How to Avoid Common Pitfalls of Real Estate Investing

by Josh Slaybaugh, President, Trade Up 1031

There are great real estate deals to be had for the strategic investor, but it’s crucial to examine your goals and financial reality when considering an investment. Here are some tips to help you get off on the right foot, as well as mistakes to avoid.

1. Have a plan

It is astonishing the number of investors who jump into a long-term commitment without taking the time to determine what they want from a property. There’s never a good reason to purchase real estate without having a clear understanding of how it can be used to your financial benefit.

This advice is particularly important when considering a 1031 exchange. Investors only have 45 days to identify a new investment property. Those who wait until the last minute often don’t find their next purchase, leaving them with a large tax liability – typically 21 to 24 percent. That’s a big hit to take, no matter the dollar amount.

2. Build a team

There are a number of professionals an investor should consult before completing a real estate transaction. If you’re serious about investing, you need an advisor to navigate all the different properties and investment options out there. At the very least, you need a team to cover the basics, to look at the physical condition of the property and to determine if it matches your investment strategy.

3. Do Your Homework

Fully evaluate not just the building, but the neighborhood it’s in. Look at the demographic data for the area and physically inspect the property. Get an appraisal.

Shop around for the best deal if you’re considering carrying debt. Don’t jump in.

4. Create Multiple Exit Strategies

It’s important to prepare for market changes, especially if you’re hoping to turn around a property in a matter of weeks or months. Set realistic expectations. Know what type of improvements will increase the property’s worth and understand who the buyers are in your area. Consider hiring a good advisor who can offer solutions to common problems.

Just as there are basic requirements to real estate investing, there are mistakes to avoid at all costs. Taking a realistic approach, and in some cases preparing for the worst-case scenario, can help you avoid disappointment or financial disaster.

Here are the don’ts:

1. Don’t Expect to Get Rich Quick

There will always be a risk and reward balance in any investment. If you want to see your money grow rapidly, be prepared to take a few hits along the way.

Real estate has proven to be a powerful income generator and wealth builder, but typically only in the long term. Give your investment time to grow. Becoming impatient can mean less stability in your financial portfolio and a potential loss on your investment.

2. Don’t Assume You’ve Found the Best Deal

You’ll make the most on your investment by purchasing the right property at the right time for the right price.

Advisors have access to properties that are off-market and will never be listed in traditional press. A property that isn’t advertised to a large audience is going to be your best bet for investing. You’ll get a better deal by not competing with a large number of bidders, and a lower buying price will give you a greater return on the investment.

3. Don’t Duck Due Diligence

You can’t see a property once and know what you’re in for. There are many things to consider before purchasing a property. Making a profit is just the tip of the iceberg.

Due diligence can’t be done overnight. Many investors fail before they ever get a chance to succeed because they lack the patience and knowledge to really investigate a potential investment. If you fast track the sale and skimp on research, you’re looking at losing not just profit, but any money you put into the purchase.

4. Don’t Expect Perfection

Investing demands caution. Understand the worst-case scenario and be prepared to deal with it.

To succeed, understand what can go wrong and prepare for it. You might not be able to lease a property as quickly as you’d like, or for the price you had in mind. Create sufficient reserves. Caution and risk management will give you the certainty of riding out ill market conditions and weathering any crisis.

The real estate market has historically operated in peak and valley cycles. However, the truly successful investor can navigate through any ups and downs. Know your do’s and don’ts and you too could be one of the investors who prospers in all investment climates.

About Trade Up 1031

Trade Up 1031 is a nationally recognized leader in real estate investing, particularly tax-deferred investments. As a full-service real estate firm, the firm provides comprehensive consulting, property acquisition and disposition services. Investors are offered a wide range of real estate opportunities through the firm’s network of top-tier Tenant-In-Common sponsors, developers, builders and commercial brokers. To learn more about Trade Up 1031 or to sign up for a free monthly newsletter, visit www.tradeup1031.com or call (866) 661-1031.

Investing in Green Real Estate: Wishful Thinking or Best Practice?

Investing in Green Real Estate: Wishful Thinking or Best Practice?

by Josh Slaybaugh, Trade Up 1031, Inc.

There are millions of people across the country committed to living green in their own homes. They recycle and do their best to eliminate drafty windows and doorways, even if their main motivation is to save a few dollars on the monthly electric bill.

When it comes to building green, commercial and industrial properties are increasingly being constructed with energy savings in mind as well. And just like at home, when it comes to business, the push for environmentally friendly construction is guided less by philosophical and more by financial motives.

Do green buildings make good investments? Do the increased costs of constructing and certifying a green building yield positive investment returns? Despite the growing recognition of sustainable practices, green products, and high-performance technologies in building design and construction, concern within the industry continues.

“There definitely are hurdles when it comes to the perception of cost,” notes architect Dan Heinfeld, president of LPA Inc., Irvine, CA.(3)

Greg Kats, principal of Capital E, a Washington, D.C. consultancy focusing on clean energy, has come up with some concrete answers to the question of cost. The 2003 study The Costs and Financial Benefits of Green Buildings, in which Kats is the lead author, reports that “LEED Bronze buildings had an average cost premium of less than 1 percent. Silver buildings averaged a 2.1-percent cost premium, while Gold buildings had an average premium of 1.8 percent. Platinum buildings accounted for a 6.5 percent cost premium.” The report concluded that the average premium for all 33 studied green buildings was slightly less than 2 percent ($3 to $5 per square foot).

Another study, Costing Green: A Comprehensive Cost Database and Budgeting Methodology, July 2004, by Lisa Fay Matthiessen and Peter Morris of Davis Langdon, Santa Monica, CA, notes that the cost per square foot for buildings seeking basic LEED certification - not the Bronze, Silver, Gold, or Platinum levels - falls into the existing range of costs for buildings of a similar program type. (5) Overall, the costs are relatively insignificant compared to the benefits that will be accrued by the occupants of the building.

Green building consultant Jerry Yudelson agrees. “We’re learning how to do high-performance buildings on conventional budgets, so we’re cracking the cost barrier,” he says. Add to that energy savings, productivity gains, marketing and public relations benefits, and faster lease-ups, “and you have growing recognition of the business case for green in all dimensions.”

So, building costs may increase slightly on projects aiming for Bronze, Silver, Gold, or Platinum LEED certification, but it is estimated that high tenant satisfaction and consistent lease-ups will lead to buildings with higher-than-normal-occupancy, and thus, potential for greater net operating income (NOI) and appreciation.

Don’t discount the affect green buildings can have on those working within them. Thomas Aguer of Aguer Havelock Associates says that, “Studies are showing the increase in efficiency of employees [in green buildings]. People working in these clean buildings are healthier, happier, and more productive, and that’s going to get corporate America’s attention. Social responsibility is great, but when you show them [corporations] that they will be 2 to 5 percent more efficient, that’s a huge number when you run that out on a major international corporation with hundreds of thousands of square feet.”

What about existing buildings like a 40-year old, 500-employee Class A office building in Center City Philadelphia? Can owners of existing buildings afford the rehabbing process required to enjoy the benefits of sustainable facilities, lower energy and water costs, healthier work environments, and lower operation costs? Absolutely.

The JohnsonDiversey global headquarters in Sturtevant, Wisconsin spent $73,000 – or 27 cents per square foot – to implement a series of green improvements in their 277,400 sf building. These included measures to increase energy efficiency, as well as instituting a recycling program, revamping its cleaning processes, and even collecting storm water for landscape irrigation. The result? The company has achieved annual net savings of $137,320 – or 49 cents psf – and a 15-year life cycle net savings of $4.87 psf. It’s reduced its energy costs by $90,000 a year, uses two to four million fewer gallons of water a year to irrigate landscaping, and recycles more than 50 percent of its site-generated solid waste.

The bottom line: Green building is not only affordable, but profitable. More importantly, Wall Street has noticed and is taking action. Of the 300 REITs in the U.S., 41% are actively pursuing energy efficiency and green building upgrades and another 27% plan to do so, said UBS, citing the industry newsletter Progressive Investor.(9) "We believe the green movement will continue to gain momentum as pressure from governments, tenants, customers, shareholders, and the public continues to grow in the coming years," said a report authored by James Feldman, Alexander Goldfarb, Jeffrey Spector and other analysts for UBS’s REIT team.

Everything points to rapid expansion of green building and rehabbing. The infrastructure is coming together, local governments are enacting green regulations, and consumer demand is growing exponentially. So the next time you’re looking to diversify your real estate investment portfolio, look into green buildings. You too can do more to promote green initiatives than just using CFL light bulbs in your house.

About Trade Up 1031

Trade Up 1031 is a nationally recognized leader in real estate investing, particularly tax-deferred investments. The firm provides comprehensive consulting, property acquisition and disposition services. Investors are offered a wide range of real estate opportunities through the firm’s network of top-tier Tenant-In-Common sponsors, developers, builders and commercial brokers. To learn more about Trade Up 1031 or to sign up for a free monthly newsletter, visit www.tradeup1031.com or call (866) 661-1031.

Time for a Change? How to Stay Invested in Real Estate without the Burden of Management

Time for a Change?
How to Stay Invested in Real Estate without the Burden of Management
by Josh Slaybaugh, Trade Up 1031, Inc

Even in the face of a tumultuous debt market, the fact remains that many real estate investors are increasingly looking to capitalize on their highly appreciated property by selling. However, there is an obvious dilemma for those choosing to defer paying taxes on the sale of a property by utilizing a section 1031 like-kind exchange. That is, “What kind of property should I exchange into?” Real estate investors typically fall into two camps: those who want day-to-day management responsibility and those that don’t. If you are the latter, you have a decision to make: Should I choose between a Tenant-In-Common Investment or a Single Tenant Net-Leased property? How do I determine which investment type is the best option for me?

Firstly, let's define these two options. Single Tenant Net-Leased properties (STNLs) are usually commercial or industrial properties leased on a long term basis to tenants backed by corporate credit. These leases obligate the tenant to pay for real estate taxes, insurance, and building maintenance. Commercial properties of this type are frequently leased to regional or national retailers such as Walgreens, Rite-Aid, CVS, Wal-Mart, Home Depot, and Federal Express, to name a few. STNLs allow the owner to drive income from the property net of expenses.

Tenant-In-Common investments (TICs), on the other hand, are multi-owner investment properties with in-place professional management. Much like Single Tenant Net-Leased properties, TICs provide income net of expenses without day-to-day management responsibilities. One big difference, however, is that the Tenancy-In-Common structure can be used for virtually any property type, including multi-family, office, warehouse, hospitality, and recreational, as well as retail. (The majority of the single tenant net-lease market is retail). TIC investors are deeded, fractional owners who proportionately share in the gains and losses of the particular investment property.

So how do you determine which type of property is for you? There are three primary phases we look at to compare and contrast any given TIC to a STNL: Pre-sale, closing, and post-sale.

Pre-Sale - This is where one should evaluate the amount of time, money, and energy it takes to determine what property to buy. A Single Tenant Net-Lease property requires a traditional negotiation and contract period. Obviously, this is a variable, but one could assume this takes anywhere from a few weeks to a few months depending on the situation. With a TIC the sponsor company has already completed the negotiation and arrived at a purchase price by the time the property comes to market, thereby saving the investor a lot of time and aggravation.

The due diligence process is also vastly different. In a typical STNL transaction, the buyer bears the responsibility and cost of any third party due diligence reports, including a Property Condition Report (PCR), Environmental Survey, and Appraisal. This process can potentially add another few weeks to the timeline. Whereas in a TIC transaction, the due diligence reports have already been completed and are available to the investor for review.

Closing - If an investor desires financing on an STNL investment, they are responsible for locating a source of funds and negotiating the terms. TIC property sponsors take the responsibility of finding a lender and negotiating the terms on the investors’ behalf. Usually, a TIC property sponsor's banking relationships allow it to secure institutional-quality, non-recourse financing. This has the potential of saving the investor a substantial amount of time and money. Otherwise, closing on both types of investments is relatively easy. Attendance of the investor is typically not required.

Post-Sale - Once the sale is complete, both types of ownership require little or no active management on the part of the investor. STNLs rely on the tenant to take responsibility for the building's general maintenance. A TIC owner relies on a third-party property manager for such duties. Both TIC and STNL owners customarily receive rental income checks on a regular basis (typically monthly or quarterly). One big difference between the two is that TIC property managers are in regular communication with the investors regarding issues affecting the property, including financial data and the property's performance. Furthermore, TIC property sponsors have a built-in exit strategy before the property is marketed. This provides the investor with an estimated hold time for any given TIC investment. In addition, the sponsor acts as the broker or enlists a professional to help the investors evaluate prospective buyers' offers. Of course, STNL owners can put a similar exit strategy into place, but they are on their own in evaluating the sale.

In addition to the benefits mentioned above, TICs offer an investor the opportunity to diversify by asset type and geography more easily than a typical STNL buyer could. For example, a NNN, corporate-leased Advanced Auto Parts in Bedford, IN is selling for $1,500,000. That $1.5M could easily be diversified between 3-5 TIC investments (depending on the minimum investment requirement) into ownership of larger, more desirable assets in potentially stronger markets throughout the country. The old adage of 'Don't put all your eggs in one basket' remains as true in real estate investing as it does in your brokerage account. Creating a diversified portfolio of real estate holdings not only mitigates risk but also increases the potential greater returns.

So what's the best option? Of course, this depends on what type of investor you are. For the investor who desires complete ownership control without active management, a Single Tenant Net-Lease investment may be the answer. For the investor who seeks to diversify their investment dollars, own significantly larger institutional-quality property, and still have the freedom from management responsibilities, TICs may be a more suitable option.

What type of investor are you? You may want to reevaluate your answer to this question. The type of investor you are today may be very different from the type you were years ago. The real estate investment market has changed dramatically in the past five years. Prior to 2002, when the IRS gave guidance to real estate companies regarding TIC offerings, net-leased properties were the first choice for those wanting to remain invested in real estate without actively participating in property management. The TIC marketplace has since grown to over 60 real estate companies offering hundreds of institutional-quality properties in which to invest each year. Do yourself a favor and research the options available in the TIC market. Before jumping into that next Walgreens or Rite-Aid, seek education on how TICs work and how they differ from traditional net-leased property. You may be surprised at what you find.

For more information, we recommend the following resources:

Federation of Exchange Accomodators (FEA)

http://1031.org/about1031/faq.htm

IRS Rev. Proc. 2002-22

http://www.irs.gov/pub/irs-drop/rp-02-22.pdf

Net Leases (Wikipedia)

http://en.wikipedia.org/wiki/Net_lease

Investors Turn Attention To Net-Lease Properties” By Ray A. Smith

http://homes.wsj.com/columnists_com/buildingvalue/20030930-buildingvalue.html