Is Austin The Wrong Place to Invest In 2021?

Image from Pixabay

By Adiel Gorel

I get many calls from people interested in buying in various cities and want my opinion.

One of the popular markets right now is the Austin metro area (people get excited about the overall thriving of the local high-tech scene, Elon Musk publicly decamping to Austin, and others moving there from California). It is tempting to think of Austin as a good destination to buy in 2021. However, in my opinion, it is not! Austin, in fact, is a good city to be a SELLER in 2021. Austin prices have climbed rapidly in the past six years, while rents went up much more slowly. As a result, the rents are too low to cover all expenses. One expense in Austin (and in the state of Texas overall) is the very high property taxes. The property taxes in the Austin metro can get to almost 3% of the home value per year (depending on county and town). That is over 2.5 TIMES the property tax rate in Oklahoma (or California). Together, the high prices, relatively low rents (relative to the prices, that is), and the high property taxes, as well as high insurance costs, create an untenable cash flow.

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Here is a partial headline of a Business Insider article “Elon Musk and other tech powerhouses are flocking to Texas, pushing an already bonkers real-estate market to new heights”. Just logically, do you want to be a buyer in a market that is “already bonkers” and now is being pushed up even more? They have a name for such a market in the real estate world: “A strong Seller’s’ Market”.

Do you want to be the BUYER in that strong Sellers’ market? You will be the one paying “bonkers” price to the savvy sellers, fending off multiple offers higher than list price.

It is very tempting for a California resident to say, “What? I can buy a new home in Austin for “only” $320,000? That is so cheap! Yes, it is. “Cheap” relative to San Francisco prices. However, it is not cheap to buy as a sound rental home, and has bad cash flow. Austin is a place where many of our savvy investors are now SELLING, as the selling market is strong. It is not uncommon to see an investor selling one Austin home and buying 3 brand new homes in a 1031 tax-deferred exchange in Oklahoma City, or Tulsa, or Baton Rouge, or Central Florida. This move creates much more quality real estate owned, more 30-year fixed loans at todays’ super low rates, and brand-new properties with brand new roofs, ACs and all other parts of the homes.

Similar logic applies to the Dallas Ft Worth metro area (DFW), Houston, Phoenix, Las Vegas, Nashville, Denver, Salt Lake City, Boise, and others. I even get some investor talking about Seattle and Portland, which make no sense at all. Some misguided reporters (who in many cases have no actual experience in real estate investing themselves) confuse high prices and growth with an attractive place to invest in. The two are not necessarily linked. An example of another very popular destination for Silicon Valley people leaving to other states, is Miami. Miami is popular, large (much larger than Austin, for example), has an international airport, great weather, beautiful beaches, and proximity to great vacation spots. Miami also has a thriving tech sector. Sounds perfect, right? We should invest in Miami, right? No! Miami prices are way too high to make sense at this time. While the property tax is “only” about 160% of that in Oklahoma or California, the price/rent ratio makes it an unattractive place to invest. Miami has been a magnet for the wealthier set of tech and finance people as of late. The prices reflect it. There is an interesting article in Business Insider written by a tech person who had moved from San Diego to Austin and regrets it. It’s titled: “I moved my family from California to Austin, Texas, and regretted it. Here are 10 key points every person should consider before relocating.” The author mentions the harsh Texas heat, coupled with humidity, which, in the summer keeps you indoors and runs your AC 24/7, while also bringing scorpions and the like, and being hard on the houses. Of course, he mentions the super-high property taxes and high insurance costs. He talks about the very high cost of power and water, much higher than he had in California. Overall, he was surprised by the cost of living being much higher than he had anticipated. He mentions the travel difficulty, as Austin doesn’t have a large airport, requiring an extra “hop”. He laments the relative lack of public parks and spaces, to which he was used in California. While this is only the account of one high tech family who moved to Austin, and may not reflect everyone’s experience, some of the points are absolute.

Image from Pixabay

We have investors who actually LIVE in Austin. They are absolutely not interested in investing in Austin. They live there. They know how little sense it makes to buy in Austin in 2021. They seek investments in saner markets where the prices, rents, and property taxes, are in much better balance. We also have investor who live in Miami, Phoenix, AND Las Vegas, as well as Portland and Seattle, among many other places. All these investors wouldn’t dream of buying rental homes in the market they live in at this time. They know the insane sellers’ market that exists there, and the way-too-high prices.

This phenomenon is not new. Investors declare they want to “Buy Low, Sell High”. However, in reality, many investors end up “Buying High and Selling Low”. Right now, Austin is the darling market touted for its growth and Elon Musk. The people who are buying super-high in a “bonkers” market, pumped by the media hype, will be the first ones to sell frantically when a recession hits, or even lose those homes to foreclosure. We have seen these scenarios throughout history, time and time again. You see the same phenomena in the stock market. People secretly love to “Buy High”.

The reason is usually “But this market will appreciate a lot!” Really? You mean you know the future? No one else does. Just because a market behaves a certain way, and even booms, it is not necessarily a guarantee of everlasting constant appreciation. We have seen it in many areas of the country.

One other factor that is important to discuss is, again, the heart and soul of single-family home investing in the United States. The reason single family rental homes change futures so effectively and powerfully: The 30-year fixed-rate loan. I talk a lot about the wonder of this loan. A very quick recap for new readers: The monthly PI payment never changes, while everything else in the US economy constantly changes with the cost of living. Same is true for the mortgage balance, which goes down due to amortization, but also never keeps up with the cost of living. This creates incredible futures for people, as inflation constantly erodes the real value of the loan balance and monthly PI payment. No need to wait for 30 years. Typically, after 12, 14, 16 years, the loan balances are very small relative to the home price. The monthly payment is very small relative to the rent. It is not uncommon for a person to find, after 14 years, that the loan balance (even though the loan still has 16 years to go), is merely 20%-25% or so of the home price. Many sell a couple of homes at this point, and use the after-tax proceeds to pay off several other small loans, and leaving several free and clear homes, enabling them to retire. People also see how this can send kids to college (even costly colleges), and achieve many other long-term financial life goals.

The reason I hark back to this point in this article, is to remind you that the most important point is to buy a good new single family rental home, put a down payment, and then get the constant power of inflation and the payments by the tenant, to pay off and erode the loan balance, building equity for your future wealth. With today’s astoundingly low rates, strong results may be seen even sooner, perhaps 10, 11 years.

The single-family home is the VEHICLE to let inflation work its magic on the 30-year fixed-rate loan. The location of where you buy the home (as long as it’s large metro areas in the Sun Belt states, where the numbers make sense), is of secondary importance. It would behoove the smart investor to buy in a market where the prices are not “bonkers” and where the rents measure up to the price well, preferably in an environment where property tax and insurance costs are low. This enables the owner to enjoy cash flow (especially with today’s low rates), which building their wealth for the future with the help of inflation.

ICG (International Capital Group) Real Estate Investments was established in the 1980’s. Adiel Gorel, founder and CEO, has been helping people achieve financial security for over three decades, and in that time worked with investors to purchase over 10,000 homes. Gorel is a real estate broker in several states in the U.S., an international keynote speaker, and notable author of three books: Remote Controlled Retirement Riches – The Busy Person’s Guild to Real Estate Investing, Invest Then Rest – How to Buy SingleFamily Rental Properties and Remote Control Retirement Riches – How to Change Your Future with Rental Homes. He has been featured on major television and radio networks across the country and in Fortune Magazine. He has also been featured on Public Television with his show, “Remote Control Retirement Riches with Adiel Gorel.” To invite Adiel Gorel to speak for your group, email [email protected] and visit AdielSpeaks.com. For more information on ICG Real Estate Investments visit icgre.com.

The Great Exodus Of Our Time

By Sensei Gilliland

Investors Are Leaving The Golden State & Big Apple In A Stampede. Here’s What’s Driving Them And Where They Are Going…

We’re seeing a macro shift in migration, capital flows and investor relocation at incredible new levels. Keep reading to learn how wise investors are adapting to this incredible event.

The One Thing You Can Count On Is Change

Image from Pixabay

As much as you might like it to sometimes, nothing ever stays the same forever. Change is the one thing we can bank on. There are mini cycles and economic rotations which go around every 7 to 15 years. Then there are macro shifts. There are evolving eras, which we’ve seen go from hunter gatherer to agricultural societies, to the industrial era, and now the internet. We are currently experiencing one of those mega shifts which only comes around every 100 years or longer. The dinosaurs couldn’t adapt to it. All that is left of the great Egyption civilization is crumbling pyramids. Ancient civilizations that once thrived in Machu Picchu and Tulum have left only ruins. Detroit has literally become an urban waste land since the end of the industrial era too. If you haven’t been lately, there are real ruins, weeds and vines taking over once vibrant neighborhoods, and a few urban farmers trying to stick it out among the remnants of a once economic powerhouse.

According to a new report from the Pacific Research Institute and many others, not only is San Francisco, but also Los Angeles, California is checking off all of the boxes on the way to becoming the next Detroit.

This includes increasing taxes, regulation, harassment of businesses, rising crime and riots, and distrust of leaders are some of these signals that lead up to these massive shifts, and the downfall of once great cities. Perhaps some of these things sound familiar to you?

This Exodus Is Far More Significant Than You Think

This isn’t just a few low wage workers who are teachers or restaurant workers leaving high cost states for somewhere they can afford to live.

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Almost 700,000 people moved out of California in 2019, before COVID hit. A Berkley study reports that half of registered voters in California have been considering moving out of state. 44% of New Yorkers making $100k a year or more (not even a living wage there) say they plan to move out of their state. We are talking about millions and tens of millions of people leaving these states. If you thought it was bad before they left, wait until the remaining few realize they have to pick up the tax bills to cover the void by the other half who left. If many are leaving for safety, then crime rates will also be expected to dramatically rise, with the per capita risk of you being a victim of a crime at least doubling. It’s not just the amount of people leaving either. It is who is leaving that is also making a huge difference. We are talking about the wealthiest and smartest individuals and their companies that employ millions of people. It is a massive wealth and brain drain.

We’re talking about people like Elon Musk and Peter Thiel. Even the New York Stock Exchange has said it will leave NY if newly proposed taxes are implemented.

Those who are left are at least sending their money out of state for safety and better returns.

What’s Driving Them?

There are now many factors driving people and their cash out of coastal states and other major cities, and pulling them to other destinations. These are just some of them.

Affordability

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Sheer lack of affordability is one of the top factors driving out residents and capital. Even in Florida, which seemed cheap in comparison to NY and LA at the beginning of 2020, the massive surge in migration has driven up property prices by at least 1,000% in some areas. In Miami some builders are finding excuses to kick out pre-construction investors to be able to resell those same units at top of the market prices. Even in the most rural and cheap areas it has become so expensive that investors are buying distressed homes, and are renting them out at top of the market rents, while leaving tenants to make the homes livable. It’s not just housing prices either, it is overall cost and quality of living.

When it comes to investing, affordability is the number one factor that analysts look at to gauge where a market is in the cycle, real value, and future potential growth or decline.

Profits & Returns

In addition to these coastal cities, even international investors are looking for smarter places to invest with more value and better returns. Even in Denver investors have been resorting to negative cash flow properties due to such high prices.

Image from Pixabay

It is true rents and house prices may float down in California and New York as millions leave. Yet, they have long been too high to make sense for investors. You should never invest for negative cash flow. If you are just going to gamble, it is probably a lot more fun to go to Vegas and play the games, than go through all of the work to invest, and in something which may have less odds of going up in the short term. Real estate has taken off in a big way over the last year, not only due to the huge amount of moving activity, but also as people see the stock market and things like Bitcoin just go crazy with no real fundamentals to support them. They are running on vapors and speculation. They offer no downside protection, and rarely reliable passive income.

Anti-Investor & Anti-Business Climate Change

An extremely litigious climate, lack of physical protections for businesses, and a regulatory pattern of trying to crush businesses, entrepreneurship and investors is forcing capital flight and the movement of talent.

Image from Pixabay

These are beautiful places, dear to our hearts, but just make no sense to live and invest in anymore. At best they just want to bleed us and our children dry financially. Why not go somewhere you are wanted, and that wants you and your family to prosper? You can always go back home on vacation if you can stomach it.

Safety

Personal safety, property protection, and wealth preservation are all compounding this trend.

Freedom

While many have been working from home and running fully remote businesses, even in real estate for at least 16 years, many are just walking up to the fact that they can live in the Midwest, and get a three bedroom house with a yard for a quarter of the cost in California, while still making NYC and San Fran level wages. They also no longer have to put up with lockdowns and restrictions if they choose not to.

Where Are They Going?

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Cleveland, Ohio stands out as one of the top places for people to move and invest in 2021. Here are just some of the reasons it stands out and it drawing savvy investors:

Ranked one of the top 2 most affordable cities in America for 2021
Ranked one of top 10 markets to watch this year by Forbes
$1B in stimulus being invested in infrastructure and attracting new residents
Low volatility
Rental property investors can still achieve the 1% rule

It just makes sense. There is positive cash flow to be had, with plenty of room for assets to appreciate over the long term, and low downside risk.

How To Do It

One of the best ways to invest in Cleveland, OH today is in turnkey rental properties. Handsfree investments, producing passive income, with professional management and boots on the ground to support your assets.

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In addition to market rate, cash tenants, there are also strong local Section 8 and other housing programs through which the government pays your rent and profits. No worrying about another pandemic.

With prices so cheap, many real estate investors will find they can sell a single unit in California, and buy 7 houses with yards in Cleveland’s suburbs for the same price. Only with a whole lot more cash flow and much better returns and growth prospects. Within an IRA or through a 1031 exchange this can even be done without any tax hit on your capital gains. It’s the chance to exit mature investments, and diversify for consistent returns. Or more importantly, the ability to sleep well at night, knowing you are set financially. You can buy a second home to Airbnb while not there, and start spending some vacation time exploring the city, and acquiring more deals. Or go turnkey and handsfree and spend your time in Mexico, traveling the country in your RV, on your own private ranch, while your rentals put money in the bank.

Black Belt Investors is a real estate firm offering education, coaching and turnkey rentals. Get started now by visiting www.BlackBeltInvestors.com or call us at (951) 280-1900.

Eviction Moratorium

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By Stephanie Mojica

Property owners can now take steps to evict delinquent renters, according to a U.S. Supreme Court decision that blocked President Joe Biden’s recent moratorium on evictions.

Over objections from three sitting Justices, the Supreme Court ruled on August 26th that the Centers for Diseases Control (CDC) did not have the authorization to enact a moratorium on evictions, according to USA Today.

The court’s majority wrote the following in an eight-page, unsigned opinion:

“It would be one thing if Congress had specifically authorized the action that the CDC has taken. But that has not happened. Instead, the CDC has imposed a nationwide moratorium on evictions in reliance on a decades-old statute that authorizes it to implement measures like fumigation and pest extermination. It strains credulity to believe that this statute grants the CDC the sweeping authority that it asserts.”

The majority further added:

“Congress was on notice that a further extension would almost surely require new legislation, yet it failed to act in the several weeks leading up to the moratorium’s expiration.”

The CDC’s original moratorium had lasted from September 2020 to the end of July 2021 and was designed to quell the spread of COVID-19, according to CNN Business. On August 3rd, 2021, the CDC issued a new moratorium on evictions that protected about 90% of the country’s renters and drew the ire of many landlords and real estate companies. The new moratorium applied to areas of the country where COVID-19 infection rates are once again spiking due to the Delta variant. Critics of the eviction moratoriums state that these allow unscrupulous renters to spend money on other things while shafting their rent obligations and causing undue financial distress to landlords. Supporters of the moratoriums claim that dissenting landlords are acting on greed and do not care that innocent people will be left homeless.

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According to a recent U.S. Census Bureau survey, more than 3 million renters will become homeless in the next two months if alternative solutions are not offered. Fortunately, there is $46 billion of federal rental relief aid funding available, according to CNN Business. Only about $5 billion had been distributed through the Treasury Department as of July. Another blow to renters with financial struggles is that three unemployment programs — Pandemic Unemployment Assistance (PUA), Federal Pandemic Unemployment Compensation (FPUC), and Pandemic Emergency Unemployment Compensation (PEUC) — end on September 4th, according to 13 WREX.

Last Call for Vendors (Annual Los Angeles Real Estate Grand Expo)

Annual Los Angeles Real Estate Grand Expo

LAST CALL for VENDORS! In 2019, we had over 800 people attending our Annual Los Angeles Real Estate Grand Expo. And this year promises to be even BIGGER! Can you handle over 800 new clients to your vendor table in one day?

If you have a product or service for real estate investors, realtors, and related real estate professionals, you need to reserve a vendor table at our “Annual Los Angeles Real Estate Grand Expo.” The Grand Expo is scheduled for Sunday, October 31 (9:00 am to 6:00 pm), at the beautiful Skirball Cultural Center. An entire day celebrating real estate investing and you can participate. There will be twelve national speakers (in three breakout rooms) and a vendor exhibition area the size of a football field. (We have taken over the entire Skirball – it’s all ours for the entire day!)

We already have over 70 vendors, but there’s always room for MORE. So don’t miss this opportunity to network with investors and real estate professionals, the best and brightest, all levels (neophyte to experienced), all in one location, and all in one day. These are your future clients. They need your product or services. And the best way to display your stuff is at our Grand Expo. This year you need to be a vendor! The cost is $697.00 for the entire day. But please register as soon as possible so that we can include your name and logo in our extensive marketing. Please call (310-994-1962) or email: [email protected] for more details.

Vendor Reservation Form 2021

Hands Off My IRA! Important Legislative Insight Every Investor Should Know

Special Contribution by Kaaren Hall, CEO | uDirect IRA Services

In this article I’m going to discuss a few reasons why Sections 138312 and 138314 of the House reconciliation bill (released September 13th) threatens the investment choices of an approximate 3 Million Self-Directed IRA investors in America. It’s time to tell your Congressional Representatives, “Hands Off My IRA”!

Firstly, the proposal could make it so that you could no longer purchase private equity or use the IRA-Owned LLC. Secondly, what’s worse is that the proposal offers no “grandfather clause” and says you would have to remove those existing assets from your IRA by 2023. As a result, the implications are wide-reaching and would cause a lot of damage to IRA savers who may be forced to pay taxes on the value of those assets. Thirdly, it could wreak havoc on asset sponsors who could be forced to look for new sources of capital. Specifically, the proposal addresses:

Private Placements (e.g. hedge funds, real estate funds, private equity funds, etc.)
Checkbook Control IRA LLCs and Trusts
Minority interests in LLCs that are 10% owned by the IRA or account-holder
Investments requiring the IRA owner to be an accredited investor

Steven Rosenthal, senior fellow at the Tax Policy Center, is quoted in MarketWatch, saying that non-public investments do not belong in retirement accounts. In his view, it’s a matter of fairness, tax compliance and investor protection when it comes to retirement tax rules that for too long, have already favored rich households. What Rosenthal fails to see is how the proposal would impact Self-Directed IRA investors’ choices and prevent them from providing access to working capital for businesses. This then deters job creation. Self-Directed IRA investors as a group hold some $118 Billion is retirement assets. These assets are crucial to our economy because these assets are to be used for expenses in retirement. The proposal could decimate the nest egg of many middle-class savers. Removing the choice to invest in certain assets removes the ability for many to access the same start-up opportunities offered to the uber rich.

What Can You Do To Stop This?

Make your voice heard. Contact your elected officials in the United States House of Representatives and Senate. Tell your story. Let your Representatives and Senators know how this proposal could impact you personally. Not sure how to contact your U.S. Congressional Representative?

Go to: https://www.house.gov/representatives/find-your-representative

Not sure how to contact your U.S. Senators?

Go to: https://www.senate.gov/senators/senators-contact.htm

__________________________________________________________________________

What This Proposal Does Not Affect

Brick & Mortar Real Estate
Raw Land
Precious Metals
Lending from IRAs
Mobile Home Parks
Investing in performing and non-performing debt

When Could This Take Effect?

Congress seems eager to have this and other matters resolved before the session adjourns December 10th. Take action now. Call, write, email or visit the offices of your representatives in the House and Senate.

TEMPLATE LETTER FOUND HERE – https://udirectira.com/template-letter/

How to Benefit from a Private Money Loan

By Stratton Equities

Banks used to be the only option for real estate investors trying to take out loans. Nowadays, private money lenders are allowing investors to borrow money under more flexible conditions. Banks and traditional financial institutions can reject your loan application for multiple reasons—your credit score, your debt-to-income ratio, employment status, etc.— What private money lenders do is implement a framework that makes it easier and more conducive to be a real estate investor.

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The real estate market moves fast, and it is often crucial to act quickly. But the process of getting a traditional loan through a bank can often be lengthy and complicated. Many of the solutions and loan programs from private money lenders are easier and quicker to get than through banks, which is why private money loans are often better options for real estate investors.

Making investing easier

What private money lenders like Stratton Equities do is accommodate real estate investors.

“Real estate investors, as we all know, don’t have the greatest of tax returns,” Stratton Equities’ CEO Michael Mikhail said. “They move money around, have different trusts, and have different accounts. Banks absolutely frown upon that and they actually hate it. Good luck getting a loan through a bank or mortgage company if you’re a hardcore real estate investor.”

The programs offered by private money lenders are designed for investors, who oftentimes can’t show their income and make a lot of monetary transactions. Companies like Stratton Equities have put in place certain standards that make it easier to take out a real estate investment property mortgage. These include no tax returns, no upfront fees, and no junk fees.

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The closing time for loans from private money lenders is much faster. This element can be crucial for investors, as sometimes the faster you close, the better chance you have at securing a transaction. Also, the LTV (loan to value) ratio is higher with private money lenders. Loans from traditional institutions on investment properties usually max out at 70% LTV, while those from private money lender Stratton Equities can go up to 85%. You’ll likely be spending less through private money lenders too. “If you go to a bank, you’re going to have PMI (private mortgage insurance) with those loans, a few extra hundred dollars per month,” Mikhail explained.

The Loan Process

The first thing you’ll want to do to get a private money or NON-QM loan, for example a hard money loan is to contact a private money lender. As the borrower, you should be ready to provide the lender with information like the location of the property, purchase price, and estimated appraised value. The lender will ask questions to get to know you and your borrowing history. After this, the lender will appraise the property and come up with a loan offer for you. The lender will review the documentation and complete the underwriting process for the loan. This process is usually speedy, but it varies from lender to lender.

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After the loan is completed with underwriting it gets moved to the closing department. As a borrower, you’ll have to sign a variety of documents during this phase, but it is relatively straightforward. The lender will then send the funds to the title company so the deal can be completed. Many real estate investors have found that getting loans from private money lenders is their best option for achieving their investment goals. Be it a hard money or a soft money loan, private money lenders are faster, more understanding, and more lenient than mortgage companies and banks. You have to consider that these companies’ sole purpose is to give loans to real estate investors, so naturally, they’ve found ways to make the process smoother. If you’re thinking of getting into real estate investing, you should definitely take these factors into account.

Contact Stratton Equities, the leading hard money and NON-QM lender, to speak with one of their talented and experienced loan officers at 800-962-6613, email us, or apply for loan pre-qualification today!

Partnering For Profits in High-Priced Markets

Image from Pixabay

By Bruce Kellogg

The Situation Today

A large number of real estate investors and would-be investors live in high-priced markets. Large cash downpayments are necessary to make a purchase, and even more cash is required to achieve a positive cashflow. This can be discouraging.

One alternative that many in this position consider is “Turnkey Investing”, usually in rental houses in distant locations with local real estate support. This involves locations, companies, persons, and properties that are not well-known or familiar, and which might, or might not, work out. For sure, the investor has only limited control over their investing fate. Then, if a problem arises, the investor has to jump in to right the situation to protect their investment. “Passive investing” this is not.

Investing Locally With Partners

It is not necessary for an investor to send their money thousands of miles to unfamiliar people to invest for them in unfamiliar neighborhoods with properties of uncertain condition and rental prospects. It is definitely possible to invest locally in high-priced properties with a high degree of control by the use of partners.

Three Kinds of Partners

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There are three kinds of partners: 1) a “money partner”, 2) the seller as a partner, and 3) the tenant as a partner. In each case, the approach is to set up the transaction so that the partner contributes in such a way that the investor profits, and the partner receives their benefit from the arrangement.

Partnering With a “Money Partner”

The principle here is for the “money partner” to bring in the funds necessary to make the purchase and set up a reserve to ensure success. There are four investing structures that are attractive based on the interests of the parties: 1) Limited Partnership (LP) 2) Joint Venture (JV) 3) Tenants-in-Common (TIC) 4) Limited Liability Corporation (LLC) The partnership should be designed so that the “money partner” receives about an 8% annual cash return plus an “equity kicker” upon liquidation of the investment. The investor needs to provide for themselves, as well, even if it means profiting only at the end. Obviously, the better the deal, the more the investor will profit and be able to compensate the “money partner”. Investors are encouraged to use a real estate attorney to draw up customized documents for the partnership rather than doing it themselves “on the cheap” with internet “pdf. documents”. This is not a place to economize! (Hint: You can draw up internet documents, then have an attorney review them. That should save some money.)

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As an example, three brothers pooled their funds to purchase a 3-bedroom, 2-bath rental house in Hayward, near Oakland, in March, for an LLC that they had created. They put down $178,750 (25%) on a purchase price of $715,000, with a new 30-year first loan of $536,250 (75%) at 3.1%. They paid “market price”, but the house was being sold by a retiring corporate facilities manager for a national company who had maintained and upgraded it impeccably. They rented it out for $3,500/month in the Bay Area’s ultra-tight housing market. Their overall return is 2.7% on their downpayment, but since all three brothers are in the top federal and California income tax brackets, and “starter homes” in the Bay Area appreciate strongly, and will for the long term, the brothers will see a nice after-tax return.

Partnering With The Seller

There are two major occasions of partnering with sellers. The first is when builder/developers or sophisticated investors enter into a joint venture with the owner of developable land. Typically, the owner contributes the land while the investor obtains the necessary financing, performs the construction, and does the marketing. Then the parties split the profit according to their joint-venture agreement. This is a sophisticated partnering method. The more accessible partnering method with an owner/seller of a property is to use a lease-option. Here, the buyer/”lessee” leases the property on agreed terms and simultaneously negotiates an option to purchase the property in the future at an agreed price and terms. Usually, the buyer/”optionee” pays some “option consideration” for the right to purchase during the term of the lease. This is paid either up-front or on top of the lease payment. It is important to keep the lease and the option separate but attached because judges in disputes have been known to interpret the documentation unfavorably to the investor. Advice from local real estate counsel is important initially when employing your first lease-option. On-line and Realtor® forms can be used, but an attorney should review the first one.

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Another accessible partnering method is to negotiate a “shared-appreciation mortgage” to be carried back by the seller as “owner financing”. The idea here is to structure the note such that positive cashflow to the investor is the result. The seller is usually given some cash flow, but not a lot. Then the seller participates in the profit when the property is eventually sold. This works well with motivated sellers in high-priced areas. Again, legal advice is recommended for the first time.

Partnering With The Tenant

The first method where the tenant is essentially a partner is to use a lease-option, to sell this time, rather than to buy. The idea here is to use the lessee/optionee’s “option consideration” to help pay for the purchase of the property. It can be used as part of the monthly loan payment, or as part of the downpayment. Either way, since it is not a rental security deposit, it will never need to be refunded.

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A second method of partnering with a “tenant” is known as “Equity-Sharing”. Here, the parties purchase the property together on the market. One party, the “resident co-owner”, resides in the property, maintains it, usually makes the entire loan payment, pays taxes and insurance, and might get the income tax benefits. Those are negotiable, as are the percentage of ownership. The IRS allows taxes to be allocated as the parties decide, as long as they are deducted only once. The “investor co-owner” typically makes the downpayment and pays the purchase closing costs. This is all done with extensive documentation, but it is particularly useful for helping first-time buyers get started while allowing investors a high-yield, relatively-passive investment. The author represented one unmarried engineer who set up seven of these to help his relatives get started in homeownership while he grew his retirement plan.

Getting Started

This article presents nine different methods for investing with partners in high-priced markets. It is not necessary to wire funds out-of-state in order to make a profit! Find an expert in the application of these, and get started. Good luck!

Bruce Kellogg

Bruce Kellogg has been a Realtor® and investor for 40 years. He has transacted about 800 properties in 12 California counties. These include 1-4 units, 5+ apartments, offices, mixed-use buildings, land, lots, mobile homes, cabins, and churches. He writes and edits copy for Realty411 and REI Wealth Monthly magazines. Mr. Kellogg is a recipient of an Albert Nelson Marquis Lifetime Achievement Award, listed in Who’s Who in America – 2019. Mr. Kellogg is available for consulting about syndication, “turnkey” investments, joint-ventures, and other property purchases nationally, and other consulting assignments. Reach him at [email protected], or (408) 489-0131.

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