For many, owning a home is an exciting dream, and one of the best ways of achieving that is through a mortgage. Taking on a mortgage is necessary if you don’t have the cash to pay the cost of a home upfront. Several real estate investment consulting firms offer incredible benefits, such as investment in property opportunity zones.
In fact, when choosing the best mortgage option, it’s crucial to have clear facts about how much money you’ll need to present, how high your credit score should be, and whether you’ll need extra money to pay for the mortgage insurance.
If you’re considering taking a mortgage but are unsure where to start, let alone which loan to take, keep reading. In this article, we discuss three of the best mortgage options–conventional loan, FHA, and VA loan–their differences and advantages.
The Federal Housing Administration (FHA) insures an FHA loan. If you have low credit scores, then you should probably apply for the FHA loan. Moreover, FHA loans require a lower down payment compared to conventional loans.
To borrow the value of a home using FHA, arm yourself with a 580 credit score and a 3.5 % down payment.
With an FHA loan, you don’t get the loan directly from the FHA. Instead, the FHA guarantees and insures your loan from approved lenders, banks, or financial institutions. As such, your lender is at a lesser risk because the FHA will pay the claim if you default.
FHA borrowers who get approved must purchase mortgage insurance and make premium payments to the FHA.
The FHA-approved lender will gauge your qualifications as it would any mortgage applicant. However, instead of evaluating your credit report, a lender may scrutinize your work history and payment records for the past two or three years.
Additionally, you need a front-end debt ratio (your monthly mortgage payments, mortgage taxes, and insurance) at a maximum of 31% of gross monthly income and a back-end debt ratio (your mortgage payment plus all other monthly debts) at a maximum of 43% of gross monthly income.
However, it’s crucial to note that the lower your credit score and down payment, the higher the interest rate you’ll need to pay on your FHA mortgage.
● You don’t need exceptional credit scores.
● Low down payments.
● You can build your equity sooner and stop renting earlier.
● Suffering from bankruptcy or foreclosures does not hinder your ability to get an FHA mortgage.
● Since you have a poor credit score, one requirement is paying mortgage insurance upfront and annually to protect the lender from default risks.
● You’ll have to meet stringent property requirements.
● You will pay higher interest rates to compensate for the low down payment.
Like any other ordinary loan, the government does not back or insure this mortgage loan. Instead, private lenders guarantee it, while the borrower pays the insurance. Conventional loans are available through various mortgage lenders, such as banks, credit unions, and online lenders.
There are two types of conventional loans–fixed and adjustable-rate loans. A fixed-rate conventional loan charges constant interest, while an adjustable-rate conventional loan changes interest rates according to market conditions.
Conventional loans are riskier because the government does not back them. Therefore, it can be harder to meet the requirements than FHA or VA loans.
Build up your credit score to 620 and have at least a 3% down payment to be eligible for a traditional mortgage loan.
The private lenders will verify your documentation, including recent payment records, bank statements, tax returns, and other financial information. They want to ensure you have a solid income that can meet monthly mortgage payment obligations on time.
Next, the lender will evaluate your debt-to-income (DTI) ratio (other debts you need to pay each month, including loans and credit card debt). The DTI ratio should not exceed 43%, although some might exempt a ratio of up to 50%.
● You can cancel the mortgage insurance once you reach 20% equity in the home.
● They offer flexible repayment terms.
● The conventional loan rate is lower than FHA loans.
● Conventional loans are flexible and offer options for second homes and other similar real estate investment opportunities. This means the borrower does not have to occupy the property.
● They do not allow projection-based financing
● Require a lot of collateral
● They feature restrictive agreements.
A Veterans Affairs (VA) loan is a mortgage loan established and backed by the U.S. Department of Veterans Affairs. They are available to service members, veterans, or those who were discharged.
Private lenders, such as mortgage institutions and banks, provide these loans. However, if the borrower defaults, the VA offers a settlement.
You must complete 181 days of active service during peacetime and at least 90 consecutive days of active service during wartime. Alternatively, you must be the spouse of a service member who lost their lives in the line of duty or who has a service-connected disability.
● No down payment
● Lowest interest rates
● No mortgage insurance
● You can finance the total value of the home
● Mandatory funding fee
● Strict appraisal and inspection
To find the best option between FHA vs. Conventional vs. VA loans, you need to consider your preferences, needs, finances, and qualifications.
While the VA is exceptional as there are no down payments necessary, only war veterans or their spouses qualify. You don’t need exceptional credit history to get an FHA loan, but that also means high-interest rate payments and mandatory insurance payments.
On the other hand, a conventional loan offers flexible repayment terms, and you can opt-out of insurance payments once you get to 20% equity. Choosing one over the other will depend on your financial situation.
Apart from that, one can avail several benefits through diversifying their portfolio. For example, you can save money on taxes by following the 1031 exchange process and making wise investment decisions.
The Section 8 Housing Program offers financial assistance to access low-cost housing, sometimes referred to as the housing choice voucher program. And is one of the most reliable real estate investment opportunities known so far.
Since the government takes care of a large chunk of rent payment, the section 8 multifamily subsidized housing program has a massive advantage over traditional rental contracts. We examine how a shrewd property owner can tap into the program and build wealth.
According to the latest figures, about 2.2 million households by low-income earners receive subsidized rent through the section 8 housing choice voucher program.
Under the program, the government pays a percentage of the tenant’s rent directly to section 8 landlords whose property is in the listing. The U.S. Department of Housing and Urban Development Management (HUD) funds the program by paying, on average, 70% of a section 8 tenant’s rent and utility bills. A family must typically earn under 50% of the median income in a given area to qualify for HUD Section 8 relief.
Homeownership and maintenance under the program can involve financial support from the HUD. The owners can also access conditional government subsidies when renovating, building new homes, or putting up properties for a mortgage.
The homeowner must set aside units to house the low-income American population under the section 8 housing list.
Section 8 landlord application can be lengthy and costly, involving a lot of paperwork, a waiting period, and property inspection. It can take up to 5 months to get approval.
Multifamily homes are properties with up top units and still qualify as a single residence from lending standards. These can be townhouses, duplexes, triplexes, or apartments with up to four units. Five units and above are multifamily but usually require a commercial mortgage.
Most multifamily dwelling property owners rent them out to residents. They are great for generating a higher monthly rental income with lower maintenance costs, so you can rely on commercial property investment to build wealth over time.
Section 8 includes two types of vouchers for the tenants– The Housing Choice Voucher Program and the Project-Based Voucher. The Housing Choice Voucher program allows tenants to choose any unit within the section 8 program. The Project-Based Voucher ensures that the federal rental assistance stays within the selected housing unit and is often more profitable for the owner.
For real estate investors with a record of handling rental assets, the bank can use the projected rental income from the units to finance down payment programs for multifamily homeownership.
Upon qualifying for the Section 8 program, the HUD agrees with the property owner on the expected rental income, per the Fair Market Rate. The landlord will receive monthly payments from the government, even when there’s a recession.
As an incentive, the government often includes an annual 5 to 8% incremental increase on rent payments. The rate could translate to a better deal than what they would get from the open market.
Qualified and listed property multifamily homeowners get access to a vast pool of would-be tenants on the waiting list. The list can have 2 million or more Americans at any given time. That means minimal vacancy issues, reducing your marketing budget significantly.
The federal subsidies make multifamily homes in the Section 8 program suitable for long-term tenancy, as the tenants are likely to stay longer in the units.
Among several real estate investment opportunities one can look for investing in several multifamily homes as a remarkable way to achieve long-term cumulative wealth. Here are some tips to consider when investing in section 8 multifamily homeownership:
While renting out the multifamily units under Section 8, you pay off your mortgage from the tenants’ rent. Hence, liabilities go down, while in almost every instance, the property’s value goes up.
In this case, there comes a time when the mortgage is zero, and the income is primarily profit. Therefore, you can obtain more multifamily property, which you can scale to millions of dollars in wealth.
The multifamily concept is more investor-friendly as compared to single-family units. In this case, when you need financing, you bring the deal to the table while investors bring the money on board. Later, the profits get split as agreed.
When you own a multifamily home, you can live in one of the units while renting out the rest. The tenants’ rent caters to your housing expenses, and you can save up over time.
A sure-fire way to increase your rental income is to follow the BRRRR (buy, renovate, rent, refinance, repeat) strategy. Additionally, it would be best if you thought about increasing the number of rooms.
There’s a healthy market for multifamily homes with more than four bedrooms, but a chronic shortage for them:
For example, a single home will make you $150 in profit per month, but a duplex will rake in $300, while four-unit multifamily will fetch $600 within the same timeframe.
Scaling up wealth from multifamily units has a longer time horizon, is not entirely problem-free but is assured, especially when listed in the Section 8 program, whereby there is the assurance of monthly government payments. It gets better over time as you can hire property managers from top commercial real estate investment companies that also offer a few tax benefits like 1031 exchange process to run it on your behalf, and you can adjust rental prices upwards after periodic renovations.
Thanks to increasing demand and a recovering economy, the real estate market is on an upward trend for 2022. There is a rise in activity in all the asset classes, with the leaders being industrial and multifamily.
In 2022, this upward trend will continue as investors and tenants alike demand more real estate variety. The mortgage interest rates forecast for 2022 is 3.6%, which could impact the market. That said, this is what to expect from commercial real estate investing in 2022.
The pandemic brought about a surge in online shopping, while sales in traditional brick-and-mortar stores declined due to social-distancing requirements. However, there has been a rise in the share of eCommerce retail sales from 16% to 19% in 2020 compared to pre-pandemic 2019.
Even though online shopping offers advantages like convenience and saving on time, many consumers still prefer shopping in person. Brick-and-motor shops allow consumers to shop for items that require accurate sizing and a proper fit.
More online business owners will likely push the demand for brick-and-mortar properties. For instance, Amazon recently announced its first-ever physical store for men’s and women’s fashion, Amazon Style. The store is set to offer an elevated shopping experience and will open later in the year.
Even though offices remain the hub for business activities, employees now have flexible work-from-home options. Employees can skip the daily work commute for a few days a week. During the height of the pandemic, millions of employees worked from home.
However, as things slowly return to normal, statistics show that an increasing number of employees prefer the more flexible work-from-home model.
Real estate investors must keep an eye out for days when all the employees are in the office for teamwork, which creates a need for bigger office space. That maybe calls for a rethink of the workspace design, as buildings have to conform to the new reality of preventing communicable diseases.
With increased life expectancy, there is a growing demand for senior living homes and skilled nurses. The demand is not just about buildings as investments, but the increasing need for places where the elderly can feel safe, protected, and cared for.
It’s expected life expectancy will rise to 85.6 by 2060. Baby boomers are growing old and will need skilled nursing and more senior living homes.
Covid-19 caused a decline in the move-ins, leading to a drop in occupancy rates. Even though there is a growing demand for senior homes now, percentages are still lower than what they were pre-pandemic.
Post-pandemic, consumers are looking for affordable rents and home prices, which in turn will limit home price appreciation and rent growth. Millennials aged 26 to 35 are in the prime first-time homebuyer age and need affordable housing despite the slight increase in mortgage rates to 2.9%. Rising rents, as high as 7.1%, will further drive millennials to purchase homes.
The markets for home purchases and apartment rentals are usually polar opposites of each other. When the rental market is strong, the housing market is soft, and vice versa. The pandemic created a desire for more space, as more people adopted a work-from-home model. This directly affects the rental and housing market, driving them to record highs.
Inflation is expected to continue above the trend and will likely decrease as the year progresses. The majority of the Federal Reserve members predict three interest rate hikes in 2022. They also expect that the increased interest rates will help fight inflation.
Long-term real estate interests will remain low, providing attractive financing conditions for investors. The consumer price index rose to an all-time high in 30 years. However, this does not account for the unpredictable swings during the pandemic’s short period.
The bottlenecks in the supply chain are still present and will continue to be for some time. The shortages in key commodities and goods are likely to continue and fuel high prices in the middle of the year. However, things are likely to cool down towards the end of the year.
Self-storage outperformed expectations during the pandemic with an average profit margin of 41%, higher than other real estate niches. The increased strength in the apartment and housing markets positively affects self-storage.
Due to the pandemic, more and more people needed to move stuff out to create space for study and work-at-home situations. Further, millennials are starting families, meaning an increasing number of people will look into self-storage. The same goes for college graduates living in cities where living space is at a premium. Thus, before getting into real estate one might want to get complete understanding of several tax benefits like 1031 exchange process to further save money on the profits and investments.
During the height of the pandemic, business-related travel halted, with most meetings and conventions moving online. Hotels, entertainment, and restaurants catering to business meetings can expect a recovery in 2022.
Selling a new product or closing a major deal is always best done in a face-to-face meeting, thus increasing the need for hotels, meeting spaces, and entertainment spots.
An overarching trend is the migration of urban user to decongested areas, leaving vast office spaces unused. To utilize the available urban spaces and provide better value, commercial real estate investors will likely turn to mixed-use developments.
That way, commercial developers can stem the tide towards residential properties by having all amenities, such as retail, commercial, and residential properties all under one roof. Mixed-use developments sound the best way to attract a new market.
Digital communications surged during the pandemic since people relied on them for work, e-commerce, and entertainment. Even as the economy opens, people continue to rely on digital communications because of the conveniences they offer.
This leads to a demand for cell towers, data centers, and logistics facilities, which counts as growth in commercial real estate.
What the market has reaffirmed is that nothing stays static forever, so there is some wisdom in moving with the times. Currently, companies are hesitant to commit to long-term leases, hence the shift towards shorter-term leases.
Further, as employees seem to prefer the hybrid working model, it makes sense to opt for small working areas, or even smaller ones situated closer to workers’ residential areas. So investors are likely to target smaller suburban offices.
While interest rates are set to rise during the year, it doesn’t create much of a worry for commercial real estate players as they expect a commensurate rise in the economy. Also, a few top commercial real estate management companies smoothen the process for investors to get through the hustles involved. That said, some of the trends you should expect from the commercial real estate market include a rise in hospitality spaces, workspaces, and brick-and-mortar retail spaces.
Like any other investment, multifamily properties pose some risks for their investors. It’s not as risky as investing in the stock market, but considering the amounts involved, a multifamily investment can easily eat into your finances if it goes bust.
So, how do you minimize risk to commercial real estate investment? This article highlights the best 10 tactics you can employ to mitigate the risks of purchasing and maintaining a multifamily unit.
That involves assessing the risks associated with the submarket or the property’s geographical location. In real estate, a competitive set refers to the group of properties that compete with your property for business.
An investor uses the competition to benchmark a property’s performance before purchasing. Carry out an analysis of properties comparable to what you’re interested in investing in.
Using this information, you can identify factors like occupancy rates to determine whether the property is profitable or not. Alternatively, consult property owners and managers within a competitive set to gain valuable information.
Now that things look good on paper, it is time to take a closer look at the property. Plan to view the property in person and ensure your tour includes the units, common areas, and amenities.
For common areas like hallways and the lobby, consider the cleanliness and general condition.
As for the amenities, look at their layout within the property. Is it organized? Consider the advantages or disadvantages, if any, of the design of the amenities within the multifamily property.
As you inspect the units, look at them from a renter’s perspective. If you rent out the units within the property, what is lacking, or what needs improving?
Consider factors like how spacious the units are, the cabinets’ finishing, and whether it has a balcony or outdoor deck. These ‘extra’ touches are what would make a renter choose your property over another one.
After inspecting the property’s physical aspects, it’s time to scrutinize who lives there. Please pay attention to how they use the property and its amenities. This inspection will give you an overall feel of the general resident profile.
Additionally, an in-depth analysis will provide an income profile for your residents. You can also get detailed information on the residents, such as their employment background.
Later, after purchasing the property, you should conduct criminal background checks on current and future tenants. This will prevent any scuffles or illegal activity on or near the property.
Law enforcement will hold you responsible for renting to a criminal, even unknowingly.
The next step is to inspect the properties in your competitive set. Go through the same process of reviewing common areas, amenities, and units. Managers or property owners will grant access to the property. Be honest about why you’re there.
Let them know that you want to tour the premises and any available units. Consider the same attributes you did with the property you wish to purchase, then compare the differences. Look at what other properties have that yours does not. On the other hand, look at what is missing to capitalize on.
Even if you are a seasoned investor who understands the ins and outs of properties, it is still necessary to call in the experts when analyzing a multifamily property. Third-party professionals need to conduct a thorough assessment of the property.
These experts will consider factors that you may not even think about, such as the building’s age, the condition of the roof, drainage issues, and the quality and conditions of mechanical components.
Using the analysis from these specialists, you’ll be able to determine capital costs needed soon or over an extended period. You will also need to factor in repair costs that are a part of capital costs.
Go back to your prospective property and conduct a North, South, East, West multifamily analysis. It is a process that involves placing yourself in a tenant’s shoes. Look at the property from their perspective.
Walk-in from all directions. If possible, drive in from all directions too. Doing this will give you a feel of what it is like to live on the property. As a resident, what do you find most appealing about the property? What don’t you like?
Is the distance from the store convenient? Is it a generally safe neighbourhood? Looking at the property from a resident’s perspective offers you the opportunity to have an objective look at its weaknesses.
This is one of the most important aspects of commercial real estate investment criteria. If you are new to investing, you may place all of your focus on the operating expenses. Instead, you want to develop a budget that factors everything about the building from scratch.
The budget can include factors like the staff. Ensure you look at service contracts to understand what services they provide.
Additionally, create your version of an operating budget based on gathered information, and compare it to the actual running budget the property currently has in place. The budget will help you determine what the net property income is.
Looking at the net property income, you can determine whether there are opportunities for growth with the same revenue. You can compare rents and determine whether the rate is fair or there’s headroom to raise the rent.
Also, the local market determines the rates you apply and whether there is potential for a new supply of properties in the area.
At this point, you should already have a clear picture of your competitors. In addition to looking at existing units, you need to scrutinize any multifamily properties coming up in your submarket. This is because these new units may end up competing with yours.
More multifamily properties will affect the amount of revenue your property brings in. If you’re in a larger market, you won’t feel the impact, but the effect is more prominent in a smaller submarket. This might prove to be a hectic task to monitor so you would need the help of the best commercial real estate investment company to assist you throughout the process and bring the best deals to boost capital gains.
Look out for a stabilizing factor for your property. For example, perhaps the property is located near a university. Students need housing, and it is unlikely that a university would relocate out of the blue.
Another stabilizing factor is whether a city is a state capital or not. Such factors help indicate how stable or volatile a market is over the long run.
Have all of these factors in mind as you consider investing in a multifamily property. Be diligent with each step to ensure your property remains profitable even in the face of recessions. Also, make sure to avail all the tax benefits you are eligible for such as the 1031 Exchange Process. That is the best way to minimize risk while saving more when making a multifamily purchase or a sale.
Now is one of the best times to become a multifamily landlord because apartment vacancies and interest rates remain low compared to a few years back. Private equity investors can also access a pool of lucrative debt capital.
What’s more, the White House notes that there’s a thirst for decent housing coupled with a chronic undersupply, leading to skyrocketing housing prices, as seen in the table below:
Statistics show that investors should expect a 6% net increase in their income for the coming year. All this signals that multifamily properties are a lucrative investment ripe for purchasing.
Suppose you are new to Commercial Property Investment and do not understand why you should invest in multifamily property. In that case, these are the reasons why this kind of property must be a part of your investment portfolio.
A higher cash flow is one of the biggest reasons to invest in multifamily property. Such properties are always in demand by rookies and seasoned investors alike.
You can expect a high occupancy rate if your property is in a strategic location. With time, this leads to increased monthly revenue.
One way to ensure you rake in good profits is to invest in different geographical locations. Doing so allows you to have multiple income streams from the same type of investment.
Managing 12 units in one multifamily property is more manageable than 12 single-family units spread out across the city. With the former, you can manage it or hire a property manager instead.
It is impractical and costly to hire 12 managers to manage single-family units. On the other hand, hiring a manager for a multifamily property makes sense because of the number of tenants you are dealing with under one roof.
A multifamily property makes you eligible to enjoy tax breaks as a reward from the government for providing housing for city residents. The kind of tax breaks you enjoy depends on the property classification.
That’s because you can write off expenses from taxable income. In short, you can deduct repair, maintenance, and management expenses from the taxable income produced by the multifamily property.
This is not to say that multifamily properties do not come with risks–they carry some risks like any other investment. The only difference is that the risks associated with this kind of property are lower than single-family units, as the table below illustrates:
One of the risks you may encounter is the vacancy rate. Because you are dealing with several tenants at a time, the possibility of 0% occupancy is slim to none.
Suppose you have a well-maintained property with fair rental rates. In that case, a low occupancy is something you will rarely worry about.
Also, ensure you research the property beforehand, choose a good location, and market it well. Doing this will guarantee you a high occupancy rate.
Five years and more is the standard term for most commercial and retail leases. If the market changes, you are stuck with properties whose rent you cannot increase. With multifamily properties, the leases are shorter, typically lasting a year.
This means that you can raise rents quickly depending on market conditions and inflation. Shorter leases ensure your property stays lucrative in the long run.
If you want to delve into real estate full-time, this is one of the best ways to boost a portfolio quickly. Multifamily properties offer the chance to invest in multiple units without the hassle of managing several separate housing units.
Think about all the research, planning, permits, and cost it takes to invest in one property. Now multiply that by several units, and you know why a multifamily property is the best option.
Moreover, you’ll find it easier to purchase a multifamily property than buying a single-family unit.
Data from the U.S Census Bureau shows that renting is the most common form of housing for millennials. Currently, the millennial generation is the largest in the U.S.
One reason why they find leasing a favourable option is the increasing cost of median home prices. This places homeownership out of reach for many. Also, millennials value flexibility and mobility over owning property.
Combined, all these reasons make millennials more likely to rent than own, spelling good news for multifamily property investors.
Multifamily properties continue to hold value even if you do not get immediate cash flow. The general rule for real estate is that it appreciates over time. With multifamily property, the appreciation rate is higher.
Sure, this is not set in stone. But the best way to ensure the property retains its value is to maintain and repair it often. Check for broken or damaged areas, mold, and more issues between tenants, and it will hold its value with time.
Data shows that multifamily investments have better funding terms overall than other real estate types. Understand that this investment type costs more initially, but it is easier to maintain than other property types.
Expect lower interest rates if you opt for a mortgage loan for a multifamily property. This is a relatively risk-free investment for first-time investors. Because of the high occupancy rates, financing institutes view multifamily properties as having lower risk.
Buying insurance for a multifamily property is relatively easy. Like financing, getting insurance is a simple process compared to other real estate types. Several factors affect how much a policy will cost.
However, the number of units in the building, amenities like a pool or rooftop terrace will raise the insurance cost. This is because tenants or visitors are more likely to injure themselves on the property. It would help if you also understood that insurance premiums for multifamily homes are rising.
Despite this, most insurance companies know how to cover multifamily properties in a way that favors you. Further, if you have several such properties, some insurance companies will grant you a “blanket” cover, insuring all the properties under one provider.
Investing in a multifamily property is one of the best decisions you can make today. You can look forward to better cash flow, lowered risk, tax breaks, easier management, and a higher appreciation rate. Taking help of a property investment company can prove to be of greater help in terms of huge capital gains to fill up your pockets. Despite stiff competition and an initial high investment cost, a multifamily property is still an excellent investment opportunity.
As a technology enthusiast, I have always been into innovation that could change the world. That’s when I heard about the fund-raising campaign from the group called UGro that has recently been into real estate tokenization with the motive to bring this technology into our day to day lives. The interview by Mr. Neal Bawa from UGRO started with a brief introduction that eventually was directed towards how the real estate market and financial management would collaborate in coming times.
To begin with, I am Dr. Gurpreet Padda, born in Punjab, India. While I was in my early childhood, I relocated to the US with my family. Being the only brown kid with a turban in an all-Black school, I have known the word discrimination. However, this allowed me to think out of the box, be curious about things happening around and learn the process. This curiosity to know everything took me into science and computers.
As a teenager, I was generally active in doing repair work at home. When things started happening on a larger scale, I took help and ultimately started hiring people for doing some construction work; that’s when I fell in love with real estate. I wanted to earn freedom and co-invest with people, for I had found out.
“A Lone-Wolf isn’t an alpha without its pack!
Well, my academic background is pretty self-explanatory. Being a computer geek and having an MBA degree majoring in International Finance justifies my passion for technology and finances at a global level. I have always wanted to know how transactions occur, and this has a rather serious story behind it.
I have known that about 5.5% of international transactions, which is for the general public, are secured into middle mens’ pockets. I wanted to find out how these transactions happen, why they happen, and what can be done to stop this wastage of capital? Why can’t families live across nations transfer money without involving any mediator?
My findings gave me hints about cryptocurrency, which indeed is fascinating. So I learned about fiat currency which can be used for tokenization to bring liquidity into the entire real estate market. In my opinion, we’re at the beginning of a new revolution where complete computer systems are upgrading the ability to make transactions where the transferring value to one another is tokenized.
With these questions in mind, I tried to figure out contract languages to make them cost-effective, and quicker to share the assets with others. Not to forget the low-risk profiling that is to be maintained. Hence, I invested in this fund-raising contract with UGRO for the sole purpose of getting into tokenization.
For people newly introduced to the term, Neal explains that tokenization is the conversion of real estate into stocks or stock-like qualities.
In the case of the general share market, if someone talks about a particular stock with the potential to go bullish shortly, we tend to take positions real quick in the matter of a few clicks, affecting the financial market. However, that’s not the case with Real Estate Investment. It’s more complex than it looks.
Real estate is three times larger than the share market. Moreover, the market is highly illiquid, and now the solutions have been revealed. People in the field say that blockchain can be used to find a much faster and more secure way to demonstrate real estate so that anyone around the globe can take a position in the US Real Estate Market. The best part is that US real estate is the topmost blue-chip real estate in the world.
The fact that tokenization is already being done by many makes it all the way more special. But this needs to be done with the right process as follows:
The first component is to take ownership of something and put that ownership into a token that can be described precisely.
The tokenized property will represent a fragmental possession of real estate that can be demonstrated in your social groups and families concerning returns. “Token Represents A Real Thing”, is where it all starts.
The next step is to liquify these tokens. Since commercial real estate investing is an illiquid capital diversification, turning this into a liquid asset and putting it on 24*7 markets require real work.
However, there are problems associated with being a limited partner in real estate. First, one needs to keep the investment the entire time, which would dramatically change as soon as tokenization enroots in the scenario.
Finally, assigning value to these tokens.
A commercial real estate investment company’s management team is an independent figure regulating and managing these real estate tokens. With this, one would be able to stake the token and get a loan or even sell some part of it, which will lead to a decentralized and tech-savvy Financing System or as said Defi, which would further be utilized to generate revenue streams out of it. Therefore, the leverage position improves gradually. This is because an asset will hold its value; people would be willing to lend you even on the underlying asset value.
As Neal mentioned, tokenization is the opportunity to open the gates of a new era worth $10-100 trillion. However, here comes the pain point- not everybody will believe in this initiative. Yet one needs to pick the right team in the argument.
But, how do we pick the right team and the right management? After all, it’s the management that will manage and develop the property we want in terms of valuation!
Your ideal team would be the one with an excessive understanding and experience of both the financial and Real Estate world. They would first need to answer the question- Why would people want to go for tokenization?
Once you know how to access a token, how to keep it safe? how to transfer these tokens safely and cost-effectively? Then, you automatically cut out the middlemen and will be able to make any real estate NFT transactions in a few clicks.
And that is the reason UGRO’s fund-raising campaign for tokenization caught my eye. The management understands technology and its integration with the real estate market, making them the right team to pick for a complete Proptech System. I have experience working in several domains, and as per my observation, a team needs to have three things to be able to create a decentralized financial system for investors;
Neal says that UGRO is planning on tokenizing individual luxury fourplexes with small shares of the company. However, the plan doesn’t just end here. The thing that surprised me was that these people were much ahead of what they could imagine as the future of the real estate market. With a $70 million fund, they envision creating a metaverse; creating digitally twin buildings to put them on metaverse would open up the data to any buyer in the world who would wish to invest in US real estate. Hence, the sale that is supposed to take place in around 6-7 months would eventually happen in 10-15 days.
That’s quite interesting, for it serves the vision: Entire Real Estate Tokenized. Yet the process needs to be followed accurately, and it’s the management that will demonstrate the beginning of this revolution. Not just us; in reality, many monopolies are already headed in this direction.
Hence, all in all, to be a successful investor in the field, always choose the right group to invest with- and that’s what UGRO believes in.
Every seasoned commercial real estate investor knows that all investments are prone to risks. While real estate investing is not as risky as penny stocks, options, and futures, the sheer amounts involved mean that if things go belly up, you stand to lose a lot.
That’s why it pays to identify the kind of risks attached to each real estate investment vehicle before you ink a deal. Industry leaders created categorization labels to help investors identify the amount of risk each investment poses.
According to Tal Peri, head of U.S. East Coast and Latin America for Germany’s largest open-ended fund, Union Investment Real Estate, these labels help him focus on the losses spectrum that matches parameters for the fund he is deploying capital.
If you’re a new investor to the game, you might want to pay attention to the labels—they indicate under what category an investment falls. That might be the difference between scoring a great deal and losing money.
As usual, the higher the risk, the higher the investors’ returns. This article helps you understand the risk and returns involved in Commercial Real Estate Investments (CREIs).
Before discussing the different categories of CREI’s, it’s first necessary to define what risk and return are and their relationship to each other in building an investment portfolio.
Risk refers to the possibility of financial loss or some other adverse outcome. It’s wise as an investor to put strategies in place to help you recognize and manage risk better.
Return is the amount of income or profit made on an investment. In real estate, returns usually come in rental income, property appreciation, beneficial tax treatment, or some combination of all three.
As mentioned above, the relationship between risk and return is the higher the risk an investment poses, the higher the potential profits. The reverse is also true.
There are four categories for real estate investment strategies as highlighted in the diagram. These contain the factors to consider when investing in real estate:
Many consider this a low risk real estate investment, and it rightfully takes its place near the low risk-low return spectrum.
Core real estate assets investment often consists of established high-rise office towers and apartment buildings. You will find them downtown in major cities like New York City, Chicago, and San Francisco.
Tenants in this category have excellent credits and commit to long-term leases. As a result, investors are guaranteed reliable cash flow, making it a risk-free investment.
The characteristics of core investments are:
● The buildings are relatively new, efficient, and well-maintained.
● Bears attractive and functional design.
● Has top-quality building finishes.
● The property is in an accessible and highly desirable location.
● Relatively low degree of leverage since they might range from 0-50% of the asset’s value, but rarely higher.
● Properties are fully or mostly leased (close to 90% occupation).
Suppose your primary investment objective is to protect your assets from a decrease in purchasing power while at the same time securing long-term wealth for your family. In that case, this is the investment strategy for your needs.
Core investments have a low risk of principal loss and generally provide returns in the 4% to 8% range. However, that also means they have a low chance for significant price appreciation.
In addition, the major reward to such investments is that a slowdown in economic activities won’t affect them since their tenants are financially stable and unlikely to face unemployment.
Think of core-plus as those in the second place, a step higher than core assets, in the risk ladder. That means it’s slightly riskier but offers better returns.
There’s increased opportunity since investors can renovate the properties and, in turn, hike the rent. However, there may be a risk and opportunity since the property may be in the suburbs and not fully leased.
The characteristics of such projects are:
● Historic building rather than new construction.
● Building in relatively poor condition.
● It faces a dip in tenant credit.
● The property is in a not-so-great location.
● There’s a slender opportunity for price growth.
Annualized leveraged returns on these assets generally range from 10% – 14%.
Value investments pose a mid-level risk since they generally have a problem that needs fixing.
Value-add real estate projects incur a higher level of risk alongside the greater potential for driving operating revenue growth and capital value appreciation.
The potential for rental growth in such assets could be discovered by:
● doing moderate renovations to attract higher-paying tenants
● higher rental rates in the immediate neighborhood
● brilliant business plan to reposition the anchor space/tenant
● adding additional square footage
● upgrading building systems
● improved finishes and installing new amenities
● changing of property managers
Remember, the goal is to give the property a refreshed look and, in turn, attract quality tenants who would afford higher rent rates.
Since you put in more effort to execute this business plan successfully, these investments typically provide leveraged returns between 15–19%.
Leverage with value-add: 65% – 85% of asset value/cost. Unleveraged returns on value-add assets are high enough to entice further use of leverage to enhance leveraged returns further.
It’s the riskiest investment strategy. Most of the projects in this category are new developments that you have to build from the ground up. In other instances, it necessitates a total turnaround.
These projects can include significant design, engineering, construction costs, legal fees to navigate repositioning and obtain entitlements, and brokerage fees to market and lease space or sell units.
In addition, the major downside to opportunistic real estate assets is that investors could go months or years before receiving any income.
However, opportunistic investments offer more than 20% in returns due to the value-addition renovations or new constructions to a vacant lot.
Investors need to understand the risk and return relationship when scrutinizing a potential real estate purchase. The level of the return should be proportional to the amount of risk taken.
If you’re a risk-taker, and investing in commercial real estate makes you tick, it’s advisable to implement these investment strategies labels.
According to real estate gurus like Tal Peri, you should actively mark all potential investments using the labels to alleviate risk. Thankfully, the label strategies real estate investment risk analysis doesn’t require experience, expertise, and full-time focus to accomplish.
Do you intend to sell or purchase any investment properties in 2022? When you sell a rental property, capital gains tax and depreciation recapture tax can eat into your profits, but all you need is a legal loophole. You can simply use a 1031 tax-deferred exchange to obtain the gains.
As a tax deferral tactic, 1031 exchange, also known as Starker exchanges or like-kind swaps, are used by some of the country’s most successful real estate investors. 2022 is an excellent year to purchase or sell a home because values have risen above those of the previous decade’s real estate market.
The Internal Revenue Code of the United States, Section 1031, permits you to avoid paying capital gains taxes on the sale of an investment property. It is done by reinvesting the earnings in a like-kind property or multiple like-kind properties for the same or more period.
A 1031 exchange is a swap of one investment property for another. Exchanges are usually taxed, but if they meet the 1031 criteria, you’ll pay no tax or only a modest amount at the time of the transfer. You can change the structure of your investment without having to pay out or declare a capital gain (as defined by the IRS), allowing your money to grow tax-free. Even if you make a profit on each trade, you won’t have to pay tax until you sell for cash many years later, when long-term capital gains tax will be the only tax you’ll ever have to pay.
The majority of exchanges must be of the same nature. You can exchange an apartment complex for raw land or a ranch for a strip mall; the laws are surprisingly liberal; you can even trade one enterprise for another, but be aware of the gullible.
The majority of exchanges are delayed, since the chances of finding someone with the specific property you want who wants the identical property you have is limited. In a delayed exchange, you’ll need a middleman who will store the cash after you’ve “sold” your property and use it to “buy” the substitute property for you. A swap is a name for this three-party transaction.
The main advantage of a 1031 tax-deferred exchange is the obvious tax deferral. By switching from one property to another, you can defer taxes on investment properties you own or manage indefinitely. This allows an investor to make a greater down payment on a higher-value property than they might otherwise, which is a terrific way to build wealth and diversify one’s investment portfolio.
Let’s pretend you’re worried about your home. You may be able to trade some of your basic traits for more stable classifications that will aid your survival and growth.
Similarly, if the upkeep is too much, you can consider relocating some of your higher-class assets to buildings that require less maintenance.
You might even relocate your properties to a more desired or promising location to better position them for future profitability.
The nicest part is that you can do as many or as few transactions as you want.
You can keep moving your money around to maximise your returns and create your ideal portfolio.
According to the IRS.gov website, a like-kind investment must be “of the same sort or character, even if they differ in grade or quality.”
The property being sold/exchanged and the property being purchased must both be purchased by the same person.
Section 1031 of the Tax Cuts and Jobs Act, according to the IRS, “applies primarily to real estate exchanges and does not apply to personal or intangible property swaps.”
The net market value of the property you’re buying must be equal to or greater than the one you’re selling to qualify for a 100 per cent tax deferral.
Within 45 days of the surrendered property’s sale closing escrow, the replacement property must be identified (by having a written offer accepted).
The replacement property’s escrow must close 180 days after the relinquished property’s escrow closes.
You can do a partial 1031 exchange if the property you surrender is worth more than the replacement property, but you’ll have to pay federal income taxes on the difference, known as the “boot.”
You’ll owe the $500,000 difference in federal and state income taxes if you sell a home for $3,500,000 and want to trade it for a property worth $3,000,000. In this situation, the ‘boot’ would be subject to capital gain rates.
The capital gains tax rate is determined by your income tax bracket and the length of time you owned the investment property and can be as low as 0%, 15%, or 20%.
During the 45-day identification window, real estate investors have three main choices for locating one or more replacement properties:
– The three-property rule states that an investor may identify up to three properties, regardless of their value, and must acquire just one of them.
– The 95 percent rule states that an investor may identify an unlimited number of properties, but he or she must acquire 95 percent of the total value of those assets.
– The 200 percent rule states that an unlimited number of properties may be identified as long as the total worth of the identified properties does not exceed 200 percent of the surrendered property’s value.
The interval between the sale of your present home and the acquiring of a new property is separated in a delayed exchange.
You have 180 days from the time the sale ends to:
● Hire a reputable intermediary to handle the sale and place the proceeds in a trust to be utilized to buy a comparable property.
● Choose an exchange property and purchase the new home
You must move the new property to exchange accommodation ownership, pick a property for exchange within 45 days, and complete the deal within 180 days to qualify the substitute property before selling the old one, you can still do a 1031 exchange.
● By the 180th day of the exchange procedure, all of the equity from the sale must have been spent on upgrades or as a down payment on the new home.
● By the 45th day of the exchange procedure, you as the buyer must have received essentially the same property as that which you indicated.
● Before the title may be transferred to you, improvements must be done.
A 1031 exchange is a tax-deferred strategy for generating money for smart real estate investors. The countless difficult-moving aspects, on the other hand, demand not only a thorough comprehension of the rules but also the support of a professional.
A multifamily property is any residential property with more than one housing unit. Duplexes, townhouses, condominiums, and apartment complexes are all multifamily properties.
Investing in a multifamily property is one of the best ways to dip your toes in real estate and property management. That’s because multifamily properties offer many benefits, such as steady cash flow, lowered risk, passive income, tax benefits, and valuation potential.
That said, like any other investment channel, it has its pitfalls. These are some of the challenges facing the real estate industry in 2021:
You do have the option of outsourcing management for a multifamily property. However, looking after such property is so intensive that it occasionally requires your personal intervention.
For instance, you will deal with multiple tenants, leases, maintenance jobs, tax issues, and even different payment options. Each tenant has a unique way of handling their lease and communicates differently.
Some tenants will treat the property with respect, while others will tear up the place, leaving you with hefty repair bills. You can avoid this by screening potential clients to ensure you lease the property to a responsible tenant.
Also, if one thing goes wrong in one unit, it will likely go wrong for other units as well. Such a situation translates to higher maintenance and repair bills.
Compare this to if you were dealing with a single-tenant leasing a 15,000 sq. ft. office space. Despite the size, it’s still just one tenant. Unlike residential properties, maintenance costs and obligations fall to the tenant and not the owner, making management less intensive.
On the flip side, dealing with a multifamily unit has its perks compared to managing separate single-family units. It is easy to hire one on- or off-site manager to oversee the complex with a multifamily property. Whereas with multiple rentals, you’d need several managers to do the same job.
It is an understatement to say the price for a multifamily property is hefty. In fact, this is one of the main challenges of property development. This causes many real estate investors to shy away from investing in this property type.
Investing in a multifamily property is also challenging for first-time investors who may not have the required amounts to make the down payment.
For example, a two-unit apartment in New York or San Francisco costs more than one million dollars. As an investor, banks will require you to raise at least 20% for a down payment. This amount translates to $200,000, which is an amount a new investor may not have.
The scenario is more challenging in a bull market because new investors compete against seasoned investors for the same property.
An advantage to this is that you are more likely to get approval for a multifamily unit loan rather than a single-family home. That’s because banks view multifamily properties as low risk.
If you are a first-time investor, you can qualify for an FHA loan if you opt to live in one unit within the multifamily property, as you rent out the rest. FHA loans require a small down payment compared to other loans.
If the rental income from the multifamily loan is enough to pay for the mortgage that means you will live rent-free. However, you might need to live at the property for at least one year for this to apply.
As mentioned, multifamily properties attract seasoned investors. The result is serious market competition, which shuts out budding investors.
Experienced investors have an advantage over the others as they can pay for these properties in cash. Moreover, they have the industry connections to effortlessly secure funding.
These investors are also more than willing to waive purchase contingencies like financing contingencies or paying for inspections. Combined, these factors make seasoned investors more appealing to sellers than new and inexperienced ones.
New investors should partner with experienced investors when they start investing in multifamily homes to stand a greater chance. The partnership offers an opportunity for a new investor to learn the ropes.
Landlords for single-family units already deal with strict regulations, but they are worse for multifamily properties. Breaking any codes results in hefty fines and penalties.
Because of real estate issues during COVID, the federal government made some rules and regulations you must enforce, including social distancing rules to stop the pandemic.
Further, there are mandatory design standards, utility cost computation rules, and the federal government has regulations governing multifamily communities.
To avoid falling foul of these rules and regulations, ensure you research the federal and state laws and abide by them religiously.
It is not uncommon for multifamily properties to have vacancies for weeks or months at a time. If you are still paying a mortgage on the property, you will have to cover that cost on your own.
Renting out both sides of the complex ensures that you still have a rent collection of about 90%. With a single-family unit, months-long vacancies are costly and offer a collection rate of about 80%. If this continues for a couple of months, it will affect your overall profits.
Generally, tenants in such properties are more temporary than other real estate types. Multifamily property tenants are typically first-time renters, and with time, they’ll want to move onto more family-friendly properties.
With an enlarged family, they’ll need a bigger space, a yard for their kids and dogs to play in, and a garage for their multiple cars.
Because of that, the average length for tenancy in a multifamily home is one-third of what you’d expect at a single-family property. So, if you’re looking for tenants to stay a little longer, a multifamily property is not the right fit for you.
You can also avoid having too many vacancies by offering a generally pleasant living experience.
You may be wondering if multifamily properties are the right real estate investment to try out. Like any other real estate investment, this type of property investment is lucrative. That said, it comes with its own set of cons, like any other type of real estate.
The most prevalent real estate challenges of 2021 you will face include hefty initial investment, high maintenance requirements, and frequent tenant turnover, forcing you to search for new tenants frequently.
That said, it’s up to you to decide whether to invest in them. When you address most of the challenges listed above, the multifamily property is one of the best investments.
Welcome to “CallumConnects.” Five-minute entrepreneurial inspiration for your day. Joining us today on “CallumConnects” micro-podcast is Gurpreet Padda. Dr. Padda is a serial entrepreneur who started rehabbing houses and repairing diesel engines while in high school, before entering medical school at the age of 17. His secret power is his ADD and curiosity about how things work.
– A hurdle I’ve faced as an entrepreneur is also my greatest strength. I have horrendous ADD and I have shiny object syndrome, and I’ve had that ever since I can remember. I started a company when I was probably 14 years old while I was in high school. And I loved science but I loved taking things apart and I loved construction as well. So I ended up doing a construction company and then starting a company that fixed diesel engines, and I did this all while I was in high school. But I was so curious about anatomy and physiology that I went to medical school. I got into medical school when I was 17 and then I ended up graduating when I was, it was a six-year program, so I graduated when I was 22 or 23 years old. I’ve got an incredible curiosity about how things work and that often leads to a lot of nonsensical learning or appearingly nonsensical learning. So I end up getting curious about something and doing a deep dive and learning everything that there is to know about it and then I get distracted by my ADD, which says, hey, this is something interesting over here. And what that does is it allows me to learn and deep dive on things that appear non-related and then my ADD interrupts me and I end up jumping to another topic eventually. And often I’m able to reconnect a variety of different topics. So what I ended up learning from this is essentially use that superhero strength of ADD to learn and to move from topic to topic, but then use the overarching entrepreneurial mindset to give it application, to come up with a cohesive theory and a business model of how to get things done. One of the coolest books that I’ve ever read is “Who Not How.” And so I’ve been able to use some of those concepts more and more, which is not necessarily doing a deep dive into every single aspect of every single thing, but finding experts that already know that and engaging them, learning from them. And that way I’m not spending forever learning about a topic that I had no interest in. I ended up starting an entire restaurant company because I was curious about the food production system. I ended up with five restaurants before I knew it. And I was interested in fermentation and ended up starting a brewery. So this can really get out of control. And I’ve found that in order to channel that correctly and do it the right way, I have to be able to bring other people on board who will keep me in check. I have an amazing business partner that helps keep me in check. And I think that the ability to rely on others to kind of self-monitor our own behavior, that you trust these others, is really valuable. The ADD permits rapid reiteration of concepts. And it also allows you to abandon concepts that are less than ideal, but only within the context of getting assistance from other people. I don’t think that if I had other great people around me, I would be as successful.
– If you have enjoyed today’s show or got any value from today or previous episodes of “CallumConnects,” do please subscribe and leave a review. It means the world to our guests to be able to see what they’re sharing has led to your learning.
This week’s episode is the first in a two-part series that features Gurpreet Padda, MD. He is a private practice physician out of St. Louis, Missouri, who runs Reversing Diabetes MD and Padda Institute Center for Interventional Pain Management. Dr. Padda also runs Red Pill Kapital, which is a real estate investment development and management company. He is an advocate for educating private practice physicians on passive wealth strategies through owning real estate.
In this episode, we talk about…
[5:05] Getting into real estate as a teenager
[6:08] The desire to have a life outside of the hospital
[9:05] Characteristics that are more relevant than your education when it comes to owning a business
[10:30] The applicability of medical training to real estate
[11:09] How Dr. Padda decided on his medical specialty
[12:39] How capital flow impacts our health as well as the real estate market
[15:17] The importance of investing in real estate for your practice(s)
[16:31] How to decide where to purchase real estate for practice locations based on patient perspectives
[17:33] The effect of the pandemic on retail real estate
[21:28] Selling restaurants before the pandemic began
[24:14] Educating clinicians on creative passive cash flow and equity growth
[25:22] Why physicians tend to make financial decisions based on narcissism
Links to resources:
Reversing Diabetes MD: https://reversingdiabetes.com
Padda Institute Center for Interventional Pain Management: https://painmd.tv
Red Pill Kapital: https://redpillkapital.com
Jason A. Duprat, Entrepreneur, Healthcare Practitioner and Host of the Healthcare Entrepreneur Academy podcast speaks with Dr. Gurpreet Padda, MD, MBA and entrepreneur. Dr. Padda is an avid real estate investor. He shares the lessons he has learned as an early entrepreneur and also provides tips for healthcare professionals interested in creating wealth through real estate investment.
Dr. Padda grew up in India during war and uncertainty. He moved to the US when he was 8 and started his first business at the age of 10 selling cards door-to-door. At 16, he had a team of 30-year-old men working for him. He states – I was an entrepreneur before I went into medicine. Dr. Padda made it through medical school by hustling, which he did through real estate auctions. During his first year of residency, Dr. Padda rehabbed an eight-unit building in Chicago. After his residency, he went into pediatric anesthesiology for heart, liver and lung transplants. His medical path also included addiction and interventional pain management. Dr. Padda’s practice has 7 locations and he provides $1.5 million in free care. “Option” is when you purchase a sale contract with an option to buy. You have three months to decide if you want to buy and the price is held at the same level. If you decide not to buy, you’re usually only out $100. Dr. Padda uses option contracts, where he’s looking at zoning and municipal plans. He researches what’s being planned for development in the area. Option contracts are low risk and offer a high reward. There are two types of wholesaling. “Ugly” includes houses below $80k requiring a lot of work. “Pretty” is when someone wants to sell and is having a hard time finding a buyer. This option provides great margins and it’s the one Dr. Padda recommends physicians to use. Dr. Padda also recommends going big with real estate vs buying single units. Cap rate is the net operating income divided by the price. Become a passive investor with somebody first, watch and learn from their mistakes, and then become an active investor. To get started in real estate investing, talk with people you know. Work referrals through friends and contacts. Don’t blindly trust people on the internet.
The most valuable resource on earth is not money but time. You have to look at both active and passive methods of gaining wealth. Passive income is what people pay you while you’re sleeping. The biggest impediments to becoming wealthy are ourselves and our taxes. The number one impediment is our personal wealth operating system and how we think about money.
“Time is like a water hose and you’re watering a particular concept or project. The more water and fertilizer you apply to it, the better it grows.” – Dr. Gurpreet Padda
“I think entrepreneurship is the ability to ask questions of yourself, realizing you don’t know, and then trying to figure out the answer.” – Dr. Gurpreet Padda
“Leverage what you know.” – Dr. Gurpreet Padda
Red Pill Kapital: https://redpillkapital.com/
Dr. Gurpreet Padda’s LinkedIn: https://www.linkedin.com/in/gurpreet-padda
Michael Blank podcast: https://themichaelblank.com/podcasts/
Adam Adams podcast: https://podcasts.apple.com/us/podcast/creative-real-estate-podcast/id1285094279