American Apartment Owners Association

Nashville ranked nation’s hottest single-family housing market

Thu, 07/20/2017 - 8:17am

Nashville has the hottest single-family housing market in the U.S., according to a report that shows nation-leading annual growth in home sales and price appreciation for the recent second quarter.

The No. 1 ranking by online real estate marketplace Ten-X Research of Irvine, Calif.., is also based on local growth in population, wages and jobs plus overall state of the economy.

“In all of these areas, Nashville’s doing far better than national averages,” said Rick Sharga, a Ten-X executive vice president, citing as example last year’s 2 percent local population growth being three times the nation’s average. “Unless there’s something unforeseen that disrupts the economy like a major employer moves out, it’s really well-positioned for the next few years.”

Orlando, Fla., and Fort Worth, Dallas and San Antonio, Texas, were the other top five hottest single-family markets also based in part on annual home price growth and annual home sales growth.

Cost of living also rising at nation’s fastest rate

A separate study by personal finance website GoBankingRates, meanwhile, showed Nashville’s cost of living rose the fastest nationwide over the past year with the amount needed to live here comfortably up $9,135. It takes a salary of $70,150 to live in Nashville today, the report said, citing housing costs among factors with the median list price of a home rising almost 30 percent to nearly $340,000 from April 2015 to 2017.

Ten-X’s Top Single-Family Housing Markets Summer 2017 report, however, said that Nashville’s housing affordability remains favorable even as prices have surged almost 40 percent beyond their prior peak, which it suggests that prices can continue to progress without pressuring buyers, “The Metro also carries modest downside risks as prices only fell moderately during the housing bust,” that report read.

Rick Sharga, Ten-X’s executive vice president. (Photo: Submitted)

Previously, Nashville had been in the top 10 in Ten-X’s tracking, but ranked No. 1 for the first time in the most recent quarter. For the second quarter, local home sales increased 7.4 percent year-over-year with price growth of 12 percent to mark improvement for 20 straight quarters.

Among the 50 largest U.S. housing markets, Nashville posted the highest score in terms of economic prospects based in part on jobs and population growth. Education, health care and leisure and entertainment are among growing sectors with local employment up 4 percent year-over-year.



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Member Q&A: Can I Deny All Tenants with Criminal Records?

Mon, 07/17/2017 - 9:25am

AAOA Member Question: As an owner of a small apartment complex, I’ve had to deal with criminal activity on my rental properties in the past. I started running criminal background checks with AAOA a few years back to increase safety for my residents. I’d like to make a rule to not rent to anyone with a criminal background. Can you please provide me with how I can go about amending my rental policy for this?

Answer: There is no way to legally make a blanket policy that would exclude applicants with criminal backgrounds from renting a unit in your complex. This is especially true since the April 2016 US Department of Housing and Urban Development’s Office (HUD) released its guidance on “Application of Fair Housing Act Standards to the Use of Criminal Records by Providers of Housing and Real Estate-Related Transactions.”

HUD’s new guidance is now being used as the de facto best practices guide for handling criminal records and it clearly indicates that blanket policies should be eliminated. Although you may not be intentionally trying to discriminate against minorities, minorities may be disproportionately harmed by a blanket policy. How is this possible? Since 2004 an average of 650,000 individuals have been released from prison on an annual bases. Having a criminal background in many cases makes it extremely difficult for these individuals to access safe and affordable housing that can help them reenter society. A high percentage of these individuals are minorities, meaning more minorities would be negatively affected by your policy, even if you have no intent to discriminate. This is known as disparate impact and is a violation of the Fair Housing Act.

As a landlord you should implement policies that are the least discriminatory. However, this does not mean that you have to accept all applicants with criminal records. HUD’s guidance states you must show that you considered each individual conviction, when it occurred, and what the convicted person has done since then. If you deny an applicant based on a criminal record, you should be able to show that your decision was necessary to achieve a nondiscriminatory interest and there was no other option that would have been less discriminatory.

You may be able to deny applicants with certain types of crimes in your policy, but you must still be prepared to prove that the criminal conduct in the person’s background is directly related to the safety of your residents. We recommend avoiding this type of policy as well to reduce your likelihood of being taken to court.


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9 Sneaky Fees to Watch for When Hiring a Property Manager

Mon, 07/17/2017 - 8:29am

To many landlords, property management services are superfluous, cutting their profit margins to a minimum in exchange for basic services. But the reality is that property managers can make your life extraordinarily easier—and most charge a reasonable enough rate that you can draw a monthly profit from your properties (headache-free).

However, when you’re searching for a property manager to handle your landlord responsibilities, it’s important to note that not all fee structures are the same. If you don’t understand how a manager’s fees work, you won’t be able to compare apples to apples, and you might end up shaving your profit more than necessary if you aren’t prepared for those fees when they come up.

9 Fees to Watch For

These are some of the most common “hidden” fees, extra fees, and differences in fee structure to watch for when comparing providers or finalizing a contract:

1. Rent Due and Rent Collected

Many property managers will charge fees as a percentage of rent, but watch how this is worded—there’s a difference between charging as a percentage of rent due and a percentage of rent collected. A percentage of rent due means your company will charge you based on how much money a tenant owes you; a percentage of rent collected means your company will charge you based on how much money a tenant actually pays you—and is generally more favorable. If you’re charged based on rent due, you’ll end up paying for property management even when your property is vacant and you have no money coming in.

2. Early Cancellation

You may also be charged an early cancellation fee should you break the contract with your property manager before the end of its outlined term. For example, if you agree to work with them for a year and you want out after eight months, you might pay an additional few hundred dollars. Be especially wary of this fee with untested property managers.

3. A La Carte Management Fees

“A la carte” management fees refer to a suite of extra fees a property manager may charge you in addition to basic services. Usually, a property manager will either charge a higher price (and no additional fees) or a lower price, with multiple additional fees, somewhat evening out. Accordingly, it pays to know what fees are applicable and what they might run you. The remaining items in this list could all be classified as a la carte management fees.

4. Vacancy

If a company isn’t charging you the full cost of management while your property is vacant, there may still be an additional vacancy fee. Rather than collecting a percentage of rent due, they may collect a smaller amount from you as a kind of retainer.

5. Advertising

When it comes time to seek a new tenant, some property managers may charge you an additional advertising fee. This would cover the cost of creating media (such as taking photos) and placing it on sources like online listings or paper publications.

6. Leasing

A leasing fee may apply when you find a new tenant for your property. This covers the cost of drafting and securing a new lease agreement and is generally low in cost. If the cost here is high, it should raise a red flag, especially if your resulting tenant turnover seems to increase.

7. Lease Renewal

Lease renewal is even simpler than initial leasing, but it may still require a fee. You may need to draw up new paperwork or renegotiate terms with a tenant, and that means your property managers will be doing a bit of extra work. Expect minimal fees here as well.

8. Maintenance

Property management fees should cover basic instances of maintenance and repair, but some companies may charge extra for big jobs, or for an inspection between tenants.

9. Eviction

Eviction can be a messy process, and if you ever need to evict, you’ll be grateful you have a property management service in your corner. Most property managers will handle the eviction completely on your behalf, but some will charge you an extra fee for the extra work involved. Expect to pay at least a few hundred dollars for this process.

Apples to Apples

Different companies might charge money in different ways, but if they’re offering similar services, you’ll likely find the bottom-line price of each to be competitive with one another. The big difference here is how you plan on using your property management company; for example, if you’re looking for long-term arrangements, an early cancellation fee shouldn’t factor much into your decision. Try to consider all these factors and all price points when comparing providers and making your decision.


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What’s on the Horizon for the Student Housing Industry

Mon, 07/17/2017 - 8:24am

If there’s one word that sums up the current state of the student housing industry, it’s growth. With an average of 48,000 off-campus purpose-built beds delivered per year, the industry is predicted to grow at a healthy and sustainable pace. Opportunities are popping up across America to invest in Student, and there’s no end in sight.

Taylor Gunn, Student Housing Analytics Lead from Axiometrics, shared a bird’s eye view of current trends along with some opportune advice for property managers. She’s one expert who takes Student seriously.

“Student housing,” Gunn said, “is a maturing asset class that is much more complex than students living in apartments.”

She pointed out the potential of Student to go beyond the reaches of the conventional market, alluding to “leading companies in the industry that have achieved results above even the conventional apartment market.” The question property managers are asking now is, what is driving the student housing industry boom and how do we stay ahead of the competition?

Supply and demand

There’s a reason behind the success of the student housing industry. According to Gunn, Student growth is most affected by supply and new demand, and new student enrollment increases housing demand year after year. Things are looking up for Student – as long as demand stays ahead of supply.

“If demand and supply are in balance, or if demand is outpacing supply, the effects are positive,” Gunn said. If supply outpaces demand, the effects are the opposite. In the current climate, however, demand appears to be well ahead of supply.

Performance trends

“Leasing velocity is a key performance metric looked at in the student housing space,” Gunn said. For the past few years, leasing velocity has outpaced the previous ones, pushing occupancy to its highest levels. “We’re seeing leasing velocity moderate compared to last year, which is a result of increasing competition and shifting leasing strategies.”

The forecast? Gunn predicts that with these conditions, we can expect moderation in some markets, but also higher revenue potential.

New opportunities

Opportunities to own and develop continue to grow, and the harvest is ripe for development. “There are still many universities with limited student housing options,” Gunn said, “and many that don’t have any off-campus options at all.”

She even predicted hope for aging dormitories and conventional apartments. “There are opportunities to update properties built in the earlier years of the student housing industry and many conventional apartments that can be repurposed,” Gunn said.

How to stay ahead

There’s a wider playing field now, and competition is on the rise. Gunn recommends knowing your market to stay ahead.

“The competition is increasing, though this is expected with a growing industry,” Gunn said. “It’s even more important to know what’s going on in your market and how to stay ahead – know when to start leasing and what your competition is offering in terms of rents, amenities, concessions, etc.”



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Should you be a landlord in your retirement?

Mon, 07/17/2017 - 8:18am

In 2005, everyone I knew was buying real estate. With no experience and no money, they bought properties they couldn’t afford and were convinced they were going to make a fortune.

Unfortunately, it didn’t work out that way, and most of them now have a foreclosure or short sale in their past.

Does that make real estate a bad investment? No. It’s an investment. The good or bad part comes from how you approach it. What’s good for one person can be bad for another.

To find out how to make real estate investments work, I decided to talk with a few experienced professionals and asked them whether real estate should be in a retirement portfolio.

“Absolutely,” says Judy LeMarr, a seasoned agent with Russ Lyon/Sotheby’s who works with clients in the Arizona and California areas. LeMarr grew up in a family that was all about real estate, and initially got her license because her dad told her it was something she “just needed to know.” That sounds like good advice.

They key, LeMarr says, is knowing what you’re in it for. Are you looking for current cash flow, long-term appreciation, or are you looking for a flip opportunity? You must know your area, she says. In the Midwest, you might find smaller residential rentals that will throw off stable cash flow. In other areas near military bases or manufacturing facilities, like Georgia, Kentucky, or Tennessee, your focus might be on Grade B multifamily properties, as you’ll have a steady source of working tenants who will pay their rent.

To make rental properties work, LeMarr advises you look at the age and condition of the roof, windows, plumbing, etc., and keep enough reserves in the bank to cover capital expenses that will come up. Also, plan on holding two months’ rent in the bank to cover turnover costs that occur between renters.

Lukas Krause, chief executive of Real Property Management, also thinks real estate can be a good investment for retirement, as rental rate increases have historically outpaced inflation. “For an individual investor, this means that an investment property bought with a break-even cash flow can become a net profit generator in a couple of years,” Krause says.

He added that rental growth rates do vary by location and said research shows that the three key factors that determine rental rates are the number of jobs, the level of wages, and the amount of available housing in a market. “Smart investors focus on markets with job and wage growth,” says Krause.

Both Krause and LeMarr talk about the importance of doing your homework before you buy. LeMarr likes to focus on finding properties before they hit the mainstream market. She looks for homes where she can go in, make improvements, and then raise rents.

Krause says you must determine a competitive rental rate for the property, and research expenses including capital improvements. Then calculate your cash flows and tax implications before making a purchase decision.

With property, be prepared for the little interruptions. LeMarr recalls one property where all the new blinds came in, but they didn’t fit. These things can slow down the time to market. And of course, with renters, there will be calls and repairs to handle. That’s why Krause says, “Smart investors realize that the value of their time is greater than the fees paid to a property manager, and property management fees are tax-deductible, so they cost less than they appear.”

If diving in to buy an investment property scares you, one way to generate rental income without the commitment of a long-term purchase is to rent out your home, or a room in it, on HomeAway, VRBO, or Airbnb. According to Airbnb’s reporting, from Sept. 1, 2015, to Sept. 1, 2016, seniors, defined as a person over 60 years old, have earned a collective $747 million from short-term rentals on Airbnb.

Rob Stephens, general manager of Avalara MyLodgeTax says that short-term renting has become very popular and easy, but there are pitfalls. “Nearly all cities and states impose lodging and occupancy taxes that must be paid on rental transactions. Over the past few years, government agencies have increased their focus on short-term rentals and stepping up enforcement tactics to ensure short term rentals are properly registered and paying the correct taxes.”

Rental real estate can be a great addition to a retirement portfolio, but it’s not a get-rich-quick scheme, and it’s not for everyone. Like any business, it takes cash, research, time, and commitment.


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Landlord alert: New index aims to take the risk out of rental investing

Mon, 07/17/2017 - 8:15am
  • Demand for single-family rental homes has never been stronger and, consequently, more investors are hoping to get in on the game.
  • For investors, the competition is high and so is the risk, especially for novices.
  • Now one company, Roofstock, claims it can gauge risk right down to the neighborhood level.
Demand for single-family rental homes has never been stronger and, consequently, more investors are hoping to get in on the game.

From large institutions buying thousands of homes to individual investors hoping to see strong returns on just a few properties, the competition is high. And so is the risk, especially for novices.

New companies hoping to help investors in every phase of the process — and cash in on their growing demand — have ranked large local markets for potential returns. Now, one claims it can gauge right down to the neighborhood level.

Roofstock, an online single-family rental marketplace, is launching a “neighborhood rating algorithm,” analyzing more than 72,000 separate Census tracks and ranking their risk. It goes beyond home values and average rent to include dozens of factors, such as income levels, employment rates, education levels, percentage of owner-occupied homes and school district ratings. It then ranks each neighborhood on a scale from 1 to 5, 1 being the most risky.

“As with any investment, whether it’s real estate or a stock or bond, you need to compare risk with return, and so what we’ve done with our star system is created a metric for estimating risk, which is really a measure of volatility or variability of your return,” Roofstock CEO Gary Beasley said. “So if you’re investing in a 4-star or 5-star neighborhood, your returns might be a little bit lower but your returns might be a little more predictable. There might be a little less variability.”

Neighborhoods with higher risk may offer better returns in the short term but will be less predictable. Beasley cites San Francisco as an example. Rents there are currently sky-high downtown, but certain suburbs of the city have very different characteristics and levels of risk. The index breaks a city down into tiny pieces and assesses each piece.

Here’s the Roofstock Rating Scale:

  • 5-star: Very high employment rates. Above-average income levels and school district ratings. Newer properties above the average home value and mostly owner-occupied.
  • 4-star: High employment rates. Average income levels and school district ratings. Average home values. Slightly older properties than in 5-star neighborhoods, but generally high quality and mostly owner-occupied.
  • 3-star: Good employment rates. Slightly below average income, with decent school districts. Home values slightly below average. Properties are a mix of new/old, with slightly more owned than rented.
  • 2-star: Below average employment, income levels, school district ratings, and property values. Homes are an equal mix of rented and owned.
  • 1-star: Lowest employment rate compared to higher-rated neighborhoods. Low income levels, school district ratings and home values. Properties are older, with more rented homes than owner-occupied.

“I think what makes our index different, and I’d argue better, is its granularity,” Beasley said. “It’s down to the neighborhood level because it’s very difficult to describe real estate at a metropolitan level.”

There are currently about 16 million single-family rental homes in the United States, about 5 million more than before the housing crisis. While large institutional investors bought thousands of distressed properties and set up a new asset class of rentals, they still make up barely 3 percent of the single-family rental market. The vast majority of rental homes are still owned by small to medium-sized, individual investors, and more novices want to get in on the currently strong demand.

“It’s a new landlord nation, where everybody is renting out their basement. When somebody moves up they don’t sell their old place, they rent it out to somebody else,” said Glenn Kelman, CEO of Redfin, a real estate brokerage.

Roofstock is not alone in the market. Companies like HomeUnion, Investability and TenX aim to guide smaller investors in picking properties. Some help with the sales, management and even renovation of the homes.

Despite the growth of this asset class, most individual investors — 70 percent according to Roofstock — purchase properties within an hour’s drive of where they live. This is likely so they can manage the properties themselves. With the huge growth of rental management companies, however, investors can look much farther for better returns. That means they need more data. The Roofstock index is free, but investors must log on and become a member of the site.

“A big part of our strategy is data — and then being able to monitor all that information and make recommendations as to which markets might look interesting for different strategies,” Beasley said. “So it is very much, from our perspective, a tech play because we’re working through this data but our goal is to simplify all that.”

While a risk index is certainly helpful, it’s not foolproof. Property values and local market dynamics can be influenced by unexpected factors, rental demand can change due to construction, and tenants are not always reliable. As with any investment, buyer beware and be informed.


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4 Questions You’ll Get at Open Houses

Mon, 07/17/2017 - 8:10am

Besides discussing the home’s layout and physical characteristics, come to your open house prepared to respond to these other common questions. Coldwell Banker recently featured some of the most common questions potential buyers may ask a real estate professional at an open house. Here’s what you need to be ready to answer:

1. How many bids have you received on the home?

Buyers may want to gauge the true price of the home and see how much competition they might face for it.

2. Why is the seller moving?

A real estate professional isn’t required to share this information, but it can be another hint to a buyer how motivated a seller is. Based on the reason given, buyers may be able to know how quickly the seller will be looking to sell if they have a job relocation, for example.

3. Are there additional homeownership costs?

Be ready to talk about any additional costs with the home, such as the property being located in a planned community and the homeowner association fees. List out the amount buyers will need to pay for association dues, additional taxes, and any other fees.

4. Are there any special regulations with the home?

Be able to talk about any regulations that the homeowner association may have that affect living in the property, such as pets, parking, or any remodeling limits for owners on the property.



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Buying a Vacation Home: The Questions Before The Purchase

Thu, 07/13/2017 - 8:42am

Whether it’s an oceanside bungalow or a luxury cabin in the mountains, many people dream of buying a vacation home. Financial advisors call a purchase like this “lifestyle investing.” Like any investment, buying a second home comes with both benefits and potential drawbacks, so it’s important to consider how a vacation home fits into your long-term plans before taking the plunge. Are you ready to pull a trigger on that property in Tahoe or Cabo? Read on before you close on any new vacation home.

Take a Close Look at Your Finances

Before even looking at listings, it’s important to assess your finances. To determine whether you can actually afford a vacation property, consider the following questions:

  • How strong is your income stream? Will it hold up during an economic downturn?
  • Will you be able to write off some, or all, of your mortgage? The IRS caps write offs for mortgage indebtedness at a maximum of $1 million between your primary and qualified second home.
  • Will you need to finance the vacation property? If so, keep in mind that banks are quite strict on limiting borrowers for a vacation property to a 42% debt-to-income ratio or less. For example, if your gross income is at $10,000 a month your total debt payments (including the new mortgage) will need to be under $4,200.
  • What is your current asset allocation? It’s typically not a good idea for anyone to have more than 50% of his or her net worth in any single asset class, especially one like real estate, where leverage is usually a big factor. You don’t want to be overexposed if the housing market turns.

Sit down with an advisor and answer these questions. If you still think a vacation home makes sense, keep reading.

Retirement Retreat or Raking It in With a Rental?

Once you’ve determined that a vacation home is economically feasible, the next big question to think about is how you want to use your vacation property. Are you planning to rent it out, fix it up and sell it, or retire there?

If you’re thinking about becoming a landlord, make sure the vacation home has rental income potential. If you’re looking to eventually profit from a sale, are you prepared to own the home for five years? You’ll likely want to keep it for at least that long in order amortize the high transaction costs associated with buying a vacation property. On the other hand, you may see the home as part of your retirement dream, which makes it more of a lifestyle decision than a purely financial one.

Making the Move

Once you know what you’ll use your home for, it’s time to figure out where to buy. Anyone who has ever bought a house has heard the adage about the three most important factors: “location, location, location.” This is even more critical when buying a vacation home.

First, look closely at the local market. As the Great Recession showed, real estate doesn’t only go up. An array of factors can drive a local market up or down, including: major employers coming or going, damaging weather events, and changing zoning laws. By working with an agent knowledgeable about the area, you can get a good idea of market activity and pricing trends.

It’s important to analyze the pros and cons of the kind of community in which you want to live. For example, a beachfront house will make it easy to find tenants if you choose to rent, but it may come with complicated insurance requirements. Mountain getaways typically offer lots of land at lower costs, but they are often located in rural communities with roads and utilities that may not be well maintained.

As you scout locations, be sure to consider the distance from your primary residence to your vacation home. According to a recent survey by the National Association of Realtors, the average vacation homebuyer purchased a property that is a median distance of 200 miles from his or her primary residence. How often will you be willing to make that drive? And have you factored in the costs associated with the journey?

The Final Decision

Once you know where you want your vacation home to be, you may be faced with the choice of buying a pre-existing home or building a new home. While many experts consider location to be the most important factor for buying a property with long-term appreciation potential, expanding a property gives you another way to make money, as the ultimate sale price can be significantly more than the construction cost of an expansion.

However, this approach isn’t without its downside, as expansion projects can often take longer and cost more than expected. There are also tax implications to consider. Before beginning a home investment process, you should run realistic worst-case cash flow numbers to see how long you can survive before your money runs out. Having two years in cash flow is a good guideline.

Another option is to buy an older home, then remodel or renovate. While a renovation or remodeling likely won’t get you a huge return on investment when you sell, it can save you money by allowing you to buy a less expensive home and then improving it over time as opposed to shelling out more money up front. Renovations can also enable you to charge more should you choose to rent out your home.

While buying a vacation home can be a dream come true, it’s important to look at it with clear eyes, just as you would with any other investment. Make sure to do extensive research and think hard about why you’re making the purchase before signing on the dotted line.


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7 Powerful Benefits To Mobile Home Park Investing

Thu, 07/13/2017 - 8:40am

“Brandon… you’re crazy!”

That’s the response I tend to get when I tell folks I’m looking to buy a mobile home park this year.

And I totally get it. A couple years ago, I would have said the same thing. But times have changed, and so has my opinion on mobile home parks.

You see, after the real estate crash nearly a decade ago, real estate investments were easy to make. Nearly every property was a good deal and great money could be made.

But that was yesterday.

Today- ­ the real estate market is tough.

Single family homes are being scooped up by homeowners attempting to get their next home before interest rates rise. New investors are learning about the power of real estate investing and buying up most “nasty houses” as well as the small multifamily deals. And hedge funds and large institutional investors are grabbing all the larger apartment complexes at prices that simply don’t make sense to savvy real estate investors.

So real estate investors have a choice: they can sit out and wait for the next real estate crash or they can get creative and find opportunities in this current market. Of course, there is nothing wrong with sitting the next few years out, but I love the action too much to stop.

So I’m opting for option two: finding opportunities.

One such opportunity that has recently caught my attention is mobile home parks. And for clarification: no, I’m not talking about buying mobile homes. I’m talking about the entire park, where the residents own (or rent) homes and I lease out the land.

My interest was peaked after interviewing several mobile home park investors on The BiggerPockets Podcast, and later finding The Mobile Home Park Investing Podcast, hosted by Kevin Bupp and Charles Dehart of Mobile Home Park Academy.  I realized that mobile home park investors were crushing it right now.

I had to dig in deeper!

So, why are mobile home parks one of the best investments left in America? I recently met up with Andrew Lanoie, Founder and CEO of Four Peaks Capital Partners (a Private Investment Group which allows qualified investors an opportunity to passively invest in this industry) and discussed with him the benefits of investing in mobile home parks.

After speaking with Lanoie, and doing many hours of research, here are seven powerful benefits to mobile home park investing.

1. Lower Cost Per Unit

When investing in large multifamily properties or single family homes ­ the cost per unit is high.

But mobile home parks allow a person to jump in and acquire more units for less money. According to Lanoie, “MHPs offer the lowest cost investment per unit of any real estate asset class with potentially higher risk ­adjusted returns”.

Most park owners own the land, not the housing units themselves ­ which means that the cost of the investment is typically going to be a lot less in comparison to the number of units owned.

You can easily expect to pay $100,000+ per home or apartment unit versus paying as little as $10,000 per lot in a mobile home park.

2. Lower cost for repairs and maintenance

One of the factors that makes me the most excited about mobile home parks is that I don’t have to work with contractors. To put it bluntly, I hate dealing with contractors. When you’re working on single family homes and multifamily properties, dealing with contractors is a daily hassle.

However, by not owning the actual homes that your tenants live in, it means that the mobile home owner is responsible for the maintenance, repairs, and updates for their residence, not the landlord. While the mobile home park owner is still going to need to account for the expenses of the upkeep for the park, it will most likely be significantly less than what they would pay for the upkeep of the homes.

3. Spread Out Risk

Because mobile home parks allow investment companies to acquire more units for each investor dollar (as discussed above), the risk for loss decreases. In other words: with more tenants, the risk is spread out more. For example, let’s say you own four single family houses, and one of the tenants forces you to evict them and you are left with $20,000 in expenses. Bummer. There goes five years of profit from your entire portfolio. While those kinds of situations are rare, they do happen.

However, when you own a large collection of units, the high cost of those freak occurrences are spread out across your entire portfolio.

4. The Demand is High

Due to numerous factors, the demand for mobile homes inside well-­managed parks is ever increasing. According to Lanoie, new mobile home parks are not being developed due to government zoning, gentrification, and zoning changes.

However, while home prices are climbing to historic levels, incomes for many Americans are not rising. The need for affordable housing is only getting stronger.

Lastly, baby boomers on fixed incomes are retiring in record numbers creating a greater demand for affordable housing that will only continue to grow. According to Lanoie “10,000 Baby Boomers retire each day with an average social security benefit of just $1,294 per month. 75% of retirees have less than $30,000 in their retirement accounts, and the bottom 50% have zero measurable savings.”

More and more lower income Americans and retirees are looking to mobile homes as their chance of still being a homeowner.

5. Less Tenant Turnover

As a landlord of numerous single family and multifamily properties, I know that one of the largest expenses for a property owner is tenant turnover. Cleaning their unit, needing to track down a new tenant, and the lack of income during the vacancy can take thousands of dollars per unit out of the investor’s pocket each year.



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Selling rental property to offspring in installments may avert tax bite

Thu, 07/13/2017 - 8:36am

We have a rental property that we would like to sell to our son and his wife. The problem is that we have not lived in the house as our primary residence for the required two years and therefore would have to pay a considerable amount in capital gains. Is there any kind of rent-to-buy or reverse mortgage or other arrangement that would make this possible without our facing a large tax bite?

Your question seems to mix two concepts when it comes to taxing real estate sales. If you own a home, use it as your primary residence and have lived in it for two out of the last five years, you can exclude from any taxes up to $250,000 in profits if you are single and up to $500,000 in profits if you are married. That’s the way it would work for personal residences.

Now if the home isn’t your primary residence and you sell it, you’d have to pay the tax on the profits on the sale of your second or vacation or investment home. The taxes on a second home sale could be significant, but remember that your taxes would be at capital gains rates and could be substantially less than if you were taxed at ordinary tax rates.

For a substantial sale, the taxes on a sale when taxed at capital gains rates would be around 24 percent; but if you sell and pay taxes at ordinary rates, you might pay around 40 percent. (We’ve rounded figures and included the 3.8 percent Net Investment Income Tax, often referred to as the Medicare Tax, which may be rescinded depending on what happens this year in Congress.)

You indicated that your property is a rental property. As a rental property, you could sell it and defer paying any federal income taxes if you plan ahead and use a 1031 tax deferred exchange. When you use an exchange, you are selling one property to then buy another property. You’d have up to 45 days after your sale to designate a replacement property and up to 180 days to close on the replacement property. So if you were planning to buy more rental properties, this is the way you should go.

Having said all that, if your plan does not include owning more homes or properties and you want to sell it to your son and his wife, we’d really suggest that you talk to an accountant, because our next suggestion would be to sell it to them on an installment basis; that is, you become their lender and sell the property to them over time. Installment sales, however, can be complicated. Without knowing any other issues you might have tax-wise, you would likely need some professional help.

There are ways to structure installment contracts to allow you to pay federal income tax as you receive the money from your son and his wife. You would still pay taxes, but you might pay at a lower rate and pay over a longer period of time. Whether this is better for you or not, we don’t know. It may be an option for you, but you’ll need to know what your taxes might be if you sold outright versus what your taxes might be if you sell on an installment basis.

Given the possible changes in the income tax code that could come up, there could be benefits in doing it over time. Then again, we don’t know what those changes might be and how any changes would affect you. Please consult with your tax preparer and a real estate attorney so that you document the sale correctly.



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NJ frat’s drinking death at Penn State — Do landlords and universities share the blame?

Thu, 07/13/2017 - 8:33am

Lawyers for Penn State University fraternity members who face charges in connection with the death of a 19-year-old pledge from New Jersey are trying to get some of the charges dismissed before a trial takes place

A preliminary hearing in the case against 18 young men who were part of the now-closed Beta Theta Pi frat house took place on Tuesday, and two additional sessions are planned for August.

They face a variety of charges relating to the February death of 19-year-old Tim Piazza of Readington, including aggravated assault, hazing, reckless endangerment, furnishing alcohol to minors, and tampering with evidence.

Piazza died after falling down a flight of basement steps in the Beta Theta Pi frat house after a night of heavy drinking, according to authorities.

Bob Ottilie, the founder and chairman of the Student Justice Project, a nonprofit organization that advocates for students, believes there are other parties responsible for the tragedy.

“One would be the landlord of the house, in which the drinking took place. Two would be the national fraternity, the Beta fraternity. And the third would be the university,” he said.

He stressed it’s easy to look at this situation and say his fraternity brothers could have done something for him, “but the landlord, the national fraternity, and the university could have done something proactively to prevent that type of event from taking place in the first instance.”

Ottilie added, “It’s not fair to suggest that a group of 18 to 22-year-old boys, most of whom are probably intoxicated, were ultimately going to be responsible for Tim Piazza. The people that should have been responsible for him were the adults in the situation.”

He said this issue needs to be addressed because several hundred young adults attending college die each year, whether it’s alcohol poisoning, an injury resulting from being intoxicated, or a drunk-driving motor vehicle accident.”

Ottilie believes the problem is becoming more pronounced because colleges, for the past 10 to 15 years, have been experiencing “an epidemic of alcohol over-consumption.”

He stressed the responsibility for this lies partially with parents, who allow their high school students to drink alcohol in their homes, and the permissiveness of universities.

He said schools will include alcohol awareness courses for freshmen, but they will also let students consume alcohol in dorms, sometimes in common areas, which encourages a party atmosphere and an over-consumption of alcoholic beverages.

“You can dramatically decrease consumption of alcohol just by eliminating alcohol in the common areas of student residences,” said Ottilie.

Instead of renting an entire house to college kids, he says landlords should only rent them rooms so they can monitor and keep control of common areas of the residence, even if it means hiring security guards.

“You don’t see a lot of people dying from alcohol poisoning after being at a bar. They might die in a car accident going home, but with Uber and Lyft that problem has been minimized. But you do see a lot of deaths in student residences, and that’s because nobody is monitoring these kids,” he said.

He noted research shows the brains of young people, particularly males, aren’t fully formed until they’re about 27 years old, which affects judgment and common sense.

“Even very smart guys make very bad judgments about alcohol,” he said.

“You cannot allow students to have 100 percent control of risk assessment or risk management. You always have to be involved with them.”

In the wake of the Tim Piazza tragedy he suggested parties in all fraternities be phased out completely and moved to licensed establishments, so there would be some control over how much alcohol is consumed, and better protections against underage drinking.

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Top zip codes for housing investments

Thu, 07/13/2017 - 8:21am

Homeowners aren’t the only ones fighting over the limited housing inventory as many investors are entering the housing market to take advantage of rapidly rising home prices.

A new report from ATTOM Data Solutions shows the median sales price in the first quarter hit $410,684. However, the Neighborhood Housing Index, which measures more than 1,000 U.S. zip codes with an A rating, showed the median sales price in 382 zip codes came in under $250,000, and 27 zip codes held median sales prices under $100,000.

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This infographic shows the top neighborhoods for home flipping by comparing the median sales price from the first quarter, the crime rate, average school score, tax rate and the 2016 gross flipping return on investment. The index score is based on a max score of 490.

Click to Enlarge

(Sources: ATTOM Data Solutions)

Using that same information, but substituting the 2017 gross rental yield for 2016 return on investment, ATTOM also found the top five markets with the best rental returns. These index scores are also based on a scale where the maximum is 490.

Click to Enlarge

(Source: ATTOM Data Solutions)



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San Francisco lawmaker wants to tax landlords who keep apartments vacant

Thu, 07/13/2017 - 8:16am

It’s a problem in San Francisco, units that remain vacant. Pick any reason why this frustrating phenomenon occurs: pro-tenant housing laws, greedy landlords smarting over rent control, owners waiting for leases to end in order to sell, overseas investments. Seeing as how the city is in the midst of a crippling housing crisis, vacant units, which could and should be filled, aren’t doing the masses any good.

Enter Supervisor Aaron Peskin, a lawmaker responsible for blocking development in the past, who wants the powers that be to toy with the idea of taxing landlords who keep units vacant.

According to the San Francisco Examiner, Peskin would like the City Attorney’s Office to “explore legislation that would allow the city and county San Francisco to impose a vacancy tax on property owners to help mitigate the impacts of the widespread practice of warehousing valuable residential and commercial units.”

This would go on top of the small fee landlords already pay for keeping space resident-free.

As SFist notes, “San Francisco’s Department of Building Inspection has since 2009 required owners of empty buildings (commercial and residential) to register their property as vacant with the city, including an explanation of what future plans they have for the property. They must also pay a $765 annual fee.”

No word yet as to how much said tax would be.

As for exactly how many residential units are currently bone-dry, a SPUR 2014 study suggests that roughly 30,000 vacant are vacant in San Francisco, which, according to the Examiner, “included 8,900 units in the process of being rented, 2,400 ownership units in the process being sold or sold and not yet occupied, vacation or seasonal use at about 9,100 units, and 9,700 units not in any of those categories.”



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6 Amazing Tips on Turning Real Estate Into a Real Fortune

Mon, 07/10/2017 - 1:56pm

At least 30 U.S. billionaires made their money from real estate; some say that it’s the greatest way to create real wealth and financial freedom. These six tycoons and members of The Oracles suggest how you can invest $100,000 or start with nothing.

1. Start small.

Although I’m a businessman first, I’ve always been a part-time real-estate investor. You can do both, too. Have a business or career that creates positive cash flow, which you can diversify into part-time real estate investing. I’ve done it for many years.

If you’ve never invested in real estate, start small and don’t use all your money. No one’s ever looked back and said, “My first deal was my best.” You’ve got to learn how to read the contracts, build your network of specialists—for example, lawyers and realtors—and develop a good eye for it. This only comes from experience.

The beauty of real estate is that you can learn the ropes while starting small: find some cheap properties, like single-family homes, renovate-and-flips, multi units, or commercial properties. Try to commit as little as possible while you get some notches under your belt. Joel Salatin, my mentor, always said, “Make your mistakes as small as possible without catastrophic consequences.”

If you have zero cash, maybe do wholesale deals. A business partner, Cole Hatter, and I created a real-estate program teaching you how to put a property under contract for very little money down, sometimes less than $1,000; you sell that contract to another buyer before the contract expires. Worst case: you just lose under a grand. Best case: you make $5,000-15,000 positive cash flow that can be reinvested in long-term holdings.

2. Think big.

It’s easy to give up on the real-estate game because you don’t have any money, but it’s the deal that matters, not how much money you have. Chase the deal, not your budget.

I know a guy who saved $50,000 and started chasing $200,000 deals. First of all, you can’t buy more than four units with that budget. The problem with four units is that each can only produce maybe $1,000 or $2,000 per month. And that’s only after you’ve done thousands of dollars in work around the units to make them rentable in the first place. That math isn’t difficult—there’s just not enough money to make it worthwhile.

That’s why you’ve got to go big from the start—with 16 units, minimum. Don’t buy less. Without 16 units, you can’t have a manager, and if you can’t have a manager, you’re going to either dedicate all your attention to the property or to your full-time job. To get 16 units, you will need to wait and save more money or use other people’s money (but you’ll need to learn how to sell).

Grant Cardone, top sales expert who has built a $500-million real estate empire, and NYT-bestselling author of “Be Obsessed or Be Average”; follow Grant on Facebook or YouTube

3. Understand the economics, then find a mentor.

The real-estate deals that look the prettiest and are easiest to find—such as buying a property that has a tenant and management in place, joining a crowdfunding website, or buying into a publicly-traded real estate investment trust—yield the lowest returns. The most profitable opportunities are the ones no one else knows about, which you find and create.

Due to a strong economy, high consumer confidence, historically low inventory levels, and extremely low interest rates, it’s the best time to flip houses in the past 40 years.

High consumer confidence and a strong economy give retail buyers the feeling that “now is a good time to buy” rather than retreat in fear and continue renting. Low interest rates allow retail buyers to purchase more of a home than if the rates were at historical average levels, like 6 percent. Low inventory levels create bidding wars by retail buyers, which increase the prices that investors sell their flipped houses for.

So, if you can find the deals before the competition, you can transform a little bit of money into a whole lot in a relatively short period by flipping houses.

If you’re seeking tax-advantaged passive income, thanks to the rise of the sharing economy and services like Airbnb and HomeAway, short-term renting of residential properties is producing the highest returns. (It’s not uncommon to obtain more than a 20 percent return on very nice properties in beautiful areas.) The majority of my real-estate holdings are now in short-term rentals.

Unfortunately, real estate is full of pitfalls. Getting educated through reputable online sources can help, but an article, book, or how-to video will be of little assistance in answering the most important questions you’ll have in the heat of a deal. That’s where the right real estate mentor becomes an invaluable resource. Phil Pustejovsky, founder of Freedom Mentor, bestselling author of “How to be a Real Estate Investor”, and #1 YouTube channel on real estate investing with nearly 20 million views

4. Learn, then earn.

Before throwing money away on the HGTV pipe dream, educate yourself! Don’t spend thousands of dollars on coaches and seminars. No matter how shiny they make it or how much you’re told you need an expensive education, you don’t. Information is inexpensive and plentiful. Find it or someone specializing in investment real estate, like me.

Holding assets is the way to build wealth through real estate. Shelter is a basic need. Dirt, in and around major metro areas, is a finite resource, and demand is constantly increasing. By owning a rental on that dirt, you have a small business that works to pay off your mortgage. Flipping is over glamorized, in my opinion. Rent and hold for the win.

Boomers and millennials want smaller housing, closer to cities. Additionally, real-estate investors commoditizing American suburbs and re-gentrification has pushed lower income families out. Because of this, America’s suburbs have seen a 57 percent increase of people living below the poverty level in the last 15 years. Buy your cities.

Don’t blow your budget. Most projects have surprises or overruns; it’s just part of the business. Keep a cushion for the unexpected. Lever your funds to increase returns and reduce risk. Start with one project. Get your model set, tweak, then buy two. Continue and progress until you build a solid portfolio.

Educate yourself, hustle, and create value. Take massive, determined action daily. Talk to brokers, call contractors, view open houses, and go to meetups. Learn! And when you’re ready, door knock! The best deal is the one that isn’t for sale. Find it, then find someone like me and close it down. Mark Bloom, President at NetWorth Realty

5. Start today.

In building over $100 million in real estate, I’ve personally used three strategies many times.

One: Purchase a low-income property, typically for $35,000 to $55,000. Costs are low but yields are consistent. Hand over all management to a third-party company, and collect your monthly rent passively, bringing in annual returns of 8 percent to 10 percent. If you purchase two to three properties like this per year, you will have a portfolio of 20 to 30 in a decade.

Two: If you can fix things yourself, do a “live-in flip.” Buy a house that needs a little work at a great deal; live in it for one or two years while you rehab it. Then flip the house for an appreciated value and profit. Doing this five times in 10 years could generate $300,000 to $500,000 net profit. That would let you buy your own house in cash! Or reinvest into rental properties, which would cover your cost of living anywhere in the world.

Three: Joint venture on a deal. People have money; they just need the right opportunity. Find a good deal and tie up the property with a contractual clause, pending financing approval within 30 days. Then find another investor to partner on the flip with you. Explain that you secured the property and just need the funds for a specific period, and the return will be split between you both.

Make enough calls, and you’ll find a joint venture partner easily. Just ensure you correctly calculate the cost of rehab and expected sale price. Most people mistakenly underestimate the rehab cost and overestimate the sale price, killing their margins. — Com Mirza, “The $500 Million Man” and CEO of Mirza Holdings; failed in eight companies back to back and today, runs a nine-figure empire with over 600 employees

6. Profit is in the purchase.

Source transactions that contain some core elements: they take the shortest amount of time to complete, and provide the maximum amount of profit while minimizing risk and the amount of cash you invest initially.

Before really embarking, solidify your A Team (advisors whose opinions you trust) and B Team (associates who turn the gears).

Once you have a plan, pull the trigger. Don’t just have a backup plan—ensure that even the most airtight scheme has at least five exit strategies. Experience has taught me that the winds of a favorable real estate market can shift rapidly; the last thing you want is to be anchored to a dozen unsellable investments.

Finally, know the difference between buying, holding, and trading. Buying is a no brainer, but it’s what you do with a property that determines your success. My primary strategy has been holding onto commercial real estate for the long term and trading out residential pretty quickly. Know your market. Roy McDonald, founder and CEO of OneLife




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How to Build a Strong Defense to Improve Apartment Website Rankings

Mon, 07/10/2017 - 1:49pm

Your property’s online presence is being challenged every minute of the day by a competitor seeking to get an edge when prospects look for apartments. The best offense to fend the attack is a strong defense, one that assures when consumers look for a place to call home they see your website first.

The evolving online world requires staying one step ahead of the competition so your website markets for rather than against you. When it does, falling asleep at night gets easier.

Improving rankings by triggering websites and maps

How well a property positions itself for searches determines the true effectiveness of a website, industry pros say. The key is not running with the crowd but employing unique branded terms – unlike those general phrases popular among internet listing services (ILSs) – that propel a listing to the top.

Because competition is so intense for the 10 organic search engine listings, properties should focus on short, one-line niche keywords that “have a fighter’s chance” of getting ranked or pulling up a map, says David Cockburn, Director of Digital Marketing at RealPage. Touting the neighborhood, amenities and proximity to local attractions, for example, improve rankings rather than generic keywords like bedroom size, a pool and even price points.

If you want to immediately start ranking and generating traffic to your website, PPC should be one of the first steps in your digital strategy. Paid ads always show first above any organic ads, so you will instantly get more prospects on your page.

The goal is to promote the brand to improve your rankings, as well generate a Google map, the latest caveat in desirable search results. With a map, prospects get an immediate introduction to community location and what it has to offer.

“Keywords with your brand name, especially if you have multiple locations, are great opportunities to trigger maps,” said Cockburn, who directs the company’s digital marketing. “Maps are very prominent on search pages.

Cockburn is among four RealPage panelists who will share thoughts on effective apartment website marketing at RealWorld 2017 July 16-18 in Las Vegas.  The hands-on session, “How to Evaluate Your Marketing Performance with Marketing Center,” will detail how properties can manage and measure marketing activities while capturing more qualified leads without depleting the marketing budget. Joining Cockburn will be RealPage Senior Director Leads and Leasing Product Management Matt Stevenson, Senior Director Digital Marketing Nikki Khorrami and Product Advocate Randy Hurn.

Consumer searches are more specific today

An effective apartment website does much of the marketing legwork and often can be done for minimal spend. But the rules for establishing a top spot have changed, and personalization and quality content are necessary to be competitive. Today’s apartment seeker is a much smarter searcher than 25 years ago when search engine optimization (SEO) began cutting its teeth. Consumers are narrowing searches to find that needle in the haystack.

In 2009, it was clear that renters depended on the internet and search engines to find apartments more than more traditional means like newspaper ads, word of mouth and even real estate brokers. According to a study, 84 percent of renters thought of searching online for an apartment instead of looking in the newspaper or a magazine.

Today, searching for an apartment is an internet race where SEO and apartment search engine marketing (SEM) are behind the wheel. Last year, J Turner Research published a report on the top 10 emerging trends in the apartment rental process, and nearly all related to cultivating information from the internet. Whether it’s searching for an apartment or looking for reviews, consumers are using the web.

Overcoming the competition by focusing on branding, unique features

Cockburn says building search volume based on the property’s brand and focusing on content specific to the community’s unique features and type may be a long-term effort but it’s basically the only defense against an ILS.

It’s a strategy that ranks well and sustains traffic month after month, keeping competitors at bay.

“It’s a defense strategy that blocks your competitors from taking that first spot,” he said. “It’s your brand, you own it and it’s all over your site. For your competitor that’s going to be a word that doesn’t match content of their page.”

Another great branding strategy is, if the budget allows, to bid on your branded terms through Google and Bing Paid search.

“A lot of people never think to Google their own branded terms and spend so much time on non-branded terms, but you will notice that your competitors may already be bidding on them and showing up first on the paid search results” says Khorrami. “This is a quick and easy way to gain cheap, high quality traffic since Google will give your branded terms high quality scores, which leads to lower costs.”



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7 Ways Roth IRAs Help Investors Purchase Real Estate

Mon, 07/10/2017 - 1:38pm

Self-directed IRAs are the only retirement arrangements that allow individual investors the freedom to pursue alternative investments, such as real estate. Investing in real estate with a self-directed IRA offers many benefits to those who are looking for creative ways to save for the future. Before you start, you may want to consider which type of IRA would be best to invest from. You have two options: Traditional IRA or Roth IRA.

The fundamental difference between a Traditional IRA and a Roth IRA is how they are taxed upon distribution. Choosing one of these options instead of the other can result in significant differences in the amount of wealth accumulated and the amount you can distribute tax-free. Most importantly, Roth IRAs have features that may benefit investors who want to use an IRA to invest in real estate.

Here are seven reasons why you might consider this strategy:

  1. Tax-Free or Tax-Deferred EarningSelf-directed IRA investing offers great tax advantages to real estate investors, though the exact benefit will depend on the type of account used. If you use a self-directed Traditional IRA, for example, you will not have to pay taxes on contributions or earnings until you start taking distributions during retirement. With a self-directed Roth IRA, however, your earnings will appreciate tax-free, allowing you to enjoy your profits without hassle from the IRS.
  1. Wealth of OptionsWhen investing through a self-directed IRA, your real estate investment options are nearly endless. Choose between rental properties (both residential and commercial), undeveloped land, fix-and-flip opportunities, mortgage notes, REITs, limited liability corporations, offshore real estate, and more. Investment restrictions include any work of art, rugs, antiques, gems, stamps, or any alcoholic beverages, as well as S Corps (S corporation tax laws prohibit IRAs to invest in them).
  1. No RMDs While the IRA Holder Is AliveThere is no Required Minimum Distributions (RMDs) for Roth IRAs. The IRA owner doesn’t have to deplete their retirement assets even after age 70½. Additionally, the IRA owner does not need to worry about liquidity or valuation for real estate assets. Simply put, they can pass assets to heirs tax-free.
  1. Beneficiaries Enjoy Tax-Free DistributionsBeneficiaries have options for how they can deplete the inherited Roth IRA. The first option includes a complete lump sum distribution that’s tax-free, if the deceased has had a Roth IRA for 5 years. Secondly, the five-year rule option lets beneficiaries leave assets in the Roth IRA until the fifth anniversary of the original owner’s death. After five years, the assets are distributed in a lump sum, tax-free. The annual distribution is calculated based on the beneficiaries’ age (life expectancy payment option).
  1. Secure Future for You and Your FamilyIf you are an experienced real estate investor, you could be using your knowledge to help secure a comfortable future for yourself, as well as your family. Self-directed IRA rules protect your retirement savings from debt collectors, which means investments held in these accounts are more safeguarded. Self-directed IRA rules also allow you to leave these savings to your heirs, so successful investing could mean a significant inheritance for your children.
  1. Flexible Contributions Year-RoundYou can withdraw contributions made to a Roth IRA tax and penalty-free at any time (i.e., ordering rules). Even if the owner has not satisfied the criteria to distribute the earnings tax-free, owners can withdraw some of the growth in value or earnings penalty free. Examples: paying for medical expenses above 10 percent of the individual’s AGI or college expenses.
  1. Contributions Are Allowed After Age 70½If, like many people, IRA owners want to keep on working past the “normal” retirement age, owners can keep on contributing to a Roth IRA as long as their income falls within the limits.

Once your Roth IRA account has cash in it, you can start investing immediately. You can even partner with other investors until you have enough cash to invest in real estate on your own.



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This tax move has made a lot of real-estate investors rich

Mon, 07/10/2017 - 1:37pm

As a real-estate investor, you may want to unload one property and replace it with another. But selling an appreciated property results in a current tax hit. This is a bad outcome if you intend to use the sales proceeds to buy replacement property. The good news: Section 1031 of the Internal Revenue Code allows you to postpone your tax bill by arranging for a deferred like-kind exchange. This time-honored maneuver is one big reason that some real-estate investors have struck it rich. However, there’s a risk that the like-exchange privilege could be sacrificed at the altar of tax reform. So it could be a good idea to get like-kind exchanges done sooner rather than later while the current taxpayer-payer friendly rules are still in place. Here’s what you need to know.

Like-kind exchange basics

You can arrange for tax-free real property swaps as long as the relinquished property (the property you unload in the swap) and the replacement property (the property you receive in the swap) are of like-kind.

To avoid any current taxable gain, however, you also must avoid receiving any “boot.” Boot means cash and property that’s dissimilar to the relinquished property. When mortgaged properties are involved, boot also includes the excess of the mortgage on the relinquished property (the debt you get rid of) over the mortgage on the replacement property (the debt you assume).

If you receive any boot, you are taxed currently on gain equal to the lesser of: (1) the value of the boot or (2) your overall gain on the transaction based on fair market values. So if you receive only a small amount of boot, your swap will still be mostly tax-free (as opposed to completely tax-free). On the other hand, if you receive lots of boot, you could have a big taxable gain.

Of course the easiest way to avoid receiving any boot is to swap a less-valuable property for a more-valuable property. That way, you’ll be paying boot rather than receiving it. Paying boot won’t trigger a taxable gain on your side of the deal.

In any case, the untaxed gain in a like-kind swap gets rolled over into the replacement property where it remains untaxed until you sell the replacement property in a taxable transaction.

What constitutes “like-kind” property?

When it comes to real estate, the IRS has a very liberal definition of “like-kind property.” So you can swap improved real estate for unimproved real estate, a strip center for an apartment building, a boat marina for a golf course, and so forth. However, you can’t swap real property for personal property without triggering taxable gain. For example, you can’t swap a building for an airplane. Finally, you can’t swap property held for personal use, such as your home or boat. Nor can you swap inventory, partnership interests, or investment securities. The vast majority of tax-free like-kind exchanges involve investment real estate.

Back in 2002, the IRS clarified that even undivided fractional ownership interests in real estate (like tenant-in-common ownership interests) can potentially qualify for like-kind swaps. For example, you need not receive an entire commercial building as the replacement property in order to complete your tax-free exchange. Instead, you could receive an undivided fractional ownership interest in the property. Source: IRS Revenue Procedure 2002-22.

Deferred like-kind exchanges

As you might imagine, it’s usually difficult (if not impossible) for someone who wants to make a like-kind swap to locate another party who owns suitable replacement property and who also wants to make a like-kind swap rather than a cash sale. The saving grace is that deferred exchanges can also qualify for tax-free like-kind exchange treatment.

Under the deferred exchange rules, you need not make a direct and immediate swap of one property for another. Instead, you can in effect sell the relinquished property for cash, park the sales proceeds with an intermediary who effectively functions as your agent, locate a suitable replacement property later, and then arrange for a tax-free like-kind exchange by having the intermediary buy the property on your behalf. Here’s how a typical deferred swap works.

  • You transfer the relinquished property (the property you want to swap) to a qualified exchange intermediary. The intermediary’s role is simply to facilitate a like-kind exchange for a fee which is usually based on a sliding scale according to the value of the deal. In percentage terms, intermediary fees are generally quite reasonable.
  • Next the intermediary arranges for a cash sale of your relinquished property. The intermediary then holds the resulting cash sales proceeds on your behalf.
  • The intermediary then uses the cash to buy suitable replacement property which you’ve identified and approved in advance.
  • Finally, the intermediary transfers the replacement property to you to complete the like-kind exchange.

Voila! From your perspective, this series of transactions counts as a tax-free like-kind swap. Why? Because you wind up with like-kind replacement property without ever having actually seen the cash that greased the skids for the underlying transactions.

What if you still own the replacement property when you die? Under our current federal income tax rules, any taxable gain would be completely washed away thanks to another favorable provision that steps up the tax basis of a deceased person’s property to its date-of-death value. So taxable gains can be postponed indefinitely with like-kind swaps and then erased if you die while still owning the property. Wow! Real estate fortunes have been made in this fashion without sharing with Uncle Sam.

The last word

As you can see, like-kind swaps can get pretty complicated. However, the tax advantages can be huge, which makes all the complications well worth the trouble. That said, I don’t know if the current like-kind exchange rules and basis step-up on death rule will survive tax reform efforts — if anything actually becomes law. So doing like-kind swaps sooner rather than later may be advisable.

Sidebar: Requirements for deferred like-kind swaps

In order for your deferred exchange to qualify for tax-free swap treatment, you must meet two important requirements.

  • 1. You must unambiguously identify the replacement property before the end of a 45-day identification period. The period commences when you transfer the relinquished property. You can satisfy the identification requirement by specifying the replacement property in a written and signed document given to the intermediary. In fact, that document can list up to three different properties that you would accept as suitable replacement property.
  • 2. You must receive the replacement property before the end of the exchange period, which can be no more than 180 days. Like the identification period, the exchange period also commences when you transfer the relinquished property. The exchange period ends on the earlier of: (1) 180 days after the transfer or (2) the due date (including extensions) of your federal income tax return for the year that includes the transfer date. When your tax return due date would cut the exchange period to less than 180 days, you can simply extend your return. That restores the full 180-day period.



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Fickleness of the housing market pushes some owners to become landlords

Mon, 07/10/2017 - 1:28pm

In addition to our primary residence, we own one-and-a-half rental properties. That is, we own one by ourselves and half of another, more expensive condo that we rent out in a college town.

We’ve owned the more expensive condo for nearly 10 years and decided that this spring would be a good time to sell it. We wouldn’t make that much money when we sold, if anything, but given that we bought off the plans at the height of the market, we thought we would get all of our money out.

So we listed the condo to sell and got an immediate offer (thrilling us), which then fell apart (enormously disappointing). But the agent told us that there was another offer coming, to rent the condo for two years. With no other offers forthcoming, that’s the deal we ultimately took, and it’s at a high rental amount our agent didn’t think we’d get.

“Landlord nation.” That’s how Glenn Kelman, chief executive of Redfin, recently described the current real estate market to CNBC’s Diana Olick. He told her that inventory is dropping dramatically (Redfin reported that the number of homes for sale fell 13.3 percent, the steepest decline in four years, marking 19 straight months of annual declines), and that home builders are putting up rental apartment buildings rather than single-family homes millennials and other first-time buyers could afford.

He told her empty-nesters are enjoying living in their big homes with 30-year mortgages locked at or near historic lows and aren’t selling. That for the first time, the real estate industry is feeling the pinch and his own company is going to have its growth constrained by the lack of housing inventory. If nothing gets listed, real estate agents have nothing to sell.

We are continuing to experience the aftermath of the worst economic recession since the Great Depression in unexpected and unintended ways. When the real estate bubble burst, millions of homeowners were underwater with their mortgages and went into foreclosure or did deeds-in-lieu of foreclosure, sold their homes in short sales, or got stuck in homes they couldn’t unload. Investors with cash stepped in. Hedge funds bought thousands of homes and rented them back to the current owners. Smaller investors picked up dozens of homes for pennies on the dollar. Homeowners who were flush, who always wanted that bigger lot, picked off their neighbor’s homes for a fraction of what they were worth.

(And lest you think the real estate transfer was limited to residential real estate, commercial and industrial deals abounded — and still do in many places. Think about malls where tenants such as Sears, J.C. Penney and other large legacy retailers are struggling.)

Self-taught experts in REO transactions, foreclosures and short sales ruled the markets. And, slowly, the residential real estate market recovered and then boomed. Because not only are mortgage interest rates still near historic lows (despite the Federal Reserve Bank raising interest rates twice), very few homeowners (on a relative basis) are selling.

Millennials (the eldest of which were in their early 20s when the Great Recession started, and the youngest of which witnessed the financial stress and, in many cases, ruin of their family firsthand) have been struck by how stuck Americans got. Those who are finally moving out of their parents’ homes are renting with friends or by themselves. They are realizing that student loan debt, Uber habits, overcharging credit cards, eating lunch and dinner out (and not the consumption of avocado toast), leasing fancy cars, and taking jobs that don’t pay enough to add to savings on top of covering debt payments, have at least postponed — if not sunk — their dreams of homeownership.

“Landlord nation” is an interesting concept. It could imply that people are choosing to rent and not own. It could also imply that they can’t. But in real estate, nothing lasts forever, and housing markets can change on a dime.

Trulia is reporting that more than 1 in 10 for-sale listings had a price cut, and most major housing markets saw cuts increase: Sixty-nine of the 100 largest metros saw the share of for-sale listings with a price reduction increase from last year to this year. While that could mean home price increases are flattening, it could also mean sellers, seeing price wars firsthand, are setting pie-in-the-sky prices for their homes, only to re-price them in order to sell.



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Is the renting trend turning around?

Thu, 07/06/2017 - 11:22am

National homeownership rates hit 50-year lows last year during the second quarter, slipping to just 62.9 percent, according to the U.S. Census Bureau.

Since then, rates have climbed slightly to 63.6 percent in the first quarter of 2017. This is 0.1 percent higher than the first quarter of 2016 before the drop, but it’s a statistically insignificant increase year over year.

But is this upward trend an indication that homeownership is turning around in U.S. markets?

It may be too soon to tell. However, current analyses are encouraging: Credit bureau and risk information provider TransUnion released an analysis earlier this month of people who shopped for a mortgage in the first quarter of the year – and 55 percent of them were first-time homebuyers.

That’s up from the 35 percent of all homebuyers who were first-time homebuyers in 2016, according to the National Association of Realtors’2017 Home Buyer and Seller Generational Trends report, which was released this March.

But before we jump to conclusions about residential real estate market, let’s examine key factors that will determine the future of the renter vs. owner debate.

The Millennial Question

As the generation now coming of age, millennials are largely looked upon as the group to decide whether homeownership grows or shrinks in coming decades.

The downward trend of homeownership began with the housing bubble burst and subsequent recession starting in late 2007, which resulted in as many as 10 million families losing their homes to foreclosure nationwide, according to the National Center for Policy Analysis. Not only were homeowners unable to pay off existing mortgages, but younger people entering the workforce for the first time were unable to qualify for mortgages, as lenders had to restrict lending practices dramatically.

Without the funds to make a down payment or the credit to be approved for a mortgage, millennials opted to rent. And they continue to rent in many cases – the homeownership rate for Americans under age 35 was just 34.3 percent in the first quarter of this year, according to the U.S. Census Bureau. But the passage of time and, of course, the end of the recession has allowed those renting millennials to slowly build the wealth necessary to enter the housing market.

Mike Doherty, senior vice president of TransUnion’s rental screening solutions group, breaks millennial renters into three groups: those who don’t currently have the ability to buy, those who truly prefer to rent, which he notes has been the most highly publicized group, and those who want to own and will be able to in the foreseeable future.

It’s the third group that’s growing. The Transunion analysis of people shopping for mortgages found that 29 percent of nonhomeowners looking for a mortgage were millennials – up from 28 percent in the first quarter in 2016 and 27 percent for the same time period in 2015.

“What you’re potentially seeing now is a little bit of a shift … towards nonhomeowners looking for mortgages. We may start to see a change in the trend of homeownership. Homeownership may start to increase,” Doherty says.

Echoing that sentiment is Chris Nard, President of Mortgage for Citizens Bank. He says the widely publicized view of millennials as eternal renters appears to be largely a generalization. “We vastly overestimated the impact on that group of people from the housing financial crisis,” he says.

A Question of When

Even as more millennials are willing and able to become homeowners, or take steps toward it, the timing for growth in homeownership remains unclear. Is the rental renaissance past its peak, or will we see another spike in demand for apartments?

Nard points out that a slow pace of change in homeownership rates is a good sign. A sudden jump in the percentage of homeowners would be a result of drastically loosened lending practices, and it could spell out doom in the form of mass foreclosures for the housing market again in the future, which could be a symptom of bad economic times.

“I would look at [the homeownership rate] to be kind of a steady, on growth trend. I think inventory and reasonable lending programs, post-financial crisis, keep you from seeing any big, unusual spikes in homeownership rates,” Nard says.

Doherty also notes that there shouldn’t be a sudden spike in rental vacancies. “You’ll still have the increase in population, but as more people opt for homeownership, obviously the amount of supply [of new multifamily housing] you would need to add would not be as much as what’s been demanded in recent years,” he says.

Questioning the Market

For the very reason Doherty points out, it’s unlikely the rental market will have more supply than demand, leaving newly developed apartment buildings vacant. But the high number of renters has caused rents to increase significantly – in many places, high enough for buying to become the better option.

“As rents have gone up fairly significantly in the last few years, homeownership, although it’s gone up as well, it may have become relatively more affordable,” Doherty says.

But the current state of the single-family housing market keeps many first-time homebuyers wondering about their options. The notoriously tight inventory is keeping some would-be first-time homebuyers from entering the market: either they’re right on the cusp of being able to afford a home in their area and can’t risk getting caught up in a bidding war, or they would simply rather wait out the seller’s market a little longer.

For renters looking to buy in the hottest parts of town and in major metro areas, they may have to wait longer than expected. “We’re going to see restricted inventory in essentially the attractive center cities for the next few years at least,” Nard says.

Being the size they are, housing developments and apartment buildings aren’t able to match the ebb and flow of demand as quickly as other things people rent or buy, like a car. Only time can reveal whether Americans are truly opting out of homeownership for good, or if renting simply served as a means to an end following the financial crisis.



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Renting Out Your Home? 5 Things You Need To Know

Thu, 07/06/2017 - 11:16am

For some long-term vacationers, sometimes the best idea is to rent out their homes.

That’s what author/journalist Deborah Jacobs did with her Brooklyn home when she wanted to take a dream trip to France and Spain with her husband.

In her superb new book Four Seasons in a Day: Travel, Transitions and Letting Go of the Place We Call Home, she details what you need to know when considering this process.

What does renting your home enable you to do? For one, it will help finance your vacation, especially if you plan to be away for a month or so. Provided the people you rent to are responsible — and you price your home fairly — that’s one financial worry off your table.

Taking that longer vacation also takes the pressure off of trying to see everything you can in a short period of time. You’ll have some breathing room to explore.

In Jacobs’s book, she was able to soak up the culture of France and Spain, engaging in things like a Loire Valley grape harvest; an “exuberant chili pepper festival” in Spain’s Basque Country and the pintxo bar crawl in San Sebastian, where she developed “an affinity for sheep’s milk cheese and cultivated new friendships.”

There’s a lot you need to know before you rent out your home, though. Finding the right tenants is key, along with contracts that will protect you from bad ones. Here’s what Jacobs suggests:

— How to List Your Home. “We listed our house on three platforms, the most important of which were HomeAway (VRBO) and Airbnb. Over the past several years, I have spent at least 40 hours perusing comparable properties on these sites, taking photographs of my own house in various seasons, writing promotional copy and updating our listing to cut down on inappropriate inquiries.

— Write a Strong Listing. For the description, I believe in full disclosure. I play up what makes our house appealing, and to some extent, our listing is a work in progress. For example, one evening, when our dining room table was set for company, I took a picture of it and added it to our existing listing on sharing economy sites.

— Pricing it Right. With pricing, I look at what owners in other desirable New York neighborhoods are charging and adjust accordingly. For example, we can charge as much as people get for a small two-bedroom apartment close to tourist attractions in Manhattan. With our house, renters get a lot more space for the money and proximity to Prospect Park (which attracts families).

— Emphasizing Amenities. These are all advantages for renters: Desirability of location and proximity to public transit (if applicable); Flexible sleeping accommodations for more than four people; Washer/dryer on the premises; Air conditioning and free parking.

— Full Disclosure is Important. Though I work hard to show the house to best advantage, I don’t try to hide anything. For example, our house does not have a bathroom on the first floor, and I say so in the listing. It also has a lot of stairs, and I want people with young children to understand that.”

Of course, you’re bound to receive some inquiries that won’t result in suitable arrangements. That means you should review several offers and be able to say no if they don’t pass the smell test.

Jacobs had to turn down “movie producers who wanted to use it not only is lodging while they were on location, but also as a place where a staff could work during the day while they were shooting in New York. I also make it clear that we don’t rent for less than a month, though we still get inquiries from short-timers who seem to think that’s negotiable.”



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