Monthly Archives: November 2016
I’ve been hanging out in St. Barth’s and I decided every Monday I’m going to do a show on GrantCardoneTV where I show you real estate deals I’ve bought and why I bought them. This is better than doing any book. It’s going to give you the tools you need to know why you should buy a property and how to buy. You need to know the real estate game because it’s a great way to build passive income and secure wealth.
There is risk in any investment. The only way to reduce your risk is to know what you’re doing. I have a magic touch when it comes to real estate deals, no doubt about it. I’m going to continue to expand my real estate portfolio and as I do, I’m going to be sharing the things I do and even the mistakes I make.
I’ll share with you a deal I’m going over right now. It’s a $20,175,000 price but I will round it off to $20 million to keep things simple. I need to put 25 percent down to get my best debt. I put $5 million down and get $15 million in debt. This is a 75 percent loan devalue. The beauty about real estate is that I can buy a $20 million property for only $5 million.
Of course, I’m speaking in generalities here, I haven’t always put 25 percent down. The last deal I bought was in Boca Raton for $12 million. Usually, I would put $3 million down, but that deal already had debt in it and the expenses could not be paid off so that deal needed $6 million down. It was still a good deal for me for other reasons.
I’ve been doing the real estate thing for a long time. I looked at properties every weekend for five years before getting into the game. My first deal was in San Diego in 1995 for 38 units. My second deal was a month later for 48 units, and my third deal three months later was 92 units. Within about 18 months I had 500 units. Fast forward to 2016 and I have much, much more — nearly 4,000 units.
I’ve never read a book on real estate, nor did I ever have a coach or a mentor in real estate. I got rejected by the first two lenders I went to in California, even though I could have written a check for the deals. They told me I had no experience. I kept at it and the third lender gave me the green light.
You will put 25 percent down if you have good credit and have management experience. The lenders don’t care how rich you are, they’ll say “yeah, you got some money, good” then they’ll look at your credit and say, “yeah you have good credit but so does everyone else.”
Then, the third thing they will say is, “What is your management experience?” They will also ask about your experience in that particular area. A guy who used to have eight units in Tulsa may get turned down for a loan in Florida because he doesn’t know the area.
Before you pull the trigger on any deal, get great with looking at financial statements. Real estate is basically a numbers game. It’s about a certain amount of money coming in and a certain amount of money going out. The difference in this business is that you actually get to use debt. This means you get leverage. Every $100K buys $400K in real estate. Every $1-million buys $4-million. If I bought $1 million in the stock market, I would get $1 million in stock. If the stock market was like real estate, I would buy $1 million in stock and get $4 million in stock.
There are three main things you need to keep in mind today with real estate:
1. Know real estate.
Do you even want to be involved in real estate? If you aren’t sure, don’t do it. You have to know for sure that’s what you want your money in. Know what kind of real estate you want to be in. I don’t do shopping centers or offices — and certainly not houses. I do multi-family, which means basically apartment buildings. I rent 10 to 15-month contracts. I know what I want to do and why I want to do it.
2. Know the market.
Not just location, you need to know the market. There was recently an article written about how New York and San Francisco are already pulling back. I’ve been telling people for a year to stay out of those markets because they are hyper-inflated. They will bust because all bubbles do. Bubbles are pretty and everyone wants to hold it and then POP — everyone loses interest and they go start blowing another bubble. I stay out of markets that blow bubbles.
3. Know the deal.
Finding the deal today is the biggest issue for many small investors. There’s no such thing as a bank owned deal. If the banks got deals, they are calling guys like me. If everyone passes on a deal, it’s not a deal. It’s like if I told you that you can eat everything off my plate after I’ve already eaten all the good stuff off. You need to know what a deal is and what isn’t a deal.
You want to scale, which is something most small investors can’t do. I don’t advise doing multi-family unless you start with at least a $2-million-dollar deal. Otherwise, it won’t produce enough income and is not worth the trouble. If I’m going to get a splinter in my toe, the adventure better be worth it. I don’t want a splinter in my toe because I was eating a hamburger but if I get it running to my naked wife on the beach, the splinter would be worth it. You don’t want to invest in a deal where the payoff is too small.
That’s why I say don’t do anything with fewer than 16 units. Don’t do little. Don’t start early and don’t start small. People hate when I say this. Keep saving your money. You reduce risk not by diversifying but by knowing what you’re doing. Leave alone the high-end stuff that has rents of over $3K and the cheap junk. You want to have an exit plan or you won’t ever get your money out. I invest in places with rents around $1,000.
If you do a $2 million-dollar property you will need $500K and finance $1.5 million. The property will take care of your financing, your expenses, and it should pay you about $50,000 a year. If that sounds scary, consider other options — I know if I could do it all over again from the beginning I would have just ridden with a guy like me. I’ve got a brother and a sister, and some close friends that came in and wanted in on some of my deals. They get the leverage where it’s my name on the debt, my experience and my management company.
For 25 years, I have allowed only close friends and family to invest in my real estate deals. I recently put 460 units, worth $55 million, under contract to purchase and for the first time offered investors outside my family to come into these deals. The entire investment required was filled in two weeks.
I am going to open up my next deal to accredited investors. With many of you reaching out to me interested in investing in apartments as a way to protect capital and create passive income flows, I’m opening it up to accredited investors. I can’t open it up to everybody just yet because of some regulations, but I’m working on it. Accredited means you need an income of $200K a year for the last two years or a million dollars in net worth, excluding your home. The minimum investment is $100k and the maximum is $1 million.
Apartment investing has been extremely lucrative for me over the last 25 years. There are no promises or guarantees this can or will continue, but you can see where I am putting all my money. If you don’t yet make $200K a year, get on my Playbook today. Before you get in the real estate game you have to learn to increase your income — there’s no way around it.
Inflation is defined as, “a general increase in prices and fall in the purchasing value of money.” Your money doesn’t go as far — simple. The $30k you made at your job 10 years ago and lived comfortably with barely gets you by now. You can’t control inflation (the Federal Reserve does that) and the government has doubled their debt since 2008. It’s now at $18.3 trillion and grows every day.
The government cannot save you or your family, or ensure your financial freedom. Set your mind right about earning money. More cash = more freedom! Money itself won’t make you happy, but it will give you the ability to provide a better life for yourself and your loved ones. You must invest with income streams that give you positive cash flow, learn to leverage your debt, learn to handle inflation and take control of your physical assets.
Do you currently have commercial real estate assets in your investment portfolio? Are you scared to have your money in the stock market (like I am) but also fed up with almost no return on investment with your money at the bank? Do you instinctively like the idea of being invested in income producing real estate with results you can see?
Here are eight reasons why investing income producing real estate is an excellent choice for protecting and growing your wealth:
1. Positive cash flow.
One of the biggest benefits to income producing real estate investments is that leases generally secure the assets. This provides a regular income stream that is significantly higher than the typical stock dividend yields.
2. Using leverage to multiply asset value.
Another important characteristic of commercial real estate investing is the ability to place debt on the asset, which is several times the original equity. This allows you to buy more assets with less money and significantly multiply asset value and increase equity as the loans are paid down.
3. Low-cost debt leveraged to multiply cash flow.
Placing “positive leverage” on an asset allows for investors to effectively increase positive cash flow from operations by borrowing money at a lower cost than the property pays out. For example, if a property generating a 6 prcent cash-on-cash return were to have debt placed on it at 4 percent, the investors would be paid 6 percent on the equity portion and approximately 2 percent on the money borrowed, thereby leveraging debt.
4. Hedge on inflation.
For each dollar that is created, there is a corresponding liability. Real estate investments have historically shown the highest correlation to inflation when compared to other asset classes, such as the S&P 500, 10-year Treasury notes and corporate bonds.
As countries around the world continue to print money to spur economic growth, it is important to recognize the benefits of owning income producing real estate as a hedge against inflation. Generally speaking, when inflation occurs, the price of real estate, particularly multi-tenant assets that have a high ratio of labor and replacement costs, will also rise.
5. Capitalize on the physical assets.
Income-producing real estate is one of the few investment classes that, as a hard asset, has meaningful value. The property’s land has value, as does the structure itself, and the income it produces has value to future investors. Income producing real estate investments do not have red and green days, as does the stock market.
6. Maximizing tax benefits.
The US Tax Code benefits real estate owners in a number of ways, including unlimited mortgage interest deductions and depreciation accelerations that can shield a portion of the positive cash flow generated and paid out to investors. At the time of sale, IRS allows investors a 1031 provision, allowing investors to exchange into a like-kind instrument and defer all taxable gains into the future. (See your tax advisor for full explanation.)
7. Asset value appreciation.
Over time, more and more inflation has made it into the economy, drastically reducing purchasing power. However, income producing real estate investments have historically provided excellent appreciation in value that meet and exceed other investment types. Properties historically increase in value as the net operating income of the property improves through rent increases and more effective management of the asset.
8. Feeling the pride of ownership.
The right property in the right location with the right tenants and ownership mindset can produce a tremendous pride of ownership factor that is highest among all asset classes. Homeownership is out of reach for most people. Imagine owning thousands of multi-family housing units instead?
No one can ensure the future of rental of income properties’ values, but this asset class seems positioned to continue to benefit from many other socio-economic issues that I will save for another time.
Grayson and Wayne are partners at Tricorner Yards, a multi-use real estate development project. The two amassed a sizable tract of waterfront property in the Tri-Corner area and successfully rehabilitated and developed what were once rundown shipping yards into a bustling urban center. With their work complete and the properties fully leased or sold, Wayne and Grayson want to move onto the next chapter in their lives; and so, begins the tale of tax-deferred exchanges.
Wayne’s Umbrella Partnership Real Estate Investment Trust (UPREIT)
Wayne is at the point in his life when he would like to be able to move away from daily management and begin enjoying the fruits of his labor. His children have not expressed any interest in taking over the family real estate empire, so he’s willing to give up the property. However, Wayne is not interested in a traditional sale. He does not want capital gains taxes to diminish his investment in the next deal. Given these facts, his tax advisor presents a solution with the potential to address both of Wayne’s concerns.
The advisor recommends that Wayne contribute part of his interest in Tricorner Yards real property, specifically the institutional grade property, to an UPREIT in exchange for securities known as operating partnership (OP) units or limited partnership (LP) units with a value equal to the contributed property.
Relying on the partnership rules, the exchange is designed to be a non-taxable transfer. Tax should not be due until Wayne exchanges his OP units for real estate investment trust (REIT) shares or cash. However, if the OP units are held at death and receive a step-up in basis, the built-in gain could be wiped out altogether – at least up to the date of death value of the OP units.
With this strategy, Wayne does give up control and could also be subject to an unplanned tax bill if the REIT were to sell the Tricorner properties. But Wayne assumes – and is comfortable with — this risk in exchange for the diversification, economy of scale and management offered by the REIT.
Grayson’s S. 1031 Exchange
Grayson is a bird of another feather. He intends to remain actively involved in the development business and has already identified his next project. He too has good tax counsel, who has suggested an S. 1031 exchange in order to maximize the cash available to roll into the new deal.
An S. 1031 deferred exchange requires Grayson to meet a specific timeline, beginning on the date he sells the Tricorner properties, or he’ll face immediate income taxes on the sale. However, Grayson does not want to wait until his current Tricorner properties are sold before purchasing his next property. He has already identified a fantastic opportunity with a highly motivated seller and does not want another buyer to swoop in and steal it from him. Luckily, the S. 1031 exchange can be done in reverse.
The reverse exchange allows Grayson to designate a qualified intermediary, who takes title to Grayson’s new property after the purchase and parks it until the sale of his Tricorner properties closes. If successful, Grayson’s reverse exchange should preclude recognition of capital gains.
Holy tax-deferred exchanges.
While our real estate dynamic duo is fictional, their tales have real-life applications for the following types of people.
Real estate investors, who wish to diversify their holdings without paying an exit tax;
Real estate owners, who are ready to move out of the daily management of properties; and
Owners or investors looking for the next project and not an immediate tax bill.
Both Wayne and Grayson were able to use specific sections of the tax code to avoid the immediate recognition of income on the sale or exchange of their Tricorner properties, but we should emphasize that these strategies ultimately lead to the same ending. Eventually, Grayson and Wayne – or their heirs — can count on a tax bill.
If the cape fits…
How do you determine which exchange is ideal for your situation? Consider the following questions when working in conjunction with tax and legal counsel.
Do I, or does a member of the family, wish to continue daily management activities?
Am I comfortable giving up control?
Will this be my last exchange or just one in a series of exchanges as I move from one project to the next?
While not an exhaustive list, these should provide clues as to which path to consider – UPREIT, S. 1031 exchange or reverse S. 1031 exchange. And while deferral can be an important tool, you should carefully weigh the tax benefits of the transaction against the long-term strategic plans for your assets and your family.