TM
Three Ways to Wealth with Real Estate FUNDAMENTALS Realty Matters: The Cost of Evictions ENGAGEMENT
Talking Loudly: Dream Deals Lending Knowledge to Unlock More Funds STRATEGY
CLINT COONS DEMYSTIFIES REAL ESTATE TAXES The Tax Whisperer
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thinkrealty . com | 3
CONTENTS
INSIDE THIS ISSUE
THINK REALTY 8 News & Events
Updates from around the industry.
10 Think Realty Supplier: Home Depot Pro Receive discounts through the Think Realty Supplier Program.
INVESTOR STORIES 12 Presidents’ Circle Featured Member: Jason Engelman
ENGAGEMENT 22 Realty Matters: Evictions
The cost of evictions runs deep. by Brian Wojcik
BUSINESS FUNDAMENTALS 26 Embracing Opportunity Without Sacrificing Returns The right “opportunity filter” can revolutionize your investing. by Tom Olson 30 Three Ways to Wealth Building wealth from the foundation of real estate investing. by Michael Jordan 32 In Transition A checklist to transitioning property management. by Scott Glascock 35 Sponsored Content: Investor Review 52 Protection for All What is title insurance and why are you buying it? by Eric Fontanot 57 Master Your Mind How masterminds fill the educational gap in the REI space. by Kelli White
16
COVER FEATURE
THE TAX WHISPERER
56
25
ENGAGEMENT
FUNDAMENTALS
EASY ANSWERS
TEACHING REAL ESTATE
Tips from an attorney to protect yourself — and your investments.
How sharing your knowledge impacts you and others.
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STRATEGY 64 Process Is Your Protection A lender’s perspective on
financing real estate investments. by Romney Navarro
66 Talking Loudly: Dream Deals The lending knowledge you need to unlock more funds for more deals. by Nathan Trunfio 70 Build to Rent Single-family neighborhoods provide new route for real estate investors. by Bruce McNeilage
72 The Proper Real Estate Education Sifting through sources for credible knowledge. by Michael Zuber
DESIGN POINT 76 Design Guide: California Ranch Featured Designer: Michele Van Der Veen
CLINT COONS demystifies real estate taxes.
MARKET & TRENDS 90 Self Improvement
by Bobby Burch
Why growth isn’t always needed for good. by Ingo Winzer
MINDSET 94 Pivot to Passive Income
58
82
Knowing when to veer off course can lead to brighter paths. by Rachelle Boyer
FUNDAMENTALS
MARKETS & TRENDS
SHARPER TIPS
SPOTLIGHT: RALEIGH, NC
97 Too Great Expectations How we trip ourselves, and how we get right back up. by Deborah Razo
Significant opportunities are blooming around the Research Triangle.
How daily huddles can help overcome hurdles.
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PUBLISHER & CEO Eddie Wilson
EDITOR-IN-CHIEF Kelli White
SALES MANAGER Rodney Halford RHalford@ThinkRealty.com 816-398-4111 x86122
FULFILLMENT COORDINATOR Blair Pierce
ART DIRECTOR Emily Bowers
DESIGNER Kyle Goens
CONTRIBUTERS Bobby Burch Brian Wojcik
Clint Coons Tom Olson
Michael Jordan Scott Glascock Eric Fontanot Elizabeth Maora Sickels Gary & Susan Harper Romney Navarro Nathan Trunfio Bruce McNeilage
HEY! LET’S BE FRIENDS! GET SOCIAL. STAY CONNECTED.
Michael Zuber Fred Heigold III Ingo Winzer Rachelle Boyer Deborah Razo
Like, Follow & Share for the Latest Real Estate News, Trends and Insights from Think Realty
COVER PHOTOGRAPHY GoMedia
Are you following Think Realty on social media? Things move pretty fast in real estate. Don’t miss out on the latest trends, tips, insights and news from your trusted resource for all things real estate investing! Follow. Like. Love. Share. Comment. You can do it all with Think Realty’s social media channels. Join the conversations in Think Realty social communities and connect with like-minded members who range from first-time to seasoned investors. Check out all of our social media channels and connect with us - and other investors - today!
SUBSCRIPTIONS :: The annual subscription for Think Realty Magazine is $36.00 in the U.S. Order online at www.ThinkRealty.com or call 816-398-4085. Provide your full name, address and telephone number. DISCLAIMER :: Think Realty Magazine , its owners, contractors, distributors and their respective representatives do not provide tax, accounting, investment or legal advice and make no guarantee as to the effectiveness or success of any investment or tax strategies discussed herein. Please consult your own independent adviser as to any questions you have or decision you are contemplating. ABOUT THIS MAGAZINE :: ThinkRealtyMagazine isapublication ofAffinityRealEstateMediaLLC.Reproductionoruseofanyeditorial orgraphic,withoutpermission, isprohibited.Wearenotresponsible for thecontentofanypaidadvertisements.Forreprintrights; toob- tainadetailedstatementofourprivacypolicy;and forallsingle-copy requests,addresschangesandothersubscription inquiries:
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Think Realty 12200 N. Ambassador Dr. Suite 301 (Office A) Kansas City, Missouri 64163 816-398-4130 ThinkRealty.com Copyright ©2020 Think Realty
6 | think realty magazine :: april 2020
FROM THE EDI TOR- IN-CHI EF
The More You Know...
I
might be one of the few who really enjoyed
The Think Realty team is preparing for our 2020 conferences, striving to bring the best in REI education to investors of all levels, and one of the facets I like best about this
school as a kid . . . well, most of the time! Remember the feeling of amazement when hearing
about something for the first time? Like when the teacher explained that the Earth rotates even though we can’t feel it moving? Mind boggling.
job is getting to witness eager investors learn from the wealth of information at their fingertips.
The knowledgeable speakers at Think Realty events and many of your experienced peers in the industry thrive on sharing what they know, inspiring others to achieve their own version of success. It’s education in action — and it’s exciting! I look forward to speaking with many of you this year at our Baltimore and Atlanta events. It's not too late to sign up to get in on the education action! I hope you enjoy this issue of Think Realty Magazine as it’s all about Real Estate Advocacy and Education. Because, as Dr. Seuss wrote, “The more that you read, the more things you will know. The more that you learn, the more places you'll go.” •
Or connecting the dots from one subject to another and having an ah-ha moment? Like when realizing the math equation that you memorized in algebra actually helped you later in chemistry class? Ok, that example wasn’t that much fun (or true!) for me, but you get the idea. As adults, we tend to seek education when we’re passionate about a topic or when embarking on a new journey. Think Realty is all about offering education and trusted resources for real estate investors, so you might have experienced similar ah-ha learning moments at one of our conferences, or even while reading this magazine.
Keep Going!
KELLI WHITE, EDITOR-IN-CHIEF
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THINK REALTY
Think Realty's Core Focus is to be the trusted source in the Real Estate Investment Industry by providing products and services focused on serving the Real Estate Investor.
NEWS & EVENTS
T hink Realty and AAPL are advocates for YOU! This year, members of Think Realty and the American Association of Private Lenders (AAPL) will return to Washington, D.C. where they will meet with legislators on key issues affecting the real estate investing industry. "Throughout our advocacy efforts, we’ve found that our largest hurdle is that legislators do not see private lenders and real estate investors as business owners who support communities and strive to alleviate the affordable housing issue that plagues this nation. Day on the Hill is our chance to tell the real story of what we do and why we matter," Linda Hyde, Managing Director of AAPL and Think Realty said. This initiative started in 2019 when the two organizations each launched a meaningful dialogue with legislators, informing them on the real estate investment industry, how it functions, and how investors can help solve issues in affordable housing, and more. Top issues to be discussed this year will be taxation, mortgage licensing, and opportunity zones. Day on the Hill
Conversations like these can lead to reform, which could benefit not only real estate investors and private lenders, but also communities nationwide. The Day on the Hill initiative is a positive step to improving inhabitability and home values across the U.S. •
Titan Talk Video Series
- Personal Endorsement by Eddie Wilson - 20 min interview by Eddie on location: 1 on 1 with CEO - B roll footage shot of client’s office to be used in video - Feature article in both Think Realty Magazine and Private Lender Magazine -Article in Think Realty Newsletter -Titan Talk Web page section dedicated to client for 12 months- Includes video, client profile, feature article and any other articles by client
- Posted on Eddie Wilson’s personal social media pages and website -Posted on Think Realty Podcast -Presidents’ Circle Membership for 1 year -Social media post- Min 1x per month for 12 months on TR and AAPL pages -Line previewing article on cover of both magazines.
INVESTMENT: $15,000 current Presidents’ Club member $20,000 non-member
RESOURCES FORSAVVYREALESTATE INVESTORS
8 | think realty magazine :: april 2020
E ach year, Think Realty honors leaders in the industry who exemplify the best in real estate investing. Not only have the winners achieved great success in their own right, but they also demonstrate Think Realty’s mission of being trusted resources within the real estate investing industry. Know someone who fits this description? Nominate them today! Nominations are open for the 2020 Think Realty Honors through May 31. Think RealtyHonors Nominations Open! Go to thinkrealty.com/honors now and enter your picks! Winners will be announced at the Think Realty Conference & Expo held in Atlanta this September.
Nearly 500 real estate entrepreneurs attended the Think Realty event in Baltimore in 2019.
Think RealtyEvents
F or once in the world of real estate, it’s not about location! Held twice per year — this year in Baltimore and Atlanta — Think Realty events are conference- and expo-style learning experiences designed for real estate investors of all levels. Knowledgeable speakers at the
top of their fields and more than 40 vendors share their expertise and help investors with the education, services, and products necessary to help build their real estate businesses. Stay tuned for announcements on the 2021 event locations coming later this year! •
To learn more about upcoming Think Realty events and to buy tickets, visit ThinkRealty.com/TR-Events.
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THINK REALTY
HOME DEPOT PRO
Empowering Real Estate Professionals SUPPLIER BENEFITS ENHANCE YOUR REAL ESTATE INVESTMENTS
Content provided by Home Depot Pro
H
ow can Home Depot Pro help people in the real estate
beyond their retail aisles opened the door to even more benefits for professional contractors and service technicians. From special contractor pricing and same-day shipping to job site delivery in-store pickup and special orders, Home Depot Pro provides the products and services that professional contractors, technicians, and real estate investors need to maintain and grow their businesses. To maximize customers’ spending power, the company offers a business line of credit for qualified contractors. For extra convenience, they link The Home Depot® ProPurchase card to this credit line. The ProPurchase card allows customers to use their business line of credit for in-store shopping. It also makes tracking these purchases easy and provides one account billing and payment on a consolidated invoice, which is unprecedented in the maintenance and supply industry.
Home Depot Pro also offers business solutions that maximize potential profit for you. Innovative Inventory Management programs address the daily challenges that you might face by managing product inventory in multiple locations, providing visibility to inventory in a cost-effective way. Home Depot Pro representatives work closely with you and your team to customize programs that best fit your needs and business model. • Think Realty members can take advantage of these benefits and more through the Think Realty Supplier Program. Think Realty partners with companies like Home Depot Pro to bring discounts to Think Realty members. Learn more about savings available to Think Realty members at ThinkRealty.com/supplier-discounts.
investing industry? This Think Realty Supplier can help you achieve more savings (equating to higher profit) on your real estate investments. Home Depot Pro, formerly Barnett, has been empowering professionals since1958. Professional contractors and tradespeople have known The Home Depot Pro™ as an exceptional distributor of pro-grade plumbing, HVAC, and electrical products, as well as a consultant on changing trends and industry regulations. Their national team of dedicated and knowledgeable Specialty Trades Sales Professionals focuses on wholesale relationships providing reliable, knowledgeable customer service and innovative business solutions to customers like you — flippers and real estate investors — who renovate properties and who have a team of contractors and subcontractors working on their investment properties. The strength
10 | think realty magazine :: april 2020
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INVESTOR STORIES
PRESIDENTS' CIRCLE
Featured Member: Jason Engelman CREATING OPPORTUNITIES TO PAY FOR HIS DREAMS AND FULFILL HIS PURPOSE
by Kelli White
a turnkey rental provider with a solid rental portfolio as well. But long before his budding real estate career, Engelman got his entrepreneurial start by delivering donuts with his mom. “When I was seven years old, my mom made a deal with a local donut shop to purchase boxes of a dozen donuts for $2.00 each. We picked up the donuts at 6 a.m. every Saturday and she drove me around to all the mechanic shops, carwashes, and dealerships and I sold them a box of donuts for $4.00. My mom and I split the profit. Within a year, we built up our donut route to 80 boxes every Saturday. We did this until I was 12 years old. I learned so much about sales and building a business. It created a hunger in me at an early age to be an entrepreneur,” he said. Dreams and purpose are the daily driving forces for Engelman, and for him, both are achieved by helping others. “Two truths I learned
for beginners in the real estate industry? Three simple steps, he said:
A FEW FAVORITES
1. FIND YOUR NICHE There are so many ways to make money and create freedom in real estate. Figure out your goals and pick the niche that will help you accomplish them. 2. BUILD YOUR TEAM It is much easier to achieve your goals with a team you can trust and can grow with. Find attorney. They will help you learn the business and help you be successful. The key is finding the right people for those roles. You will notice I stressed the word GREAT. If you put the wrong people in those roles you will lose money. Your contractor is the most important role in my opinion. 3. KNOW YOUR NUMBERS I cannot stress this enough. You have to buy right. You make your money when you buy. Understanding realistic rehab budgets and ARVs will help you determine what your purchase price is. A quality contractor and a GREAT Realtor ® , a GREAT contractor, a GREAT property manager and a GREAT closing
Places you’ve traveled: Paris, France and Turks and Caicos TV Show: Magnum PI with Tom Selleck
Movie: It's a Wonderful Life
Book(s): The Bible
The Triumph of The American Imagination by Neal Gabler.
Sports Team: Ohio State Buckeyes!
at an early age is that dreams are expensive and
W
hen Think Realty Presidents’ Circle member Jason
most of the time others won’t pay for them. I had to figure out a way to create my own opportunities to pay for them. Most of
Engelman and his wife Tori Martin moved to Nashville in 2017, it wasn’t for his real estate career. It was for Martin’s country music career. While Martin’s music artist career was taking off, Engelman found himself wanting something different from managing investment portfolios in the energy and oil sector. His curiosity led him to apply for an acquisition manager position with a real estate wholesale company. Now, only a few years later, he is all in when in comes to real estate investing and helping others along his journey. Engelman founded Freaky Fast Home Buyers and Investments and Right Fit Property Management,
Realtor ® will help you with this. Like my mentor said, “The stars may lie but numbers never do.”
Engelman’s quantifiable goals for 2020 include expanding to three different markets and to purchase 300 properties. But that’s just business. “Personally, I want to see five new countries with Tori, and I want to see her single this year hit number one on the charts!” •
our dreams stem from our purpose. Real estate is not my purpose. It's a tool to help me fulfill my purpose of helping others and making a difference in their lives,” he said. What advice does Engelman have
thinkrealty . com | 13
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thinkrealty . com | 15
COVER STORY
ANDERSON BUSINESS ADVISORS THETAX WHISPERER Clint Coons Demystifies Real Estate Taxes
BY BOBBY BURCH
D
eath, taxes, and stress. A triad seemingly inevitable for any American taxpayer. Roughly 52 percent of American adults report
for clients. Often, investors are stressed for fear of overpaying in taxes or not reaping the return they deserve, Coons said. That’s why Coons and his team take a methodical approach to caring for their clients — not one that frantically searches for solutions at the last minute. “Most people get stressed out because they hear about ways to save taxes, but they do not know how to do it themselves and their CPA is not very helpful in analyzing their situation to find deductions,” he said. “To help relieve our clients of this stress, we tell them we need to take a proactive approach and begin planning at the start of the year, not 60 days before their taxes are due.” Founded in 1993, Anderson Business Advisors is a business planning and consulting firm that focuses on asset protection for real estate investors and other enterprises. With offices in Las Vegas and Tacoma, Washington, Anderson has realized steady growth over the years thanks not only to dedicated service but also its leadership’s diverse experience. While he now leads a team of more than 200 employees, Coons’ first foray into real estate was working as a framer. The hot, hard job taught him what he values in work and it ultimately led him to realize his professional goals.
that they find the process of filing taxes to be a stress- inducing mess, according to a survey by TaxSlayer. The Internal Revenue Service now has more than 800 unique filing forms. Its Tax Code language and statutes have nearly sextupled in verbiage between 1955 and 2017 — from 609,000 words to 2.4 million words, according to the U.S. Tax Foundation. What’s more, about 169 million American taxpayers and businesses spent 8.1 billion hours and almost $200 billion on their tax preparations in 2017, according to a study by the policy think tank American Action Forum. For real estate investors, the task of tax preparation may seem even more daunting. When owning a handful of properties, operating several businesses, earning income from various states, and navigating ever-shifting regulations, taxes for investors can quickly get complex. But for Clint Coons, founding partner with Anderson Business Advisors, therein lies one of his greatest joys— helping people navigate and succeed in the convoluted world of business planning and tax strategy. An attorney and author of Asset Protection for Real Estate Investors , Coons said he enjoys distilling complicated law and tax structures into simple terms
16 | think realty magazine :: april 2020
MANY PEOPLE OVERPAY BECAUSE THEYARE NOT KNOWLEDGEABLE ENOUGH TO KNOW WHAT STEPS THEY CAN TAKE TO REDUCE THEIR BURDEN”
CLINT COONS FOUNDING PARTNER, ANDERSON BUSINESS ADVISORS
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CLINT COONS CLEARS UP INVESTMENT MISCONCEPTIONS
Through nearly 30 years of business, Clint Coons has seen real estate investors employ a variety of strategies based on fallacies, misinterpretations, and just plain bad advice. Here are three such misconceptions that Coons most frequently sees in his work:
Your insurance will protect you from lawsuits While you should absolutely get insurance for all your properties, Coons said that insurance alone will not entirely protect your assets. Insurance will not protect investors from most lawsuits regarding the buying and selling of real estate. In fact, insurance won’t protect your assets any time you enter into a new contract, sell some property, or lease a property to a tenant. Furthermore, all insurance policies have an array of exclusions that allow insurance companies to mitigate losses on claims. “Most real estate investors don’t realize where most lawsuits are going to come from, and they don’t fall under your insurance policy,” Coons said. Make sure that you read your insurance policies’ exclusions and buy the right plan, ensure that your contracts are drafted to protect your business, and that you have set up the proper business entity. Often, your business entity can protect assets better than your insurance policy. Where you live Many investors may be attracted to incorporate in Nevada, Delaware, or Wyoming because of their low or no state income taxes. But when tax time comes, it doesn’t matter where the business is incorporated. The IRS cares about where the business owner operates it. Those operating a business in Florida will still need to pay state taxes on income they’ve earned as a resident of the state — even if their business is incorporated in Delaware, Wyoming, or Nevada. Typically, it’s best for a small business owner or investor to incorporate in the state in which she lives. Learn on the fly Invest in your real estate education and take it seriously, Coons said. Not only can you limit potentially costly mistakes but you can significantly maximize your time and dividends if you take the time to learn and implement lessons from veterans in real estate investing “Get educated — that’s the most important thing,” Coons said. “You’ve got to be educated from people who are actually doing what you want to do.” Investors can learn from a plethora of free and inexpensive resources. Ranging from real estate investing for college students and structure advice to accelerated depreciation approaches and wholesaling strategies, the Anderson Business Advisors channel is but one of many examples of valuable free resources through which you can improve your investing chops.
18 | think realty magazine :: april 2020
“You’re on the job site at 7 a.m., you’re doing your roll out for the day on what you need to do with the house, and then you’ll typically work until 4 p.m. and then go drink beer for a couple hours,” he said. “You work really hard, you’re out in the sun and it’s fun — no doubt about it. And when you get done building something, you look back on it and go ‘Yeah I put that together. I did a great job.” The satisfaction of physically constructing something instilled into Coons a desire to build for others at a larger scale. He graduated from the Seattle University School of Law in 1997 and determined that he would enter the world of estate and business planning as well as asset protection and tax law. “I started creating systems to help people set these things up and show them the benefits that can come by having a good plan,” Coons said. “Within two years out of law school, I joined with my partner and we took the company from 50 employees to now over 200 employees in four states.” With Anderson Business Advisors, Coons’ primary goal is to help clients preserve their income, protect their assets and prosper through meticulously planned strategies. Many of the same strategies are, in fact, what Coons uses himself to manage his portfolio of more than 110 properties around the United States. Coons’ breadth of experience in real estate investing — both the successes and failures — is what sets apart Anderson Business Advisors’ approach from other business planners or CPAs. It entails a nuanced view to enable success for clients and many other firms lack the insights necessary, he said. “There are mistakes that get made over and over again by new real estate investors because they receive advice from people who are not investors themselves and they think that that's just the way it goes. They think it’s this one-size-fits-all approach,” Coons said. “I work with people every year who worked with their local attorney or CPA that created an LLC and then they’re struggling to try and sell a property because the buyers’ lenders don't like the way the structure was set up and it doesn't have certain attributes that they're looking for. And you know what? It’s because they got advice from someone who doesn't understand their business.” The complicated details of business planning, asset protection, and tax preparation is part of the reason why Anderson Business Advisors invests so much time and resources into educating its clients. In addition to writing a book to help others protect their assets, Coons travels around the country offering multi-day workshops
to real estate investors who prefer a more personal learning experience. Coons and his business partner, Toby Mathis, have also created and published more than 250 free videos on YouTube that inform prospective clients and help investors succeed. The YouTube channel has more than 22,000 subscribers and its videos collectively have nearly 1 million views. “I really like going into the studio and cutting videos. It's just all been organic, and I've been approached by several people on how they want me to monetize my channel. As my grandfather would say, ‘You’re giving away too much,’” Coons said. “I want to give this away because being fully transparent is bringing in really good clients.” As Tax Day approaches, Coons recommends that readers and investors check out Anderson Business Advisors’ YouTube channel for more strategies to protect their wealth. Furthermore, he added that people should start thinking about how they’re preparing for 2021 and beyond. “Get educated. Compliance with the tax code is enforced through fear,” he said. “Many people overpay because they are not knowledgeable enough to know what steps they can take to reduce their burden and thus are afraid of what might happen if they step outside of their comfort zone.” •
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3 TAX TIPS from Clint Coons
When you’ve helped thousands of clients prepare successful tax strategies, you’re likely to have a trove of insight to share. Such is the case for Clint Coons, a founding partner at Anderson Business Advisors. As Tax Day looms, Think Realty caught up with Coons to learn some of his broader tax advice for real estate investors. It’s important to note that every person’s and business’s situation is different and that you consult with a certified public accountant before filing your taxes. 1. MAINTAIN DETAILED RECORDSAND STAYORGANIZED One pitfall that Coons sees often is investors’ lack of detailed bookkeeping. Don’t make your life a nightmare when April 15th rolls around. Ensure that you keep records of cashflow, expenses, profit and losses, and other key performance indicators. “Keep good books and records — that’s number one,” Coons said. “I see that as a problem for a lot of real estate investors. Keeping strong books and records is key to making planning and return prep go much smoother.” Keeping that vital information, however, isn’t enough. Real estate investors must also be well organized and should have a process for how to receive and maintain their data to make tax filing easier and to maximize their returns. Let’s look at deductions for expenses and how to track them, for example. Home offices are common for real estate investors. There are two important conditions to consider before tapping this deduction. The Internal Revenue Service states you “must regularly use part of your home exclusively for conducting business. For example, if you use an extra room to run your business, you can take a home office deduction for that extra room.” Also, investors must show that “you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction.” WORKING AT HOME
MILEAGE Your mileage can rack up when you’re driving between your properties. Starting on Jan. 1, 2020, the IRS allows citizens to write off 57.5 cents per mile driven for business use. There are a variety of mobile apps investors can use to make this tracking task easier, including Everlance, MileIQ, Hurdlr, and many others. Investors can also write off interest that accrues on loans. Investors should be able to deduct home mortgage interest, points, and mortgage insurance premiums. Recent regulatory changes have set the limit of deductions of up to $750,000 in mortgage debt. DEPRECIATION The IRS allows taxpayers to claim residential properties will depreciate over 27.5 years, meaning that at the end of each year, the value of improvements — also known as capital expenses for renovations — divided by 27.5 can be deducted from taxable income for 27.5 years. In other words, you can reduce income taxes because of your properties’ depreciation. INTEREST
2. COST SEGREGATION Coons said, “While it depends on the type of investor, folks should consider a cost segregation strategy.” This
20 | think realty magazine :: april 2020
seemingly little-known tax-planning strategy can enable real estate investors to not only realize cashflow more quickly but also simultaneously reduce tax liability. Commercial or residential properties often depreciate over 39 years or 27.5 years, while personal property or land improvements typically depreciate over 5 to 15 years. The tax strategy reclassifies parts of a building to personal property or land improvements, thereby allowing them to depreciate within a shorter time period than the building as a whole. As Coons mentioned, however, cost segregation is not for every type of investor. Cost segregation studies can be quite expensive, and investors may not reap the cost in tax savings via depreciation or even through the property’s sale. Consult with an attorney or CPA to see if cost segregation is a good idea for you.
For example, if you’re a fix-and-flip investor buying and selling properties in your home state, Coons recommends this scenario: You, the investor, have set up a C-Corporation in the state in which you reside, and you plan to buy and sell property through that entity. To have more asset protection for your growing brand, flippers should consider setting up Limited Liability Companies that are owned 100 percent by the C-Corp. Then, rather than purchasing properties through the C-Corp, use one of your LLCs to purchase and sell the property. After the property sells, dissolve the LLC to limit the potential harm to your broader organization. A C-Corp can establish and dissolve as many LLCs as it’d like, thereby allowing an investor to protect assets throughout their organization, he added. “The reason is I don't want to be in the middle of a flip three years from now and somebody comes back and sues me for something that occurred three years earlier because it could seriously disrupt my business,” Coons said. “By dissolving the limited liability company, you're making it go away because people would say ‘Well, he's out of business. That LLC is no longer working.’”
3. SETUPTHE RIGHT BUSINESS STRUCTURE
Once again, every investor’s situation is different. But regardless of your real estate investing goals or strategy, Coons said it’s important to have the right structure for your business.
You can learn more about Coons’ recommendations and strategies on the Anderson Business Advisors YouTube channel.
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ENGAGEMENT
REALTY MATTERS
Realty Matters: Evictions THE COST OF EVICTIONS RUNS DEEP, BEYOND THE OWNER’S BANK STATEMENT
by Brian Wojcik
R
ental housing providers have all experienced (or will eventually) the unfortunate predicament of having to evict a renter. Those unfortunate events are complex and costly, with $48 billion in losses filed annually by independent investor housing providers according to IRS data. While it ultimately comes down to a business decision done typically after months of notices, cajoling and bargaining, the cliché of the rich greedy property owner heartlessly kicking a family to the curb pervades the minds of the public. In reality, the “evil rich landlord that victimizes the poor tenant” meme is deceptive, yet it remains the majority public opinion nationally and it continues to gain strength. As well-intentioned as 90 years of recycled and rebranded housing policy may be, the very government housing assistance programs designed to provide safe, low-cost rental housing can, in fact, create a cycle of poverty for the renter and financial failure for the property owner. These are problems very personal and familiar to me. As a child, my life was unstable due to extreme poverty, which included eviction and
and behaviors of poverty, cannot be imagined or fully understood unless one experiences it.
POVERTYAND CAUSES OFHOUSING-COST BURDENSARE SYSTEMIC The very rules designed to make rental housing safe and affordable for low-income families are disincentives to housing providers. The more red tape, the harder it is to put a new property on the market as a low-cost option for those in poverty. More than 10 million individual investors provide 79 percent of all rentals (Figure 1) with rent priced closest to the need of cost-burdened renters (Figure 2). These market-rate units are non-subsidized purchases in the market and higher quality than government housing; all totaled, structures with fewer than 10 rental units have the lowest-income residents. (2013 American Housing Survey). Suggestions that the government is necessary to provide
multiple moves to avoid eviction. Consequences of poverty led to squalor,
hunger, poor health, lack of education, an addicted father, divorce, abandonment, and a single-parent household. Less visible is the emotional trauma, a sustained 24/7 mental state of destitution wreaks self-perpetuating havoc. Those problems of poverty are complex and not easy to solve. Poverty,
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taken a seminar or had a mentor to educate you about what you didn’t know. Independent investor housing providers, as a collective, have a critical role in helping others learn what they don’t know. You also have the opportunity to be an advocate for your renters. The impact may be counterintuitive; it will shift the dialogue so you, the housing provider, are not
the villain. The real problem is the system of regulations and requirements with which housing providers need to comply, complicating the availability of assistance and keeping those they’re intended to help trapped in their circumstance. The real villain is the system at-large. It bullies renters with income-limit programs that prevent self-betterment. It bullies housing providers by passing laws that empower unelected appointees to force unfair rules and policies that add red tape and jeopardize financial freedom. The momentum of over-regulation is gaining strength in the absence of an organized collective response by independent investors. The need is now greater than ever to join the national conversation and reframe public opinion. Your story is necessary to change that momentum with new solutions to systemic problems. Individual investors hold a substantial amount of unrealized influence in the marketplace nationwide. You control the majority of low-cost rental housing, nearly 17 million properties with a total-unit count of 22.7 million across the United States. And each of you have your own stories of helping renters. Those stories deserve their own forum. Without them, inertia will predictably continue to gain strength through public opinion, creating a wedge between housing providers and renters. As someone who’s worn many hats — housing provider, renter, and impoverished taxpayer — I’ve experienced hardship and struggle wearing each. I’ve advocated to elevate the industry at the state and local level. Our stories can withstand scrutiny and offer unique insights for new solutions on housing and poverty. Systemic change needs national support. That begins with small steps toward a big vision to capture the HARNESSING THE POWER OF INDIVIDUAL INVESTORS
low-cost housing because the free market is incapable has been a long-time held belief that is patently false. Some quick stats on government Low-Income Housing Tax Credit Projects (LIHTC) housing:
• Per-unit costs ranged between $126,000 to $326,000.
• 50,000 low-income units were added annually between 2011-2015 (GAO-02-76). • 70+ percent of units to low-income households also require additional subsidy from the Housing Choice Voucher program to be affordable. • 95 percent of the tax credits go to corporations and not individual investors.
The Cliff Notes version: Two taxpayer-funded subsidies combined are necessary to provide one unit of low-income housing at more than double market rate cost.
INDEPENDENT INVESTOR HOUSING PROVIDERSASADVOCATES
As majority and primary suppliers for low-cost housing, independent investors can elevate the industry and add much-needed supply for low-cost affordable housing. The strength of your collective voice will serve as a catalyst to transform systemic causes of poverty and housing-cost burdens. Advocating for self, for renters, and for common sense supply-side policy for small-unit properties will propel change that is needed to improve the marketplace and provide added supply of low-cost rental units. The key to effective advocacy involves education and action. When you first became a property investor, you undoubtedly did a lot of research and learning. You scrutinized the marketplace to make sure you were competitive with other offerings. You may have even
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Please go to FAIRH.org and complete a five-minute survey to help identify the top problems you face as an independent real estate investor and housing provider. You’ll shape our mission to serve the industry and you can learn more about our long-term goals. Add your name to be among the millions of independent rental housing providers across the nation working to improve the industry, our services, and our communities.
Go to FAIRH.org to join the cause, provide input, and learn more!
heart and spirit of national influencers. Transform and disrupt the cycle of poverty and housing-cost burdens through entrepreneurialism and thought innovation. That starts with home — with the center, with the heart. When I’ve led efforts to defeat bad state legislation, taking a stand to elevate all parties was a demonstrably successful tactic in defeating those policy initiatives. Using the same perspective, we can be as successful nationally, which can also influence state policy. The federal grant system can influence state and local policy execution; it will require federal law to change the system. This is the reason for the creation of the Federated Association to Innovate Rental Housing (FAIR Housing): to advocate for not only independent investors, but for the renters and the housing industry we serve — for the betterment of ALL. As a nonprofit, FAIR Housing gains access to legislators that we would otherwise find unattainable, so we can share your story. Imagine facing more than 10 million housing providers who also advocate for their renters: the sound of a single voice with the influence and potential energy to broker political power at federal, state, and local levels. It has the entrepreneurial desire and capacity to add substantial supply of low-cost affordable housing at scale and the power to rebuild neighborhoods. In this vision, housing providers are undeniably viewed as a contribution to community, culture, and revival. Your story can be a legacy that elevates everyone. •
BrianWojcik is a housing industry advocate who transitioned into real estate, both as an investor and property manager, after more than two decades of experience in engineering, sales, executive management, and operational/business process reengineering consulting. He resides in Howard County, MD, where he volunteers to
teach a “Tenant Success” program he created for Bridges to Housing Stability, and where he created Landlord411 to assist rental housing providers. His expertise of the independently owned rental-housingmarket has been sought after for local and state level legislation/policy development. Mr. Wojcik has been published in national publications about legislative issues, affordable housingmatters, and rental housing advocacy. He holds a Bachelor of Science degree in Manufacturing Management fromClarkson University and a Master of Science degree in Real Estate fromThe Johns Hopkins University. He is founder of diyRealty.co.
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ENGAGEMENT
BUSINESS TIPS
EasyAnswers TIPS FROM AN ATTORNEY TO PROTECT YOURSELF — AND YOUR INVESTMENTS
When it comes to your real estate investing business, asking questions is part of the job, especially during tax season. Think Realty Resident Expert, financial advisor, and attorney Clint Coons offers his advice to questions he hears from clients every day.
Q: I was told to use a disregarded LLC to hold a commercial property I am thinking of purchasing. Do you agree?
A: Yes and no. You will want to hold the title to your commercial property in an LLC, but I would not set it up as a disregarded entity. This is a common mistake made by real estate investors who do not understand how lenders look at entities. Let’s assume you stabilize this property and the value doubles. You decide it’s time to cash in and you look to sell. If your entity is set up as a disregarded LLC, then it is not filing a tax return. This may be great from an annual cost standpoint (you save $1,000 each year), but it can be devastating when you are looking to cash in. The buyer’s lender needs to verify the property’s income and expenses. When the LLC does not file a tax return, it is difficult for the underwriter and poses risk. It’s far better to set up your LLC to be taxed as a partnership or S-Corporation so you file a return each year. When you are ready to sell, the return will make your exit that much easier.
Have a legal question that might affect your REI? Send questions to Think Realty’s editor at kwhite@thinkrealty.com.
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BUSINESS FUNDAMENTALS
OPPORTUNITIES
Embracing Opportunity Without Sacrificing Returns
THE RIGHT “OPPORTUNITY FILTER” CAN REVOLUTIONIZE YOUR INVESTING
by Tom Olson
I
n today’s world of always trying to make “the next big impact” in community, business, or life, real estate investors often end up overlooking the big picture of their investment strategies. They abandon one strategy for another and pride themselves on ruthlessly cutting deals. The constant need to shift, change, and ostentatiously grow is hurting the real estate investing industry and diminishing growth patterns. To make the most of the right opportunities, you must filter them not just by immediate profit but also by the long-term ripple impact on your business, your life, and your goals. When you apply the right opportunity filter to your real estate business and investments, everything will begin to flourish. An opportunity filter does not ask you to set aside the importance of generating returns or making big profits. After all, most real estate investors got into the industry because they wanted to make money! However, not every investor has the same plans for that money. Some want big houses and fancy cars. Some want more time spent with family and friends or on hobbies or passion projects. Others want to give most or all of that money
away entirely. Every investor is different, which is why each investor needs a different opportunity filter. Opportunity filters help investors evaluate how new opportunities fit into their current goals and investing methodologies. If the opportunity fits the filter, then they continue to explore it. If it does not, they let the opportunity pass. In this manner, they are able to conserve their time, attention, and energy for the opportunities that are most likely to fit their personal and professional needs and goals. Every real estate-related opportunity filter has things in common:
1.
It assumes the investor wants/needs to generate income.
2.
It factors in an investor’s time, talents (resources), and treasure (operating budget or investment capital) into the equation.
3.
It sets priorities for different aspects of personal and professional life.
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Despite these commonalities, the opportunity filter is a highly customized tool. Ask yourself these questions about a potential opportunity: • Does this make more money? • Do I need more money? • Does it have a good/better return on time than something else I am doing? • Does it come with recurring revenue? • Does it keep legal risks and liabilities contained to a degree with which I am comfortable? • Is it scalable? • Will it be enjoyable in some capacity? • Is there adequate supply/demand in the marketplace? The opportunity filter is designed to help you make decisions about opportunities both in light of the potential they represent and the sacrifices they will necessitate. Here is an example of how this might work: You currently do about 50 single-family residential (SFR) deals every year and sell those properties as cash-flowing, turnkey rentals to passive investors. Your company manages these rentals in most cases and also handles acquisition, renovation, and tenant placement. An investment firm approaches you about partnering on a deal to fix and flip 60 properties over the next 12 months. The projected ROI is huge. You get excited about finally being involved in a big fix-and-flip project, but before you agree, you take 24 hours to apply your opportunity filter. Here is what you discover: Does this make more money? “It might, but projecting ROI on fix-and-flips a year away in some cases is risky.” Do I need more money? “Of course! But I was planning to scale my SFR business. I would have to put that on hold.” Does it have a good/better return on time than something else I am doing? “The return is definitely higher, but I am not sure it is a reliable projection.” Does it come with recurring revenue? “No. Once these properties are sold to retail buyers, the deal is done.”
Does it keep legal risks and liabilities contained to a degree with which I am comfortable? “No. I once got sued over a fix-and-flip and I had to settle just to get back to work. It was awful, and I never want to experience that again.” Is it scalable? “Maybe. It depends on what the economy looks like in 12 months.” Will it be enjoyable in some capacity? “Yes. I have been wanting to get more involved in the renovation/design angle of the business.” Is there adequate supply/demand in the marketplace? “I’m not sure. There is right now, but I’m afraid the economy will tank and I’ll be stuck with a bunch of over- improved rentals.” When you apply your opportunity filter to this opportunity, it becomes clear that it might not be quite as good for your business as you initially thought. When you encounter a new opportunity, the best option is to embrace it with caution. This means honestly evaluate the opportunity. The resulting growth in both your personal and professional lives will reward and surprise you. •
TomOlson is the founder and president of The Olson Group and the Good Success Mastermind. Learn more fromTom at GoodSuccess.com or reach him directly at tolson@goodsuccess.com.
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