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What is the Capital Stack?

A Commercial Real Estate Investment’s ‘Capital Stack’ is arguably one of the most important concepts an investor needs to analyze the equity, debt, and risk return profile of a project. Ultimately, as with any investment, commercial real estate comes with some downside risk. Investors who understand the Capital Stack can assess risk and repayment, where they fall in the pecking order of cash flow, and whether or not that investment is worth the assumed risk.

Let’s Dive In!

The Capital Stack is the structure of all capital that is invested into a company. At a high level, this means that the capital stack includes both equity and debt invested. More specifically, though, this means all types of both equity and debt.

  • Tiers of financing sources – such as equity and debt
  • Order in which investors are paid back through income and profit distributions over the entire holding period.
  • Repayment rights in the event of a default

Layers of the Capital Stack

  • Capital Stacks prioritize different capital types by seniority, with the least senior on the top and the most senior on the bottom. Equity positions are registered first, with debt positions below.
  • When it comes to properties that are unable to generate enough cash to pay all investors or lenders, capital listed on the bottom of the stack will be paid first and any leftover cash then flows to the capital that holds the next lowest position.
  • Should issues arise and the property goes into default, claims to assets are processed in order of seniority in the capital stack with the lower placed capital retaining foreclosure rights superior to those higher up in the stack.
  • In most cases, higher risk capital sits at the top of the stack, while lower-risk sit below, and the lowest at the bottom. In a similar vein, higher return potential typically sits at the top of the capital stack, with expected returns that decrease as you go down the stack.

Here is a run-down of primary sources of Capital most commonly seen in the ‘Capital Stack’:

Common Equity

Common equity sits on top of the capital stack and offers the highest potential reward in exchange for the highest level of risk. People who invest in the common equity of a project own a piece of the property and receive a share of the recurring cash flow and percentage of profits when the property is sold. However, funds are distributed to common equity investors only after the debt has been serviced and the investors at the lower levels of the capital stack have been paid.

Preferred Equity

Similar to the way that a first position mortgage has priority over a second position mortgage, preferred equity holders have priority over holders of common equity. Investors with preferred equity have the first right to receive a pro rata share of the monthly cash flow, along with a percentage of the profits when the property is sold, before the common equity holders are paid. Although preferred equity has priority to common equity, the rights of a preferred equity investor are lower than those of the debt holders.

Mezzanine Debt

Mezzanine debt is similar to a second position lender, and is usually unsecured by the real property. The rights of mezzanine debt holders are subordinate to senior debt holders, but hold priority over preferred equity and common equity investors. Because holders of mezzanine debt are not paid until payment has been made to senior debt holders, the interest rate paid to mezzanine debt holders is usually higher than senior debt. Sometimes mezzanine debt holders will also receive a small percentage of the profits when the property is sold, or an interest rate ‘kicker’ if the project performs better than expected.

Senior Debt

Senior debt sits at the bottom of the capital stack and serves as the foundation for financing a real estate investment. Because the real property typically serves as collateral for senior debt holders, investing in senior debt comes with the lowest level of risk. Holders of senior debt receive periodic interest payments before all other investors higher up in the capital stack are paid, and are first in line to have any outstanding debt repaid when the property is sold. Interest rates paid on senior debt are usually lower than rates paid on mezzanine debt, and may be viewed as having bond-like characteristics for investors seeking a truly passive income stream.


We at The Joint Chiefs of Real Estate have created a system for you to invest directly into cash-flowing, hard assets that don’t require you to manage tenants or deal with any of the headaches that come from owning Single Family Homes. This gives you the freedom to use your time as you wish while we grow your wealth through these amazing assets! 

If you are looking to secure your financial future, we would love to connect with you and explore partnership opportunities! 

To Learn More about the many benefits of investing in Multifamily Apartments, Download our Free Passive Investor Guide today!

You can set up a complimentary discovery call with one of our team members here!


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Active Income vs Passive Income

Why keep working hard, paying the highest amount of taxes possible when you can work smarter?

The goal is to get your passive income to match, at some point in your career, your active income and that’s what we’re going to be talking about today….exactly how to do it.

3 Types of Income

Let’s discuss the basics when it comes to earning money.

There are only three types of income

  1. active (earned) income
  2. passive income
  3. portfolio income

1. Active income

Active or “earned” income is the most familiar to us as it’s what we make while we work at our jobs. It is also the highest taxed of the three income types. Unfortunately, we focus all of our efforts on earning this type of income which causes us to pay the highest amount of tax.

If you earn active income ONLY, you’re trading your time for money.

2. Passive Income

Passive income is income derived from a rental property, limited partnership or other enterprise in which he or she is not actively involved.

Passive income from real estate is not subject to high effective tax rates. Why? It’s typically sheltered by depreciation which results in a lower effective tax rate compared to earned income.

3. Portfolio income

Portfolio income is generated from dividends, interest, and capital gains from selling stocks.

Education Doesn’t Prepare Us

Unfortunately our education system doesn’t prepare us financially. It ONLY focuses on earning active income.

This includes

  • Work
  • Labor
  • Time

They teach us how to work and trade our time for money. Again, this type of income is the MOST highly taxed.

For Example, the Mr Smith gradates with a Bachelor’s Degree and is making $100,000 in their office job.  He’s so excited and tells his friends that he’s making $8333 a month and doesn’t have to live off Ramen noodles anymore.

Little does he know that he’s getting ready to only focus on work that trades his time for money. If they give him $8333 a month, then the government is going to take 24% of that money. Uncle Sam is going to get his share no matter what.

In Mr. Smith’s case, $2000 comes off his $8333 a month leaving him with $6333 a month. Unfortunately, most people don’t even know what their taxes are.

If he was earning $8333 a month in all passive income, only $1250 would be taxed so he’d end up with $7083. Which would you rather have?

Most people have never been taught about active income and taxes. I know I wasn’t

You Still Need Active Income

Now, you can’t just go out and make passive income today. You need the active income first. Also we need workers. People need to work as it gives them a purpose. Even if I had more money than I knew what to do with, you’d still see me working (only difference is work that I’m passionate about not about how much I’m making).

Financial Freedom

I thought the way to get there was hiring a financial advisor but after awhile I learned they were pitching their products and services for their commissions. They did do a good job though of laying out investing advice with regards to retirement plans. Only thing was the financial advisor focused on active income only and gave different scenarios of how compound interest would cause my money to grow after I worked for 30-40 years.

For most of us, this is the only financial advice we know about…work our entire live, invest our money, hopefully have enough saved to retire and never run out.

My financial planner nor anyone else ever mentioned passive income, specifically real estate passive income. If you want to someday experience financial freedom, then you must have passive income coming in.

We call Real Estate Syndication investing mailbox money and a great form of passive income.

I know some of you think the stock market is the way to earn passive income but compared to Real Estate you would be surprised. Read my blog on What’s better the Stock Market or Real Estate? 

Real Estate Investing For Passive Income

Whether you realize it or not, everybody is an investor. People are constantly investing their time and energy and exchanging it for money.

What you have to learn is how to invest your money so that it continues making money so that you don’t have to invest your time for it to grow.

Also there are many friends of mine that I talk to that have cash that they’re sitting on. When I ask them about that, they tell me that it’s for a “rainy day.”

Cash money is going down in value. If you think saving it will get you somewhere, it won’t. Unless you enjoy your money not growing.

Get rid of the money and buy hard assets.

Summary

If you want to stop trading your time for money then you’ve got to get out of playing the active game. The active income game that is. I want you to go all in playing the passive game.

Invest in yourself, focus on growing your active income and begin putting money on the side. Once it grows then buy assets that are going to go up in value and start paying you passive money on a routine basis.

Do you know what holds most people back from doing this? FEAR. That’s right, fear. Any book on being successful or any person that’s made it will tell you the same thing.

It starts with a mindset shift. It takes courage to deplete your cash reserves and put it in something such as real estate.

It’s up to you. You’ve got to make a choice.

Do you continue to let your money sit in a bank and die or not?

If you are ready to begin replacing your active income with passive then join JCORE Investor Club.

It’s Free!!!


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What is U.S. Multifamily?

Multifamily housing is a type of residential structure with more than one dwelling residence in the same building.

TYPES AND CLASSES OF U.S. MULTIFAMILY INVESTMENT OPPORTUNTIES

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CORE: Stabilized real estate. Typically new assets in top quality locations. Tend to be the lowest yielding, institutional quality assets

CORE PLUS: Similar to core, but with a small value add component and/or less favorable location to the investment. Should trade with a slightly higher yield.

VALUE ADD: Most tend to be older assets requiring varying degrees of renovation, whether it be repairing deferred maintenance or upgrading the interiors to take advantage of raising rents, or mis-managed assets requiring repositioning.

OPPORTUNISTIC: Can be a more comprehensive value add with significant asset repositioning and higher risk. Can be new construction or redevelopment.

CLASS A: Generally a core asset. Newly constructed or fully renovated, which is well-located with high-end finishes and fixtures, and full spectrum of amenities.

CLASS B: Positioned somewhat lower than Class A. Potentially a combination of any of the following factors: age, inferior location, limited amenities, deferred maintenance, basic fixtures and finishes. Generally a value add strategy of varying degree.

CLASS C: Inferior age and/or location with original/ outdated/low-end finishes and fixtures, and possible deferred maintenance and/or substandard management, possible value add or an opportunistic strategy.

SIZE OF THE MARKET
Multifamily housing is a common form of housing in the U.S., especially in urban areas, with most of these assets renter-occupied. The multifamily sector includes 14.5 million units across the 62 largest metro markets in the U.S. (population > 1 million).

The portion of the multifamily sector that is of most interest to domestic and international investors is professionally managed rental communities with at least 150 units. The National Multifamily Housing Council (NMHC) estimates that the total value of U.S. multifamily rental properties is more than $3.3 trillion.

OWNERSHIP
Real Capital Analytics (RCA) divides commercial real estate owners into four major groups: institutional, public companies (predominantly publicly traded REITs), private buyers and international (all types of companies).

U.S. MULTIFAMILY SECTOR OVERVIEW

Private buyers own 68% of the multifamily market (based on value). These buyers include entities of all sizes, businesses and domestic and international capital partners, and high net-worth firms and developers, primarily focused on individual metros or regions within the U.S.

Institutional ownership of multifamily assets has been rising over the past few decades, and this trend is expected to continue. For example, 25 years ago, multifamily assets represented only 11% of the NCREIF Property Index; retail, office and industrial all had substantially higher market shares. Today the multifamily sector represents 24% of the total and is second only to office for total market value.
Institutional owners include investment managers, pension funds, equity funds, insurance companies and sovereign wealth funds (SWFs). The majority of multifamily assets in the U.S. are owned by domestic privately held companies. Currently only about 4% of multifamily holdings are owned by non-U.S. companies.

In the past few years, direct investment by offshore investors of all types (from large SWFs to high net-worth individuals) has averaged approximately 6% of the total. International investors are very active in the sector indirectly through investment funds, REIT stock purchases and equity investment in companies. **According to recent study by NMHC and MBA

If you would like to learn more about Multifamily Real Estate and how to invest, please email me directly at James@jcoreinvestments.com


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How Does Inflation Affect Us?

Many of you have asked me if I’m worried about inflation. Yes, I am, kind of.

Here’s the deal – when there’s inflation you want to be invested in hard assets.  Quality hard assets – like gold.  They tend to weather the inflationary storm pretty well.  But they may not provide current cash flow – or you may need to sell when they’re down.  That would be painful.  The catch is owning cash flowing hard assets that aren’t over-leveraged.  They weather the storm and come out looking great!  That sounds a lot like Multifamily!  And there’s a massive shortage in housing so we’ve got two things going for us.  If inflation kicks in, the cost of construction gets higher, which continues to put a lid on new development.

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I’m more concerned about jobs and wage growth.  If wage growth can’t keep up with rent growth, the affordability crisis, at some point, becomes a rent crisis.  I don’t think we’re there at a scale that would cause fundamental issues, but I would like to see some sustained wage growth in excess of inflation – and we really need to see the bulk of this growth at the lower to mid end of the scale.  These are our renters.  Chairman Powell, thankfully, has also stated this as one of his top goals.  And, of course, multifamily is driven by jobs so clearly we need the economy to continue to grow and thrive in general with positive job creation.  Based on past actions that the Fed and Congress have taken, I highly doubt they will do something to ruin this.  Bad tax policy, COULD, so we have to keep a close eye on that.  Businesses MUST continue to be incentivized to invest and grow!

With that backdrop, we continue to believe multifamily is a great investment.  Obviously the experience of your sponsor/operator is paramount, but the fundamentals continue to look solid.  Invest responsibly. Invest often.

 

If you would like to learn more about Multifamily Real Estate and how to invest, please email me directly at James@jcoreinvestments.com


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The Importance of Time Value of Money

You’ve probably heard about the importance of time value of money.

But do you know what it really means?

What Is The Time Value of Money?

The time value of money (TVM) is a useful concept that enables you to understand what money is worth in terms of, you guessed it, time. This is expressed in a formula which basically states that money is worth more NOW than it will be in the future. This is mainly due to inflation which increases prices over time and decreases your dollar’s spending power. Many of the financial decisions we make now and in the future involve the importance of time value of money.

Examples include:

  • taking out a 15 vs 30 year mortgage
  • buying a car on credit (no thanks)
  • investing in stocks, mutual funds or bonds

Inflation Examples

Here’s a handful of examples of how inflation increase the price on everyday items.

First Class Stamp – Back in the mid-80’s, you could mail a letter for 22 cents. That same letter today will cost you 55 cents to mail thanks to inflation.

Ticket to a movie – If you wanted to go see a movie back in 1985 such as Back To The Future or Rambo: First Blood Part 2, you’d have to shell out $3.55 per ticket. That same ticket today is right around $13.00. If you throw in popcorn and coke then you may have to borrow money from your kids!

Honda Accord – One of the most popular cars in the ’80s was the Honda Accord. Back then the base price was $8,845. Today one can be yours for $24,770.

Human Nature

It seems like kids grasp the concept of the time value of money better than adults. Don’t believe me? Try asking one if they’d rather have $100 now or pay them 10% interest and give them $110 a year later. How many would wait? I’d guess close to zero. Heck, most adults wouldn’t either!

I think that many savvy investors are starting to grasp this concept and changing the way they invest. Instead of socking away money that will be locked up in a 401K for 30+ years, they are investing for cash flow that can replace their expenses now (accumulation model vs cash flow model).

Why?

Because they want options NOW and know that buying stuff is only going to become MORE expensive each year. They’d rather have that money now rather than later.

Why Is the Time Value of Money Important?

Remember that Inflation increases prices over time so every dollar in your pocket today will buy MORE in the present than it will in the future. This makes investing even more important than most realize.

The TVM helps in that it allows you to make the best decision about how to handle your money based on:

  • inflation – Inflation causes the cost of goods and services to continue to rise. You can buy more with $100 now than in twenty years. Money you have today has a higher purchasing power.
  • risk – You understand that a lot can happen in the future. Due to unforeseen circumstances, you may not get all of your money, or any at all. But you can lower your risk to zero if you’re paid today.
  • investment opportunity – There are a lot of ways you can make your money grow today (real estate investing). But if you wait ten years to receive your money, you’re losing the opportunity to invest.

The Importance of Time Value of Money in Real Estate Investing

You didn’t think a real estate investing blog would leave out how the TVM could help them too now did you? Real estate investors can use this concept to help determine what future cash flow from a real estate investment would be worth in today’s dollars. It can also help to determine whether you’re better off using your cash now for something such as a rehab, or borrowing money and conserving cash for another purpose.

The Importance of Compounding Interest

Even though we now know that the TVM teaches us that money is worth MORE today than in the future so we should spend it now versus save it for later; we also know that sometimes that isn’t the case. While inflation works against you, eating away at the value of your money, compound interest works for you to raise the value of your present dollar tomorrow.

What Is Compound Interest?

Compound Interest is simply earning interest on interest. 

In other words, it works by calculating the interest on your entire account balance which also includes the interest that’s been accrued. Here’s a compound interest formula:

For example, if you have $1,000 and it earns 10% each year for five years,  in the first year you’ve earned $100 in interest (10% of $1,000).

In year #2, things start to pick up as you’re actually earning interest on the total amount from the previous compounding period, which would be $1,100 (the original $1,000 plus the $110 in interest earned in year one).

By the end of year two, you’d have earned $1,210 ($1,100 plus $110 in interest). If you keep going until the end of year five, the original $1,000 turns into $1,610.

The Time Value of Money Formula

Now that we’ve learned what the importance of the time value of money is, how then do we go about measuring it?

We do so by using a specific formula which takes the present value, multiplies it by compound interest for each payment period and factors in the time period when the payments are made.

Formula: PV = FV / (1+I)^N

  • PV: present value
  • FV: future value
  • R: rate of growth or interest rate
  • N: number of periods (typically measured in years or months)

Using the Time Value of Money Formula

I get it. Who wants to use a complex formula? It’s essential  if you want to answer questions such as:

How much would I need to save beginning today if I want to become a millionaire in 20 years, assuming a 7% growth after inflation?

You could also use this formula to calculate anticipated future costs like college, purchase of a home, weddings, etc.

If I start with with an account balance of zero today and put away $500 a month, what will I have in 10 years if I get a 6% growth after inflation?

This is a great way to see the direction you’re headed in.

Using this calculation with kids is a GREAT way to motivate them to focus on saving money at an early age.

Here’s an online calculator that you can use to speed up calculations.

Conclusion

Now you’ve come to realize the importance of the time value of money and that it tells us that money we have now doesn’t have the same value in the future. By knowing this, we’re able to make we’re able to set goals and make choices that affect our financial life.

 

If you would like to learn more about Multifamily Real Estate and how to invest, please email me directly at James@jcoreinvestments.com


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Multifamily Market is on fire!!!

We were outbid again on a phenomenal asset in the Dallas Fort Worth (DFW) Area. It fits perfectly into our wheelhouse on every angle so we were prepared to push hard to get it.

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Our initial underwriting put us at $12MM – in line with the guidance we were receiving.  After some further research, we felt comfortable pushing to $12.2MM, maybe even $12.3MM if we had to.  Not bad to have a few $100K to play with if need be.  Our lender even mentioned we could still get 70% LTV at $12.5MM.  While our returns began to take a hit at that point, it settled out in the 8% COC and 13% IRR.  While that may seem a little low, you have to remember that we’re talking a home run asset in a home run market so you’re going to have to give a little with the expectation that the team and the market will allow you to outperform in the long run.  Long story short the word on the street says this deal went north of $15MM before the dust settled.  WOW!

With yet another crazy price in the books, we went to go back to double check our data.  Are we being too conservative, are we missing opportunities with too much of a rearview mirror?  We don’t think so.  We think our pricing was spot on and takes into account the upside in the market.  On the flip side, I also don’t think that 4-5% returns are market either (which is what the deal would have penciled at $15MM).

We’ve been tracking the market pretty closely the past few months given all the money that’s flooded into our space and have made a couple interesting observations.

First, beginning in March of this year, rental rates literally took off on a tear.  We’ve been seeing healthy rental rate increases across the board for the past decade, but something happened in March to really amp that trajectory significantly.  Traditionally leasing season gets underway in a serious manner around that time for southern states, but usually doesn’t get it’s stride until May or June up north.  However, this trajectory was pretty consistent across all of our markets regardless of geographic location – and it’s not a small deviation, it’s massive!

Second, the spreads and rates for debt have gone to yet another record low level.  Bridge debt, the more risky debt for value-add deals, which even a month ago was 4.5%, is now in the low 3% range.  Lenders are practically climbing over themselves to sign up multifamily debt.  While occupancy, rental rates, and collections continue to make new highs as the economy improves, we suppose it’s not too hard to understand some of the enthusiasm.  This is interesting, though, considering we’re about to, hopefully, see an expiration to the eviction moratorium and potentially millions of evictions from people who have chosen not to pay rent for the past months (or year).  Maybe the market has already priced in this potential downside?

In the DFW market, the average effective rent growth was 1.9% for the quarter.  Yes, that’s the quarter, not the year.  While Class A and B took the lions share of that rent growth, that’s still an amazing statistic.  Lease concessions drove much of that increase as properties phased out previous leasing concessions that were no longer needed as demand came roaring back.  We’ve seen the same in our properties as rental rates and collections reach all time highs.  With new construction moderated by the inflationary situation for raw materials, this continues to bode well for stabilized assets.

All this to say, it is somewhat understandable why some buyers are throwing caution to the wind just to get their hands on a deal – especially in Dallas.  And while it can be frustrating and the old FOMO (fear of missing out) can set in, we have to remind ourselves that this is a long game and these are times when it’s easy to make mistakes.  We’ll continue to push forward and do the best we can to adjust our expectations (within reason) to the current market conditions, but don’t expect us to throw caution to the wind just to put another notch on the deal belt!

If you would like to learn more about Multifamily Real Estate and how to invest, please email me directly at James@jcoreinvestments.com


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Should you pay off your mortgage?

For most, paying off your mortgage is a personal decision that factors in comfort level of how much debt you have. For me, instead of paying off my mortgages, I leverage that debt to invest in more real estate. First, let me explain leverage.

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What Is Leverage In Real Estate?

Greek philosopher Archimedes once said:  “Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.”

If you’re a home owner, then you’re well aware of what it means to use leverage in real estate. Leverage allowed you to borrow money to help finance your home in the form of a mortgage. Most millionaires and billionaires have real estate in their portfolio. Why? They know that a major advantage is something called financial leverage.

Leverage in real estate means buying property with debt instead of paying cash. This allows you to buy a much larger asset and increase the potential return on your investment than you could if you had to pay 100% of the purchase price upfront.

Now that we understand Leverage, should you pay your Mortgage off.

I say No and here’s why.  Before I knew about Real Estate, my original investment strategy was to invest in index funds as it was all I knew about saving for retirement. If I put $100,000 into an index fund, then I could only purchase that amount as a shareholder. On the other hand, I could use that same $100,000 and leverage it to buy an investment property that was a much higher valued asset.

With interest rates at historical lows, there is an opportunity to use cheap debt as leverage to increase your real estate portfolio.  If you currently have a property that has equity in it, you should consider pulling that equity out with a refinance and taking advantage of the low interest rates. Instead of paying off your mortgage you can apply that equity and take advantage of financial leverage. Just like I mentioned above that most millionaires and billionaires do.

Let’s take a look at how I recently used leverage as an active investor after taking equity from one of my SFH rental properties.  Before refinancing this property, I was making about $350 a month in cash flow but had a high interest rate with a lot of trapped equity. After the refinance, I pulled out about $100K of equity, dropped my interest rate substantially but did reduce my monthly cash flow from $350 to $275.

You might be saying well that doesn’t make sense because you reduced your cash flow by $75 a month and took on more debt since you have to finance that additional 100K pulled out. ($75* 12 months = $900 a year in reduced cash flow).  Well, let me show you how I leverage that $100K instead of paying the mortgage off of the SFH rental.

With my partners, we purchased an apartment building as a joint venture and my investment of $100K was used as a portion of the down payment to finance this asset. After all expenses and mortgage, we projected this investment will produce 13% to 15% annual (CoC) cash on cash return. To be conservative, let’s say it’s a bad year and I only make 10% return on my investment. With only 10% return that means I made $10,000 return for the year and even after considering the monthly income lost of $900 from the refinanced property, I still cleared $9100. Let’s do the math.

10,000           (CoC on $100K investment at 10% return)

-900            (reduced cash flow on refinanced SFR)

$9100 (total return after accounting for reduce cash flow from refinanced SFH rental)

This is a very simplistic way to look at this but not only did this new investment make up for the lost cash flow in the refinance, but it greatly increased my monthly returns. What else to remember is I now own 25% of a multimillion-dollar apartment building that over time will appreciate as the mortgage is also paid down by the tenants. This scenario could easily be replaced with a SFH rental investment.

And that is the magic of using leverage in real estate.

Be cautious with debt.

First off, real estate investing should be viewed NOT as a liability but as an asset that is sustainable in paying all operating cost and debt while providing cash flow. Before taking on additional debt, you need to stress test the real estate investment to understand when it goes from being an asset to a liability. For example, in this multifamily investment if it went under 60% occupied it was longer considered an asset and instead was losing money – becoming a liability. In SFH Rentals, maybe over three months vacancy is when this creates a hardship and becomes a liability. Each investment is different.

By stress testing your investment, you can better understand the right amount of debt that is manageable and what reserves are required in an underperforming rentals. Underperforming rental properties may be manageable for the near term with being over leveraged but you also need to consider a downturn in the market. You need to ask yourself what if there is a major downturn in the market and this property is making no income. Worse what if this occurs across several of your properties and you are now having to pay several large mortgages out of your own pocket.

Summary

For me, I’d rather carry debt on my real estate investing and leverage that debt to grow my portfolio. Debt is cheap right now and I highly recommend that you use the equity instead of paying off the mortgage. Just don’t get carried away in over leveraging yourself.

If you have any additional questions, please email me directly at James@jcoreinvestments.com


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Going from a Bad Flip to purchasing 4 additional SFR (part 2)

With this bad flip, I had $285K of my own cash tied up in this Mulberry house but couldn’t sell at a price point to make a profit. I had to come up with some creative ideas to turn a bad flip into something better. Before reading this blog, read Part 1 at this link on how Mulberry became a bad flip.

Sell or Rent Mulberry

When putting the Mulberry house on the market, my realtor wanted sole rights to represent me in advertising/selling my property. We agreed and signed a contract that he would be the only realtor that could sell the property for the next 4 months. To have an escape clause, I negotiated an option to advertise Mulberry as a rental property through a separate property manager in parallel of listing the property for sell. The reason for the clause was my doubt of getting an offer over $300K needed to break even on this flip. Also, after the blood, sweat and tears my brother and I put into this house, I wasn’t sure I wanted to sell.

After receiving several purchase offers in the low $290K, I decided that I had to convert Mulberry into a rental property. Hey, I already owned 3 other SFH rentals in Texas so why not make it a fourth. Weeks leading up to this decision, I had vetted property managers and done market research on what the for rental range in the neighborhood was.

Immediately after my new property manager listed Mulberry for rent, we received many inquiries and decided to accept an offer from a tenant who wanted a 2-year lease.  Of course, my realtor was not happy about this and pressured me to keep Mulberry on the market for a few more weeks since he was certain an offer above $300K would come in.  Desperate for cash flow and deep down not wanted to sell, I rented out Mulberry. Of course there always has to be one more expense – purchasing a refrigerator for the kitchen since converting to a rental. Again money going out!!!

What a stress reliver to stop the hemorrhaging of money and now getting rental income coming in. I still needed to figure out how to best leverage the equity in this Mulberry flip house that was now going to be turned into a BRRR (Buy, Rehab, Rent, Refinance).  In BRRR, I had already done the Buy, Rehab, Rent and only needed to Refinance my money out. The problem is closing cost add up with purchasing, selling or refinancing a house so I didn’t want to do a cash out refinance on Mulberry to turn around and purchase another SFH rental since that would accumulate two different closing cost. So, to reduce closing cost, I began to think if there was a way to do ONE closing that would allow me to pull equity out of Mulberry to purchase another.

This is where it gets a little complicated

I knew I had about $300K of equity in Mulberry and with most lenders they will only refinance up to 75% loan to value (LTV).  With 75% LTV, I could leverage about $225K in equity to purchase another SFH rental.  Well, I started to get even more creative and started to think what if I included one of my other TX properties (WakeBridge) valued at $265K with an exiting loan of $37K. With 75%LTV on this WakeBrdige property, I could leverage an additional $213K.  (I wrote a blog about WakeBridge as my first SFH purchase at this link)

Mulberry – $300K of 75%LTV =  $225K

Wakebridge – $265K of 75% LTV – $35K(existing loan) =  $163K

Total equity at 75%LTV  is $388K

How to make this equity go far

I started contacting commercial lenders to see if they would even entertain my creative financing idea of using the combined equity from 2 of my rental properties to provide $100K cash out and to bulk purchase other properties. To recoup from the hemorrhaging of money from the Mulberry rehab, I needed $100K cash out to resupply all my bank accounts that I drained to fund Mulberry and to also have reserves for a rainy day. Oh, to make this even a little more interesting, the bulk purchasing of the additional houses would be in 2 different state so I needed to also find a title company that could pull off doing a single closing of several properties on the same day in different states.

After negotiating with a commercial lender who was interested in financing my crazy idea, we agreed on loan terms of financing $670K (65% LTV for estimated value of property at $1.03M). This included purchasing 4 properties at combined purchase price of $499K, paying off the existing Wakebrige loan, covering closing cost and $105K cash out at closing.

When you add it all up, the closing cost for this bulk deal was $27K which comparable to a traditional residential loan was a lot cheaper.  Let’s assume that on a traditional financing to purchase a SFH the closing cost averages $10K, so in this deal with 6 separate traditional closing could have been $60K . Lastly, since this was a commercial loan, it doesn’t count against my limit of only having 10 traditional residential loans in my name.

Estimated Value of Property                                                      $1,029,850.00

Number of Properties                                                                    6

Estimated Loan to Value                                                                65.00%

Payoff of Wakebridge Mortgage                                                $37,328

Purchase Price of properties                                                      $499,800

3rd Party Closing Costs (Title, Recordation, etc.)                 $6,000

Origination Fee                                                                            $11,714

Processing Fee                                                                             $1,750

Legal Fee                                                                                       $4,000

Estimated Initial Deposit for Escrow                                         $3450

Loan Amount                                                                                $669,402

Cash to Borrower at Closing                                                       $105,318

Where did the $499K Purchase Price come from?

Still licking my wounds from the Mulberry flip gone wrong, I was in no mood to do another flip or even minor repairs on a rental. Also, I needed to find several properties that I could close on the same day so started to research turnkey properties. I’ve bought turnkeys in the past and knew that they sell remodeled houses with tenants and property managers already in place.

From Bigger Pockets forum, I found a turnkey that could provide several properties at one time. Unfortunately, with this turnkey operator this was a very bad experience since they were not honest and their houses were in poor condition. After spending over $6K in property inspection, I uncovered major structure problems, poor quality in remodel and incorrect plumbing and electrical work. Again, money going out, but as the saying goes – sometimes the best deal is a deal you don’t do.

After finally walking away from this turnkey provider, someone recommended Bridge Turnkey in Kansas City MO. I’d never been to Kansas nor ever invested in this market. Bridge Turnkey was awesome in answering all my questions, providing 4 properties that met my requirements and accommodating my timeframe to close. I highly recommend them.

The 4 purchased properties

The 4 properties I selected where 3 bedroom 1 bathroom with a purchase price of $119K or $129K. Also Bridge Turnkey had a guarantee for the $119K properties to get a monthly rent range between $995 -$1050 and the $129K properties to get a monthly rent range between $1025 – $1095. Theses purchase price, rent range, fully rehabbed, being rented out and able to close on the same day fit all my requirements. Also Bridge Turnkey provided 1 year home warranty on the properties.

Kansas rental 1                                                                         $119K

Kansas rental 2                                                                         $119K

Kansas rental 3                                                                         $129K

Kansas rental 4                                                                          $129K

 

Summary

 

With the right mindset, anything is possible in real estate. It felt like every step in this journey was nothing but challenges to include rehabbing Mulberry, trying to sell, creative financing, finding a turnkey operator, etc. With creative thinking, I was able to recover from a bad flip with $105K in cash while added 4 properties to my portfolio. I also realized there is a slim chance I’ll never do a flip again. There is just to much risk compared to building equity through rentals. I can say that I gained so much experience in the rehab of Mulberry that I can over come any obstacle/road block no matter how challenging.

With this bad flip, I had $285K of my own cash tied up in this Mulberry house but couldn’t sell at a price point to make a profit. I had to come up with some creative ideas to turn a bad flip into something better. Before reading this blog, read Part 1 at this link on how Mulberry became a bad flip.

If you have any additional questions, please email me directly at James@jcoreinvestments.com


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Going from a Bad Flip to purchasing 4 additional SFR (part 1)

I’m sure you love watching all the flipping shows on HGTV network. It amazes me how these shows make flipping look stress free, fun and easy while always making a profit. What I will say is flipping a house is nowhere as easy as those HGTV shows make it look.

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Flip with my brother

My brother really wanted to get into the real estate business but didn’t have the capital to get started. We agreed that if he found a property, I’d fund the deal and he would be the boots on the ground to manage the rehab.

My brother lives in San Antonio and found a property that’s about 10-15 min drive from downtown San Antonio which is also a tourist area of the famous Alamo. The flip house we identified is in a very old neighborhood that was starting to see revitalization and just a few streets over had been designated as a historical neighborhood. This area was attracting young families that wanted to be close to downtown area but in a historical suburban area to raise their children.

My wife and I both love real estate and have remodeled houses in the past so were comfortable with taking on this project to help my brother out. My wife is an interior designer/space planner and an expert with AutoCAD and other software to design/plan remodels. Besides bringing capital to the project, I have prior experience in drafting scopes of works (SOW), project management and managing contractors on rehabs. My brother is a commercial electrician and also has many years of experience in constructions. As a team we were ready to take on this flip.

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The Mulberry House (nickname of the project)

We purchased a 3 bedroom, 2 full bathroom house that also included a very large recreational room located on Mulberry St in an up and coming neighborhood. With Hard Money, we purchased the property at $170K plus $42K for repairs. The hard money terms was for 6 months with interest only payments at 12% which worked out to be roughly $2000.00 a month.  We planned that this flip would take about 3 to 4 months so we budgeted 10K in holding cost. The total budget was $242K and with a projected appraisal after rehab of $298K. We were looking at a profit of $56K.

  • $170K – purchase price
  • $20K – closing cost to purchase and sell
  • $42K – repairs
  • $10K – holding cost

I was serving overseas so I flew back to San Antonio for closing and to also kick off the project by assisting with Demolition (Demo). I was only in town for two weeks so there was a lot of action items to put in place. Weeks leading up to closing, we had been in constant communication with our general contractor (GC) who had assisted with creating a line item on the cost of the rehab. We were still finalizing the scope of work and was planning to sign the final contract right after closing. The evening of close the GC texted my brother to say he was not taking this project and afterwards wasn’t answering his phone.

When doing a flip, there is no time to waste so we had to move quickly to find a replacement GC in such short time. We quickly signed with another GC that my brother had worked with on a different project. This was a big gamble since we didn’t fully vet this GC but decided that we had to sign since he was available to start construction right after demo. Many other GC’s said they were not available for weeks so our options were very limited.

To this day, I have no idea why our original GC backed out, but it was very eye opening to see that a person knowingly put my brother and I in such a bad position.

Downhill from there

A few days before I had to fly back overseas, our new GC realized that the foundation slab had no rebar in the concrete and didn’t think lifting the concrete slab would fix the foundation. When our original GC did the inspection of the house, he said that the crack could be fixed by lifting the foundation. At the time we never even consider that the concreate slab didn’t have metal reinforced rebar in it.

In San Antonio, foundations are a common problem in older houses so fixing this foundation didn’t seem to be a big issue at the time. What we quickly learned was that was not the case and the concrete slab was actually an old porch patio that wasn’t designed to support the weight of the current recreation room structure.

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We called every foundation contractor in the San Antonino metroplex to do a site survey, give a solution and provide a price quote to hopefully salvage the current concrete foundation. Instead of hearing solutions, every foundation contractor continued to tell us what we already knew – that the recreational room was actually built on top of an old patio slab and couldn’t hold the weight of the recreation room in its current state. To add to the problem, they pointed out that the recreation room was beginning to slide off the patio slab and could possible fall when another big rain occurred. Some of the foundation contractors even presented more bad news that once the city found out about this that the city would not approve any permit repairs to this foundation. They recommended to demolish the recreation room and tired to give us quotes on building a new outside patio. The Recreation room’s square footage was planned to be reallocated into a new utility room, half bathroom, sitting area with French doors and a new 4th bedroom. This was not an option to lose this square footage since that would severally reduce the resell value by $25-30K.

Creative solution – Float the Recreation room

My brother and I continued to brainstorm and came up with an idea to float the recreation room and build a wood deck with subflooring as the new foundation. Instead of trying to fix the patio concrete slab, we decided to just leave it in place so there was no need to demo and haul away.  When entering the recreation room from the house you actually stepped down almost 3 steps so there was plenty of room from the current ceiling to the current concrete floor. The question is, could we find a contractor to build a deck under an existing structure at a reasonable price. We found a company that had built a ton of decks and was surprisingly excited about taking up a challenge like this. I had already flown back overseas but was in constant communication with this contractor to get engineering drawings and permit/approval from the city.

The price quote to save the recreation room came in around $14K which we felt was a great price. The SOW included: cut about a foot and a half of the existing walls all the way around the recreation room, build supports to temporary hold the structure up, drill metal piers into the ground, install a new Glulam beams with subflooring, Install new 2×4 bottom plates on the floating walls and then properly lower the recreation room onto the new foundation. I wish I had a better video, but to the right is when the the contractor drove a small bobcat inside of the recreation room to drill down to the bedrock and install the metal supporting piers.

We literately floated the house as we built a new subfloor underneath

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Old concrete stairs to enter Rec Room. On the side of the stairs is cut out concrete to install new metal pier

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Above is the engineering drawings that was approved/permitted by the city to install 12 metal piers and use Glulam beams to build the subfloor on top of. Glulam beams are made by gluing together, under pressure and heat, laminates of timber that we had special order to the size we needed. The resulting product is strong, stable, and corrosion proof with significant advantages over structural steel and concrete

Here are photos as we built the new subfloor.

The Rest of the house was being remodeled in parallel as the subfloor for the Rec room was being built out.

What else could go wrong?

As the project went on, we continued to find more and more problems throughout the entire house. The rehab cost skyrocketed and the contractor begin to nickel and dime us every time we did a change to the original SOW. This is also when the contractor begin to slip on the project timeline. Besides the skyrocketing cost of construction, I was stressing on having to pay more holding cost to the hard money lender and monthly utilities if the timeline continued to slipped. In the end, the Mulberry house became an entire gut job and the only thing that was not replaced was the, roof, the walls, and the HVAC system (air conditioner and heating). Even though this house was becoming a money pit, I refused to cut any corners and wanted to ensure if we found something that needed to be repaired that we did it right.

City Inspectors

When doing construction, its important to allocate time in your schedule to ensure permits are filed, approved by the city and to allow for inspections by the city at certain stages of construction. The city can shut down a construction site if they find anything that isn’t permitted, hasn’t been inspected or is out of code.

Throughout the project the city came to inspect certain items before we could move to the next stage of the project. For example, we needed the city to pass the new electrical and plumbing before we could put up any new sheet rock on the walls. The problem is you never know what inspector you are going to get and if they are going to pass you or not. A failed inspection can severely delay the project since you have to repair that identified issue and have the city come at a later date to reinspect.

One example of an inspector catching us off guard was on final electrical inspection which we thought would be in and out. The inspector said that we couldn’t use battery powered smoke detectors but instead had to have them all wired together as one system. Not a big deal but the inspector wasn’t there to inspect the smoke detectors but decided to hit us on that and not pass our electrical inspection. Not a big costly repair but we did have to purchase new smoke detectors and wire them. A completely different inspector almost gave me a heart attack since I thought this was going to bankrupted me.

After a lot of stress over the last few months, we were wrapping up cosmetic issues and about to put the property on the market for sell. I remember my brother calling me to tell me the bad news about the final/final inspection that we thought would be a formality to close all permits. During the inspection, the inspector said the original supporting beam in the recreation room was out of code by being 1 inch to low from floor to beam. The inspector then said he would put in the city record that either the beam had to be raised or the entire recreation room would need to be torn down. The picture to the right shows the beam that is just left of the French doors. As you can see that at this stage of construction to be move in ready, there was no way that the beam could be lifted 1 in

The beam that almost ended it all

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I remember when my brother called me, I think my heart skipped a few beats. I was in so much shock since we were coming to an end on this project to include the amount of effort that went into salvaging the recreation room to now find out it was all a waste. After my brother calmed me down, our action plan was for him to meet with the head inspector to present our case. During the meeting, my brother explained that the city had approved the engineering drawings, there had been several inspections of the foundation and rehab of the recreation room and we felt that if this was an issue the city should have raised it at the first inspection. Also, we scrubbed the city building codes and found a line saying that if a supporting beam was not replaced then could be grandfathered in. We hoped the head inspector would interpret that code the same way since technically we were in a very gray area since the floor had been raised with a new foundation. To our surprise the head inspector agreed that the city should of told us in prior inspection and grandfathered in that beam. He closed out all permits and continued to say that if we had to tear down the recreation room that it would be bad for future revitalization in the area. He explained that he didn’t want the city to get a bad repetition of stopping investment in this area. What a great day for us.

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Oh, its not over yet – Have you heard of a Mechanical Lien?

After some disagreements with our GC not meeting the timeline, we decided to hold final payment of about $500.00 back. I thought that was more than fair since per the contract the GC didn’t meet the agreed timeline and had many slips on his deliverables. We had just put the house on the market and was trying to get top dollar to at least break even. The GC knew we were under a time crunch to sell the house so took advantage of the situation by placing a mechanical lien on the house for $2500.00. With this mechanical lien, if a buyer wanted to purchase the property there would be no way to transfer the title until the mechanical lien is removed. Another option would be to sue the GC to have the lien removed but that too came at a cost and lost time. After putting my ego aside, I called the GC and explained that yes this was a tough flip but I literally had no more money and could only offer $1000.00 to settle. He agreed and the lien was removed.

Almost $285K in the hole

With the overruns of cost and time, instead of making a profit I was now hemorrhaging money. We were so over budget that we would have to sell the house over $300K just to break even. To stop the hemorrhaging, I paid off the hard money loan with reserve capital I had and now was about $285K out of pocket. At least I now owned this property free and clear. The house sat on the market for several months and only got offers at the low $290K. With closing cost, these offers would be a lose for us.

Creative Thinking to dig out of this hole

I now had $285K of equity in this house and I needed to figure out how to turn this bad flip into a positive. As for my brother, he knew this property almost bankrupted me so he felt that it was fair for me to keep full ownership of the house. I really appreciate that sacrifice from him since he put so much sweat equity into this flip. In my next Post, I’ll explain how I ended up with 4 more SFR and turned this bad flip into a win-win.

 

If you have any additional questions, please email me directly at James@jcoreinvestments.com


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So what is it that the wealthy know that the rest of us don't?

So what is it that the wealthy know that the rest of us don’t?

They understand the incredible power of real estate. Real estate has the ability to generate passive income and provide a path toward building wealth. 

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#1 – Cash Flow

One of the biggest advantages real estate creates for earners is passive cash flow. Most of us go through our entire careers focusing on and growing only one stream of income, our active/earned income. Here’s a cash flow example from an active real estate investor:

If you put down $50,000 to buy a rental for $200,000, the mortgage payment would be roughly $1,000 per month. Now let’s say that you’re able to rent it out for $2,000 per month. Upon receipt of the $2,000 monthly rent payment, you pay the $1,000 mortgage, use $700 for expenses and reserves, and keep the remaining $300 as passive cash flow (i.e., money in your pocket).

This is great but what about the busy professional that wants an extra stream of cash flow WITHOUT landlord duties (myself included)?

Enter real estate syndications. These are group investments you can invest in that purchase assets such as apartment complexes. Each one of the units is creating an income stream from the current tenants. They pay rent each month, and that monthly income flows to the owner(s). In this case it’s to the limited partners such as you, me and others without having to become a landlord.

Unfortunately, too many people are only focused on saving for retirement but not cash flow now. The good news is that they’re focused on investing but the bad news is they’re trying to save up enough money so one day they can replace their current income in order to stop working. By choosing this method, they may not ever save enough money to retire and if they do, they then have to worry about running out or being too old to enjoy it. On the flip side, every time you invest in real estate (either physical property or a passive syndication), you develop an extra stream of cash flow which moves you one step closer to your goal of income replacement.

 

If you are interested in earning cash flow in our upcoming Investments, click to join JCORE Investor Club.

 

#2 – Leverage

In the example above, you hypothetically bought a $200,000 rental without paying $200,000 in cash. Instead, you put up $50,000 as a down payment, and the bank contributed the remaining $150,000. The cash flow you earned is based on the full $200,000 asset, not the $50,000 portion. Even though the bank contributed 75% of the money, all you have to do is pay the mortgage and interest, and any excess cash flow or profit is all yours.

This is the magic of leverage.

Leverage is the use of debt to increase the potential return of an investment. Most of us are familiar with debt. Take buying a car. You can use debt to purchase a vehicle without having to come up with the entire purchase price. This is NOT something I’d recommend but is done more frequently than not. Regarding real estate investing, leverage can be used by taking out a mortgage and only putting down a fraction of the total cost. Even though you only put down a small portion of the purchase price, you are still entitled to ALL of the benefits including:

 

  • the income generated
  • build up of equity
  • property’s appreciation
  • tax benefits

 

#3 –Equity

If you’re a home owner, then you’re aware that each time a mortgage payment is made, a portion of it goes toward the principal value. This is also true regarding rental property except it’s your tenant that’s paying down the mortgage. In this way, the rental property generates income to pay for itself.

At the end of the mortgage period you’ll own the entire property, and your tenants will have paid for the majority of the cost.

 

#4 – Appreciation

Real estate values tend to rise over time, which means your money can also work for you in the form of appreciation. From the 1960’s through the early 2000’s there wasn’t a single year of decline in the median home price in the U.S. Appreciation is an important variable which plays a key role in defining the profit from a property for a real estate investor.

Whenever someone is considering investing in apartment complexes, they should pay attention to what improvements are being performed in order to increase the future value. For example, consider a property purchased for $580,000. In time, the duplex appreciates to $750,000, at which point it is sold. The profit at the sale, or $170,000, will have been generated via appreciation, plus any additional equity that you had built through paying down the mortgage. That being said, while appreciation is nice, it’s not guaranteed, which is why you should always invest for cash flow first and foremost, with appreciation as the “icing on the cake“.

 

#5 – Tax Benefits

When you invest in real estate, you get the benefits of depreciation and mortgage interest deductions, as well as a whole host of write-offs for a number of other related expenses. Depreciation is an accounting method that allows you to deduct the value of an asset over it’s useful life. Investors often show losses on paper, while actually making money through cash flow. The losses play a big part in helping to offset other income, which is a major reason real estate is so lucrative.

Further, when investing in commercial real estate syndications, you have the opportunity to take advantage of cost segregation and accelerated depreciation, further increasing your tax benefits.

 

If you have any additional questions, please email me directly at James@jcoreinvestments.com


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Purchasing my first Single Family Home while serving overseas.

Step 1 – Take action and buy your first property.

This article will review my first SFH purchase whiling serving overseas. Even though I made a ton of mistakes on this purchase, taking the first step allowed me to grow a large SFH and Multifamily portfolio. Take Massive Action!!!

How it all Began

I joined the Foreign Service back in July 2002 which now seems like a lifetime ago. Prior to that, I severed in the USMC and never really had a lot of disposable income. In 2004, I remember while being assigned to U.S. Embassy Tel Aviv as a young single Foreign Service Officer (FSO), I mentioned to my mother that I enjoyed having so much disposable income. Wow, I thought as a FS-5, I was raking in the money.

My mom mentioned that a townhome community was being developed near where she lived and individual lots were being sold in advance of being built (my mom lives in Plano, Texas). Yes, my mother is the one who introduced me to real estate not knowing the impact that would make on my future. At the time, I seriously knew nothing about real estate, how to evaluate a deal, what cash flow is, interest rates, being a landlord, etc. I just knew I was going to buy a townhouse and call myself a real estate investor. Why not!!!

What did I actually buy?

Early 2005, I put a $10,000 deposit on a preconstruction 1850 square foot 3-bedroom 2-bathroom townhome for a purchase price of $148,914.00. (wow, where can you find that price in North Dallas, today). This was with Legacy Homes and over the next few months they sent me photos as the townhome was being built.

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Closing was Nov 2005 and was through Country Wide Mortgage which used creative financing to fund my loan. Can you believe these interest rates!!! Funny story – I remember when I went to the Embassy to get my closing documents notarized, I thought that the ACS officer would explain the documents to me. She first looked at me strange for a moment before saying, “we only verify your signature and it’s your responsibility to review the documents you are signing.” Looking back, I can see how naïve I was on loan rates, terms and the closing process.

  • Purchase price:                 $148,914
  • Closing Cost:                      $6444
  • Total Cost:                           $155,338
  • 1st Mortgage:                     $119,100             6.125% at 30 years
  • Subordinate loan:            $22,300                8.125%  at 15 years
  • Cash at closing:                 $13,952                 (minus the 10,000 escrow as deposit)
  • 1st Mortgage Monthly Payments:              $1126    (escrow included)
  • Subordinate Payments:                                 $214
  • Total Payments:                                               $1340

My total monthly payment was $1340.  Also, at the time I wasn’t even aware of Home Owners Associations (HOA) fee, more on that later.

One thing I did right

I interviewed several property managers and asked the tough questions on how they would manage my property. After a lengthy process, I signed with Remarkable Property Manager. Looking back, I’ve worked with a ton of different property managers over the years and by far Remarkable Property Managers in Dallas are they best. To this day, they are still managing this property plus 2 others I own in the DFW Area.

Cash Flow – or actually NO Cash Flow

At the time, I thought just owning a SFH was good enough even though I was still having to pay a few hundred dollars each month to cover all expenses. This property was renting at the time for $1100.00 a month.

  • Total Monthly Mortgage:              $1340
  • Property Manager Fee 10%:        $110
  • Total operating cost:       $1450.00
  • Monthly Rental income: $1100
  • Total Cash Flow:               -$350.00 

 

Yes, you are reading that right, I had a negative cash flow on my first property. Remember my comment about HOA, previously? To make things worse, I had no idea about HOA and that there were HOA dues to be paid every quarter. About a year after purchasing this property the HOA tried to foreclose on my property since I had never made a HOA Payment. To reconcile my HOA back payments and avoid foreclosure, I had to pay $4500.00 to the HOA. So not only was I having to pay $350 a month out of pocket, I was hit with another $4500.00 a year into this deal.

Summary

I still own this property and it now makes over $350.00 in cash flow a month. I’ve also leveraged the equity several times through cash out refinancing to purchase more properties.  Yes, that first deal almost ended my real estate investing career but I learned so much to be better prepared for my next investment. Even my second purchase a few years later wasn’t without mistakes but until you take the first step you will never begin your real estate investing journey.

We all say “I wish I knew then what I know now.” Well – you kind of can. Back in 2004 the online real estate community was in its infancy but now there are so many online resources and real estate communities with valuable resources. I recommend that you educate yourself and network with others in real estate to learn from their experience. I’ve found the real estate community is very helpful in providing advice and as a community wants others to succeed. If only I had that back in 2005, I wonder how different my first investment would have been.

If you have any additional questions, please email me directly at James@jcoreinvestments.com


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Have you ever heard of a Self-Directed IRA (SDIRA)?

Did you know you can invest in real estate with you IRA?

Over the years, I’ve experienced that real estate is a better investing strategy for my family compared to the stock market.  Even though I personally don’t like investing in the stock market, I continued to invest in an IRA for tax deferred reason.   What I didn’t know is there is a thing called “Self-Directed IRA” that gives you control over where and what you can invest your IRA in.

These investments grow tax-deferred; so, earnings can compound faster than they could outside of the account. The IRS allows a wide variety of investments choices for these accounts and the one that attracted me the most is real estate.

Here are a few examples:.

  • Real estate.
  • Undeveloped or raw land.
  • Promissory notes.
  • Tax lien certificates.
  • Gold, silver and other precious metals.
  • Cryptocurrency.
  • Water rights.
  • Mineral rights, oil and gas.
  • LLC membership interest.
  • Livestock

The catch is you must move your IRA from your current account to a specialized firm that offer SDIRA custody services. Most of the traditional IRA account holders do not do provide SDIRA accounts and will try to talk you out of transferring your account. The reason is they are losing the fees that they are currently charging you. There are many SDIRA custodians to choose from and they also have fees so it’s important to shop around.  You also need to be aware that SDIRA custodians can’t give financial or investment advice, so the burden of research, due diligence, and management of assets rests solely with you as the account holder. They are only there to ensure that when you are investing that you are following the IRS rules to keeping this a tax deferred investment.

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Lastly, the most important thing to be aware of when investing in Real Estate with your SDIRA is you still could be taxed because of what is called an Unrelated Business Income Tax (UBIT). This tax comes from any of the funds that you leverage to purchase the property.

If your IRA took out a loan to purchase property, any earnings yielded from the leveraged portion of the asset (referred to as Unrelated Debt-Financed Income or UDFI) may incur UBIT. For example

  • Your IRA holds a rental property. It paid cash for half and financed the other half (50%).
  • The rental property earns $10,000 in a given year. Since the debt percentage is 50%, half of those earnings ($5,000) will be taxed at the current UBIT rate.

The debt percentages from each of the previous 12 months will be averaged to represent the single debt percentage for that year. Profits garnered from the sale of a debt-leveraged property will also be subject to UBIT, but not at the current Trust Rate. Such profits would be taxed as capital gains.

If you have any additional questions, please email me directly at James@jcoreinvestments.com


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Do you need an Limited Liability Company (LLC)?

It really depends on your personal situation and comfort level.

First off, what is an LLC? An LLC stands for Limited Liability Company and is an entity that separates business owners and their assets from their business. When a person operates a business (rental properties) without separating themselves from the business, they essentially put themselves in a situation of unlimited liability.

If anything goes wrong (tenant gets hurt or you are sued personally) the business owner’s personal assets could be targeted in a lawsuit to award damages to the Plaintiff. But by creating a LLC, the business owner protect themselves from the threat of lawsuits, debts, and other damages.

Back to the question do you need an LLC, my recommendation is you first need to review your own situation and decide on your personal liability. For my family, there are two reasons on why we decided to created several LLC’s. The first reason is obviously “Liability” and second and even more important is “Inheritance” for my family.

I’ll start with inheritance first since it is the foundation of how my wife and I structured our business entities. My wife and I do not own anything in our name except for our personal checking accounts for day-to-day purchases. Seriously nothing!! Instead, everything that we technically own is actually legally owned by our family revocable trust that in turn owns all our assets in LLC companies. For example, our family trust owns a Holding LLC that was formed in WY and that holding LLC then owns LLC’s that were formed in the state of where our rental property is located.  Side note, the reason for the Wyoming holding companies is when forming/file your LLC with WY, the member and mangers names of that LLC are never on public record. That’s ultimate privacy on the ownership of your assets.

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Above is an example of the structure I use

I know this sounds complicated but the reason for this chain of ownerships through our trust and LLC’s is to avoid having to change individual ownership on our assets when life changing events happen. Why is this important you may ask? If I were to die then nothing changes on ownership of our assets but instead my wife becomes sole beneficiary of all our assets through our trust. If both my wife and I die, my kids become beneficiaries of the trust and all the assets easily pass to them. To better explain this, none of our rental property’s deeds or other assets would need to be changed/filed to move ownership to our kids if we died since everything is owned by our Trust.  Also, the additional benefits is the trust has clear guidance that explains how to manage our assets if our kids are still minors. This is peace of mind for my wife and I to know that our kids are taken care of if we were to pass.

Now let’s talk about Liability. There are 2 ways to think about this when you are trying to protect your assets. One way is the asset itself – what if your tenant gets hurt on your property and they want to sue the property owner. If the property is in the owner’s name then that means all assets the owner has are up for grabs. If the property is owned by an LLC then only the assets that LLC owns are liable. The second way to think about Liability is if you are sued personally for any reason. Everything that you own under your name could now be awarded as compensation in the lawsuit. When your assets are owned by LLC’s, then you are better protected on not having to liquidate those assets owned by the LLC if you lost the lawsuit.

Going back to using a Holding LLC in WY, this is an added layer of protection because it is hard for the so called “ambulance chasing” lawyers to figure out how many assets you have. To the lawyer, if you look like you have no assets or those assets are owned by LLC’s they may not take the lawsuit since you are not an easy mark. Additional the LLC provide protection by the privacy since ownership is hard to identify.

Summary

I’ve probably convinced you for the need for LLC’s because of liability protection and inheritance but this does come at a cost. It is fairly easy and cheap to go online and create an LLC but I caution against doing that unless you fully understand what you are doing. If you do not create the LLC correctly than you might not actually have the liability protection you thought you did which defeats the purpose. I recommend instead that you discuss your personal situation with an asset protection lawyer who specialize in this even though it may be costly. The other cost to LLCs are the filing fee with the state you form the LLC in. Those cost can be different in each state and usually includes a yearly reoccurring cost. Also, you will need to pay for a registered agent in the state the LLC is formed. These costs can also range but they are a person or entity that is designated to receive mail for that LLC. Once the LLC is created there will be more fees to the county clerk to change the ownership of the deed of the rental property. Finally, with every new LLC you create the process of preparing taxes becomes more complicated. Even though the LLC may be a pass-through entity, and even if there is no money coming in or going out, you will still need to prepare K-1 that will be filed with your personal tax returns as part of your schedule C.

If you have any additional questions, please email me directly at James@jcoreinvestments.com


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6 Amazing Reasons You’ll Love Passively Investing in Multifamily

Over the years, I have learned that investing in single-family homes (SFH) would not get me to the financial freedom I was seeking, especially while serving overseas. For example, trying to research new markets, find that next investment property, complete the due diligence, and form the team to fix and manage my rental property took up a lot of my time and effort.  These are just a few of the challenges that investing in single family rentals presented.

While serving overseas, I became even more frustrated as my SFH investing plateaued but luckily I was introduced to Multifamily real estate. In just one year, I was passively invested in over 4 different apartment complexes (over 1000 doors total) and learned quickly that multifamily allowed me to 10X my rate of investment.

When I speak about investing in multifamily real estate, many people do not even know that there are options available in these investment vehicles. For the longest time, I never even considered the idea of large apartments deals since I didn’t have the capital or experience to purchase a multifamily complex. I was very stubborn to look at anything other than SFH, until a mentor introduced me to the idea of Multifamily Syndication.

My mentor opened my eyes to that fact that there are opportunities to passively invest in multifamily real estate while still enjoying all the benefits of real estate investment.  I remember him saying “every time you drive by an apartment complex just think that someone owns that property, why can’t it be you?”

To get in on Multifamily investing, I invested Passively in a Multifamily Syndication as a Limited Partner. Passive investing is an approach for investors who are looking to establish long-term financial returns while minimizing their time investing.  By investing in multifamily syndication, you can enjoy the six benefits listed below, and more, of this investment class.

 

  1. Time – Let’s face it, your time is one of your most valuable resources, and you should spend it on doing things you love. By investing passively, sponsors like JCORE Partners are spending the time to find the right property and execute a sound business plan so that you focus on doing other things.  (we like to call this making money in your sleep, a.k.a. mailbox money!)
  2. Tax Benefits – Like any investment, you should anticipate some sort of return, but along with the opportunity to earn income, investing in multifamily properties offer several tax benefits to investors. Taking advantage of these tax benefits allows you to increase cash flow in the short term while maximizing tax savings.
  3. Diversification – The most commonly cited reason for investing in multifamily real estate is portfolio diversification. Meaning you are looking to add real estate to your investment portfolio. You can also diversify your real estate investments across several properties in different areas with different property types and other sponsors.  Doing so keeps you from over-allocating assets to any one group and will help you learn what you do and do not like from a multifamily sponsor.
  4. Liability – With syndications, one of the greatest benefits to investing passively is that you have no liability beyond your investment.
  5. Philanthropy – With most investments, only you or your family are receiving the benefits of the investment. However, when you invest in a multifamily syndication, you have the opportunity to not only receive monetary returns but positively impact the lives of many families.  Each multifamily syndication we execute aims to create a clean, safe, and pleasant place for people to live.  Doing so also has a positive influence on the community and environment.  This is a benefit you typically do not see from investing in stocks or bonds.
  6. Leverage – When you invest in multifamily syndications, it all comes down to leverage. In this instance, we define leverage as using something to its maximum advantage.  Leverage allows you to use various instruments of the sponsor to increase the potential return of your investment.  Passive investing enables you to leverage things like experience, knowledge, research, time, network, teams, and ability to syndicate with other like-minded investors to take down large multifamily deals.

Passively investing in multifamily real estate is a great way to diversify your portfolio and mitigate risk. It allows you to use your most finite resource, time, on the things you love instead of doing so much effort to find that next SFH investment. Also, you aren’t involved at all with fixing toilets, screening tenants, or handling the day-to-day operations of your SFH property. You benefit from several tax advantages, have minimal liability, and positively impact many families and communities. That said, we hope that this article helps you build a stronger foundation in making an informed investment decision.


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What are a few Key Terms to know when evaluating a Multifamily Syndication Investment?

There are so many factors to consider when evaluating a potential investment and at times it can be overwhelming, especially for those who may be investing in their first real estate opportunity. Investing in real estate is not rocket science and sometimes it’s just about gaining a little clarity on what you are looking for. Here are a few Key Terms you should be taking into consideration when breaking down a multifamily investment.

First off, what is a Multifamily Syndication?

Multifamily Syndication is where a group of people pool their resources to purchase an apartment building which would otherwise be difficult or impossible to achieve on
their own. This typically involves the “General Partners” who organize the syndication, including finding the property; the general partners are sometimes referred to as the “sponsors”. The group of people who are providing the cash investment are often referred to as “passive investors” or “limited partners”. In return for their investments, the limited partners receive an equity share in the syndication along with cash flow distributions and profits.

KEY TERMS

Preferred Return (My Favorite)

A Preferred Return is a set return percentage to be paid to investors each year based on how much money they have invested. This is the minimum average annual return the investor can expect to receive. If the investment does not generate enough Net Profit to pay this Preferred Return in any given year, the amount of unpaid Preferred Return is rolled forward to the next year. Until all Preferred Returns are paid to investors, the GP team cannot take any Equity Distributions (meaning they don’t make any profit until the investors do).

Example: A 8% Preferred Return on a $100k investment equals a payment of $8,000 per year. If the investment can only pay that investor $4k in the first year due to renovation expenses, for example, the unpaid $4k is rolled forward and the GP owes the investor $12k the following year ($8k for the Year 2 Return + the unpaid $4k from Year 1).

Cash on Cash Return COC

A measurement of profitability often used in real estate transactions to assess short-term profitability, usually for a one-year period. The calculation determines the rate of investment income relative to the amount of money invested.

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CoC Return can be increased either by increasing income received during the year or by reducing the number of dollars invested. A strong CoC comes from getting solid income from a small investment.

Net Operating Income

Net operating income in real estate is the money a property generates minus operating expenses. It is used to evaluate how much cash flow an investor can expect to earn from an investment property after operating expenses and vacancy losses.

There are certain costs that qualify as operating expenses and others that don’t. Operating expenses that should be deducted might include property tax, insurance, repairs and maintenance.

NOI doesn’t include depreciation, capital expenses, loan interest and loan payments, depreciation and amortization.

Internal Rate of Return (IRR)

The Internal Rate of Return (IRR) is a profitability metric used to asses the anticipated annualized return generated by an investment over time. IRR is a complex calculation that takes into account the amount invested, annual return distributions, and anticipated profit from the sale of the property in the future.

Importantly, IRR also incorporates the ‘time value of money’, meaning that it takes into account the increased
potential earning power investors enjoy due to 1) the early return of investment capital through refinancing and 2) earning annual income distributions rather than one lump sum payment at the end of the investment term. Receiving income or returned capital sooner means the investor has more time to use that money for other investments, which we call Opportunity Return.

Because IRR takes into account so many factors, it’s an easy way for investors to compare different kinds of investments at a glance. The higher the IRR, the better.