Podcast Summary
Investing in Commercial Real Estate during Inflation: Conservative underwriting, strong offers, significant earnest money deposits, and finding assets with desired return metrics are key strategies for acquiring commercial real estate in a competitive market.
In inflationary times, investing in commercial real estate can help preserve purchasing power. Dan Hanford of passiveinvesting.com shares his experience in acquiring properties despite the competitive market. He stresses the importance of underwriting conservatively, having a strong offer, and being willing to put down significant earnest money deposits to stand out. These strategies, along with finding assets that meet desired return metrics, enable Dan's group to successfully acquire properties in the $20-$110 million range. It's crucial to have a meaningful earnest money deposit to demonstrate serious intent and compete with institutional buyers. However, the earnest money comes from the capital raised and not an individual investor's personal funds.
Maintaining sufficient operating reserves for renovations and investor returns: 3one zero six aims for 8 months of operating reserves to ensure project completion and investor returns, benefiting from maintaining investor confidence and generating consistent returns even during economic downturns, and holding onto assets for at least 18-24 months to maximize returns.
The real estate firm 3one zero six prioritizes having sufficient operating reserves to ensure the completion of renovations and maintenance of returns for investors. They learned this lesson the hard way when they did not have enough reserves for a major renovation project, forcing them to loan money to the property. They now aim for 8 months of operating reserves, which can support the property for 8 months if it goes down to 0% occupancy, a scenario that is unlikely to occur. This approach has benefited them by allowing them to maintain investor confidence and continue to generate returns, even during economic downturns. They always aim to hold onto assets for at least 18-24 months to maximize returns.
Peace of mind with a large operating reserve: A large operating reserve can mitigate risks for real estate investors and provide access to various financing options, including favorable bridge debt in current market conditions
Having a large operating reserve can provide peace of mind for real estate investors, even if it means a slightly lower return. This reserve can help mitigate risks, such as potential economic pressures or capital calls, and allow everyone involved to sleep well at night. Regarding financing, larger funds like PassiveInvesting.com have access to various options including agency financing with long-term, fixed rates and low loan-to-value ratios, and bridge debt from institutional funds with floating rates and no prepayment penalties. The specific financing structure depends on the market conditions, and currently, bridge debt seems favorable. With the ongoing changes in the capital markets, it's essential to stay informed about the impact on loan terms and interest rates.
Cost Segregation Study for Real Estate Tax Savings: Investors can save taxes by using depreciation methods and bonus depreciation on real estate properties via a cost segregation study, which identifies smaller components for accelerated depreciation schedules, providing substantial tax benefits in the early years.
Investors in real estate can significantly reduce their taxes through various depreciation methods and bonus depreciation. The process involves having an outside engineering firm conduct a cost segregation study, which allows for the property to be broken down into smaller components and accelerated depreciation schedules. This front-loads the depreciation to the first few years, providing substantial tax benefits. Additionally, bonus depreciation can be applied to renovations and other improvements made to the property within the first year. However, it's important to consult a tax professional for specific advice and to understand the nuances of real estate taxation.
Real Estate Tax Benefits: Depreciation, Professional Status, and 1031 Exchanges: Real estate investing offers tax advantages through depreciation, professional status, and 1031 exchanges, potentially eliminating federal income tax and deferring capital gains taxes.
Real estate investing offers significant tax benefits for investors. The speaker shares his personal experience of using tax depreciation and real estate professional status to offset his income and potentially eliminate federal income tax. This benefit applies not only to active real estate investors but also to those with passive income from real estate or other investments. Moreover, when selling an asset, investors can defer capital gains taxes through a 1031 exchange and potentially pass on the asset to heirs with a reset basis, effectively paying no capital gains tax. By investing in real estate, one can not only generate income but also strategically manage taxes throughout their investment journey.
Stay updated with financial news and market trends using tools like Yahoo Finance: Investors can use Yahoo Finance to stay informed about financial news, analyze investments, and manage accounts. Understanding depreciation recapture and opting for 1031 exchanges can help minimize taxes when selling assets.
Staying informed about financial news and market trends is crucial for investors. Yahoo Finance is a valuable tool that provides comprehensive financial news, analysis, and investment account management features. By using it, investors can stay updated on important developments, such as Tesla's staff layoffs or iPhone shipment declines. Additionally, understanding the concept of depreciation recapture is essential for investors dealing with property sales. When an asset is sold without a 1031 exchange, investors will be subject to both depreciation recapture tax and capital gains tax. To minimize taxes and continue deferring taxes, investors can opt for a 1031 exchange, allowing them to roll the proceeds from the sale of one investment property into a new one. Passive investing.com, for instance, makes this decision on behalf of its investors, who trust the company to choose the next solid investment for them. By doing this, investors can continue to grow their investment portfolio and minimize their tax liabilities.
Two classes of shares with varying risk and returns: PassiveInvesting.com offers Class A shares with guaranteed returns and lower risk, and Class B shares with potential for higher returns but greater risk.
The team at PassiveInvesting.com is offering two different classes of shares, Class A and Class B, in their current real estate deal in Savannah, Georgia. Class A shares represent preferred equity, which offers a guaranteed return and preferential treatment in the capital stack. Class B shares represent common equity, which offers the opportunity for higher returns but comes with more risk. The team chose to offer these two options due to the varying risk tolerances and investment goals of their investors. While only a small portion of the capital stack is reserved for Class A shares, they offer a lower risk profile and attractive cash flows for investors prioritizing stability and income. Conversely, Class B shares provide the potential for higher returns but come with greater risk and uncertainty. Ultimately, the choice between the two classes depends on each investor's individual preferences and investment objectives.
Improving properties for higher rents: Real estate firm zero zero six:fifty four buys quality assets, enhances them through renovations and tech upgrades, and charges higher rents for increased NOI and property valuation.
Real estate investment firm zero zero six:fifty four aims to enhance the value of their properties by improving the assets, making them more competitive with their competitors, and increasing rents. They focus on buying properties directly from developers or from past buyers with good quality assets, and look for opportunities for organic rent growth and under-market rents. The firm plans to improve these properties by updating amenities, doing exterior and interior renovations, and adding technology packages to units. These improvements increase the property's desirability and allow for higher rents, which positively impacts the net operating income (NOI) and, ultimately, the property's valuation.
Competitive markets lead to higher exit potentials despite initial higher cap rates: Investing in competitive primary or high-end secondary markets can lead to higher exit potentials due to strong demand, but it's crucial to consider long-term exit potential and interest rate impact on debt products.
Investing in real estate assets in competitive primary or high-end secondary markets can lead to higher exit potentials, despite the initial higher cap rates. Competition in these markets acts as a litmus test, ensuring the asset's value on exit remains strong even in economic downturns. However, investing in tertiary and quaternary markets with lower cap rates can result in significant losses when interest rates rise and cap rates increase upon exit. It's essential to consider the long-term exit potential and the impact of interest rates on debt products when making real estate investment decisions. In the specific case of Mariner Grove in Savannah, the private loan with a 3.8% adjustable interest rate was secured with a short-term interest rate cap to mitigate the risk of rising interest rates.
Considering the Risks of Floating Rate Debt for Real Estate Investments: Investors must weigh potential savings during favorable economic conditions against the risk of reduced cash flows during rising interest rates when using floating rate debt for real estate investments. Careful planning and adequate operating reserves are crucial to mitigate short-term cash flow fluctuations and maintain long-term returns.
While there are benefits to using floating rate debt for real estate investments, such as potential savings during favorable economic conditions, there is also risk involved, particularly when interest rates rise. This can lead to reduced cash flows for investors in the short term, although the property should still be able to meet debt service requirements and generate solid returns over the long term. However, with current economic conditions and rising interest rates, some investors are starting to prefer fixed rate debt, despite its higher cost. Ultimately, it's important for investors to carefully consider their debt options and plan for potential cash flow fluctuations in the short term, while maintaining adequate operating reserves to weather any major shifts in the debt market.
Public.com's High-Yield Cash Account with 5.1% APY: Public.s cash account offers a high yield of 5.1% APY, surpassing competitors, while diversification is crucial for a balanced investment portfolio with opportunities in passive investing such as multifamily, self-storage, and more.
Public.com offers a high-yield cash account with an impressive 5.1% APY as of March 26, 2024, which is significantly higher than various competitors like Robinhood, SoFi, Marcus, Wealthfront, Betterment, Capital One, Ally, Barclays, Bank of America, Chase, Citi, Wells Fargo, Discover, and American Express. This high-yield cash account is a secondary brokerage account with Public Investing, and the funds are automatically deposited into partner banks for FDIC insurance. When considering multiple investment opportunities for a portfolio, it's essential to consider diversification beyond potential returns. Passive Investing offers various opportunities, including the Mariner Grove multifamily fund and a self-storage fund with potential annualized returns of 21% and a potential IRR of 18%. Passive Investing's diversified portfolio includes multifamily, self-storage, car washes, and hotels, each with distinct risk and return profiles. As investors, we should avoid putting all our eggs in one basket and instead aim for a well-diversified portfolio.
Pivoting in Real Estate: Lease Agreements and Market Conditions: Flexible lease agreements in self-storage and express car washes enable quicker adjustments to market shifts, while multifamily properties require longer-term strategies. Passive investors must assess market conditions annually and consider selling for higher returns or holding for steady cash flow and risk reduction.
The ability to pivot quickly in real estate investment depends on the lease agreement length. While multifamily properties have a year-long lease agreement, self-storage and express car washes have much shorter lease terms, allowing for faster adjustments to market shifts. For passive investors, determining the right time to sell an asset is crucial, and flexibility is key. Every year, a Broker Opinion of Value (BOV) is obtained to assess the current market value and potential selling price. If the market conditions allow for a higher sale price than projected, passive investors may choose to sell earlier for better returns. Conversely, holding onto an asset for the full 5-7 year investment period ensures a steady cash flow and reduces the risk of selling during an economic downturn. Ultimately, the goal is to maximize returns for investors while minimizing risk.
Balance between diversification and focus: Effective resource allocation is crucial for maximizing returns, avoid spreading resources too thin and focus on what one is good at to strike a balance between diversification and focus.
While diversification across multiple asset classes is important for risk management, focusing on what one is good at and not spreading resources too thin can lead to greater success. The speakers shared their experience of acquiring over $1.1 billion in assets since 2018 and the concerns from investors about their rapid growth and potential overextension. They drew a parallel to their past experience of expanding their orthopedic clinics and how focusing resources on one location initially led to neglect and decline of the original location. Thus, they emphasized the importance of striking a balance between diversification and focus, ensuring that resources are allocated effectively to maximize returns for investors.
Proactive hiring and training, monitoring KPIs for business growth: Hire ahead of time, put new hires through system training, monitor KPIs daily, expand into new asset classes with hired teams, and use fees to grow the team instead of pocketing them.
Effective growth and expansion in business requires proactive hiring and training, as well as frequent monitoring of key performance indicators (KPIs). The speakers shared their experience of growing their clinics by hiring ahead of time and putting new hires through system training. They also emphasized the importance of daily monitoring of numbers to make timely adjustments. In their passive investing business, they applied the same lessons by hiring teams to manage new asset classes and diversifying their team members. They also decided to use asset management fees to grow their team instead of pocketing it as partners. When analyzing a new market like Savannah, Georgia, for investment, they look for population growth and other favorable economic indicators. Their first acquisition in Savannah was successful due to the market's 10.2% population growth, making it a promising location for real estate investment.
Multifamily Investor Nation hosting live event in Charlotte with Jocko Willink and Barbara Corcoran: The Multifamily Investor Nation group is hosting a live event in Charlotte with celebrity speakers and is considering investing in a high-quality asset in Savannah, a market with significant population and job growth, and stability from major industries and colleges.
The Multifamily Investor Nation group is hosting an exciting in-person event in Charlotte, North Carolina in June, featuring celebrity speakers like Jocko Willink from Extreme Ownership and Barbara Corcoran from Shark Tank. The group has a history of successful virtual events, but is now ready for a live event with big names. When it comes to market selection, the group looks for markets with significant population and job growth, and stability from large corporations. Savannah, Georgia, with its population growth, job growth, and stability from major industries and colleges, is an attractive market for investment. The group is currently considering investing in a high-quality asset in Savannah and invites interested investors to connect with them through their website or social media channels for more information on the event and investment opportunities.
Learning from Real Estate Expert Dan at MFINCon: Attend MFINCon to learn from industry pros, connect with Dan on LinkedIn, and explore real estate investment opportunities with Passive Investing.
Dan, a real estate expert, recently shared valuable insights about investing in multifamily properties through the MFINCon conference and his partnership with Passive Investing. The conference, which is in Charlotte on June 23rd, 24th, and 25th, offers attendees the opportunity to learn from industry professionals and potentially invest in promising real estate opportunities. Dan also encouraged listeners to connect with him on LinkedIn and consider joining Passive Investing's group for more information on their current and future offerings. The hosts, Robert and Stig, expressed their excitement about potentially investing together with Dan and shared their appreciation for his transparency in discussing both the upsides and downsides of real estate investments. Overall, the interview emphasized the importance of education and collaboration in successful real estate investing. To learn more about real estate investing and access additional resources, listeners are encouraged to check out Robert's podcast, Real Estate 101 by The Investor's Podcast Network.
