| You have worked hard, and have invested wisely. | | | | investor, I want my direct lenders to want to lend |
| You have stocks, bonds, a CD, an IRA and maybe | | | | with me. So I will consider giving a higher percentage. |
| even a savings account or a money market account. | | | | Let's for the sake of argument say you receive 20% |
| So then, how happy are you with the returns you | | | | of the cash flow. In this case, you would receive |
| are earning from each investment vehicle? | | | | $600 per month. This is $7,200 per year, or, a 7.2% |
| As of October 23, 2007, shows a 5 year CD with a | | | | return per year. This is still a good return compared |
| 4.65% return, an interest bearing checking account | | | | to 4.65% in a CD. However, there are 2 other things |
| earns a rate of 2.2% and a Money Market Account | | | | to be excited about as an equity partner. First, is |
| shows 3.61% interest. Now, your IRA and stocks | | | | your share of "rental losses". Losses, are you crazy? |
| may perform better. Maybe you are getting 4 or 5% | | | | I hear you thinking it, or maybe even saying it!! A |
| annually with these vehicles, hopefully, your return is | | | | quick lesson in taxes is in order. |
| much higher than this. | | | | When an investor buys a rental property, the IRS |
| Now, you might be asking yourself at this point is: | | | | allows the investor to recapture the purchase price |
| Well, are there better returns to be made out there? | | | | of the property over a designated period of time. |
| The answer is ABSOLUTELY!! Let's take a step back | | | | For a commercial property, it is a 39 year period, for |
| first, and look at the tools we have discussed so far. | | | | residential, including apartments, it is 27.5 years. This is |
| What is a stock? It is a basic ownership interest in a | | | | called Depreciation. The IRS also allows Accelerated |
| given company. Basically, it gives you the opportunity | | | | Depreciation on the personal property, or Chattel, in |
| to earn dividends, or payments, from corporate | | | | the building. This requires a professional Cost |
| profits. This is a very simplistic view of stocks. Bonds | | | | Segregation Study to utilize this strategy. Chattel |
| can be backed by the government and corporations | | | | With Us is very good and you can get them on the |
| amongst other groups. They can be a very | | | | web at Now, this depreciation is on the entire |
| complicated investment tool, again, which typically | | | | purchase price minus the land value. |
| pays a small rate of return. CD's, or Certificates of | | | | Now, depreciation is an expense on paper only. You |
| Deposit are another very common choice in which to | | | | do not write a check for it. However, for tax |
| invest. Many institutions offer them with different | | | | purposes, you write it off. This can often times take |
| maturity dates and interest rates. Savings accounts | | | | a rental property and have it show a loss. Again, this |
| and interest bearing checking accounts can also be | | | | is for tax purposes. You can take this "loss", and use |
| found at banks, savings and loan institutions, credit | | | | it to offset other income. Now, you must ALWAYS |
| unions etc. Finally, IRA's are one of the most, if not | | | | consult your tax professional in regards to this. I am |
| the most, popular choice to prepare for retirement. | | | | not an accountant and offer no tax or legal advice. |
| We will focus on this tool more in a later article. | | | | These losses are then passed through to the equity |
| We have spoken about a few of the many | | | | partners in direct proportion to their interest |
| investment vehicles available. We all can agree the | | | | percentage. |
| returns these are often quite low. So what else is | | | | The second benefit to the equity investor is a |
| there? What would you say if I told you there is a | | | | percentage share of the appreciation of the property |
| way to get an 8% or better secured return? That's | | | | during the holding period. Let's assume the property |
| right, 8% or better is possible. Many times, this is | | | | goes up in value each year it is held. We will say for |
| addition to extra tax benefits you can receive as | | | | the sake of argument the property appreciates 3% |
| well. So what is this mystery investment? Direct | | | | per year. This is many times a very conservative |
| lending, specifically, in real estate. | | | | number, especially when there are "value plays" which |
| What is direct lending in relation to real estate? It is | | | | allow forced appreciation at a higher rate in a shorter |
| when you have money available and you invest it | | | | period of time. So, our $1,000,000 property will be |
| any number of real estate projects with either an | | | | worth $1,159,274 after a 5 year hold. This was in |
| equity share partner or as a debt partner. This does | | | | determined increasing the value by 3% each year. As |
| not necessarily mean you have to find a property, | | | | the private lender, you would receive 20% of the |
| repair it and sell it, or find a commercial property to | | | | appreciation, or $31,855. |
| buy and hold or reposition. Let's look at debt | | | | Add $31,855 and 5 years of cash flow totaling |
| partnering first. | | | | $36,000 and the total you would earn over the 5 |
| Many real estate investors utilize direct lenders, or | | | | year period is $67,855. Divide this by 5 years and |
| private money, to get into various deals. It could be | | | | your annual return averaged 13.57%. This does not |
| to buy a foreclosure property, renovate it and then | | | | include the additional tax benefits from the "losses" |
| sell it to any number of end users. It could also be an | | | | on rental income. These are not pie-in-the-sky figures. |
| investor buying a multi-family property because of | | | | Smart investors are seeing these returns on a |
| the strong cash flow it will produce and the direct | | | | consistent basis all secured safely by real estate. |
| lending allows the investor to use these funds as the | | | | Whenever you are considering where to put your |
| down payment on the property. As a debt partner, | | | | investment dollars, not enough could be said about |
| you will typically receive anywhere from an 8-10% | | | | doing your due diligence. This is a mantra for real |
| secured return. Your investment is secured by the | | | | estate investors and should also be yours when |
| property and a mortgage you place on the property. | | | | investigating any opportunity. So what should you |
| So if you invested $100,000 with a real estate | | | | look for? First, you should only invest with someone |
| investor who buys a 50 unit building, with an 8% | | | | who is in compliance with applicable SEC regulations |
| return, you will receive $8,000 per year. When the | | | | and rules. This would mean real estate investor has |
| investor sells or refinances the property, you receive | | | | utilized an SEC Attorney to properly adhere to laws |
| your $100,000 back in addition to your annual $8,000 | | | | effecting the transaction AND is putting your financial |
| payments. | | | | interests first. There are a great deal of regulations |
| Equity partnering is a little different. First, your | | | | effecting a transaction such as this. A full discussion |
| investment is still secured by the real estate, but you | | | | of these regulations could not be adequately |
| participate in the monthly cash flow and receive a | | | | discussed in this article. You would be best served to |
| share when the property is sold or refinanced. Let's | | | | only deal with those who comply with these |
| look at the previous 50 unit apartment building. You | | | | regulations. Second, contact your own legal and tax |
| use the same $100,000 to buy the $1,000,000 | | | | advisors so they can see what you are doing. Let |
| property, but this time, you would get a percentage | | | | these trusted advisors guide you through the |
| of the cash flow each month. In this example, we will | | | | transaction. Next, become familiar with the numbers |
| say the monthly cash flow after all expenses is | | | | in the deal. You will be presented with an offering |
| $3,000 per month. This number will obviously differ | | | | which should outline the specifics of the deal. Ask |
| based on the strength of the deal. You put up 10% | | | | questions about the deal. The more information you |
| of the purchase price, so conventional wisdom would | | | | have, the better decision you can make. |
| dictate you receive 10% of the cash flow. This may | | | | There are better ways to invest and with much |
| or may not be the case. Many, many times, you | | | | better returns. Embrace the possibilities and put more |
| would receive more. Yes, more. As a real estate | | | | money in your pocket! |