchers. While Section 8 is a great program, we have decided to leave this alternative to other investors. There’s little debate that acquiring $30,000 properties has its challenges for real estate investors. It’s our belief that whatever strategy one chooses to implement when investing in low-cost opportunities, it should entail a stream- lined and systematic approach to ensure success over the long term. • 5 INCREASED RENTAL DEMAND Our company offers a centrally
forma data makes this fact abundantly clear. So why suggest using a property management company to run one’s shared-living property? Well, to be clear, we suggest this only as a fallback or safety option—for a few reasons. First, this is beneficial for the veteran owner-manager who experiences some form of change in life circumstance. Yes, life happens, and from time to time, we are forced to make drastic changes. Second, if the investor must hand over management of the Shared Liv- ing property or portfolio, it’s important to understand that not all companies may take over the management of such properties. Still, there are plenty that will, due to the functional similar- ities to small multifamily dwellings. Nevertheless, we suggest seeking the services of a firm that specializes in this form of property management. Referring to the chart, a quick glance at the property management fee reflects the only variance between this scenario and the previous self-managed example. However, it’s a fairly substantial variance. Why is the management fee 15 percent ($312) as compared to 10 percent for the traditional model? This reflects the likely increased cost associated with a manage- ment company taking over a room-rental property as described above. Based upon this pro forma, the cash flow for this room rental property—with a property management company in place—is north of $400 per month, or just shy of $5,000 per year. Again, depending upon one’s philosophy toward an adequate CAPEX allocation, the cash flow could be sub- stantially higher. This scenario results in a 10.1 percent cash-on-cash return.
two years of experience managing their own property portfolio before testing the Shared Living waters. Again, the benefits are tremendous, but organization and experience in investment real estate is a must. More detail will be provided to this point in the next example. For now, contrast the traditional low- cost scenario with that of the scenario wherein a local investor purchases the same property for $30,000. The acqui- sition costs are identical, with the exception of an increased allo-
cation of $15,000 for rehab expenses. The additional
rehab costs are due to the conversion of the interior of the prop- erty (most often, the common area space)
into two additional bed- rooms. From experience, we have learned that the cost to “add” two bedrooms is relatively inexpensive. The glaring difference one will notice is a much higher monthly gross rent: $2,080 per month, compared to $600. (No, that’s not a typo!) Notice the gross rent per room is $520. We have found this to be a consistent number for our local Shared Living Model. We typically see an average gross rent per room of $500 to $550 monthly. Based upon this pro forma, the cash flow is quite impressive at almost $800 month- ly and approaching $10,000 annualized. Depending upon one’s philosophy toward an adequate CAPEX allocation, the cash flow could be higher. In this case, we’re very satisfied with a 19.1 percent cash-on-cash return. OUTSOURCED PROPERTY MANAGEMENT / SHARED LIVING MODEL Before we review the pro forma, it’s important to understand that the most successful implementation of the Shared Living Model is by the local owner-manager. The respective pro
BY KELLY EDWARDS AND CHRIS EDWARDS
Kelly and Chris Edwards have been active real estate investors in Raleigh, N.C., since 2002. They are Managing Principals of Edwards Capital Partners, a real estate investment firmwith a focus on Private Capital Trust Deed investments. Contact them by visiting www.EdwardsCapitalPartners.com or www.TheEdwardsCompanies.com.
3 LOWER ACQUISTION COST The point here is obvious. The cost to
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