Mark Epstein & Associates Real Estate Investment Opportunities and Asset Management

Real Estate Investment Diversification
Cash Flow & "Value   Added" Properties
Asset & Property
Management
Individual & TIC
1031 Exchanges
Business Consulting
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Frequently Asked Questions

General

Is this a good time to buy real estate?  Any time is a good time to buy as long as you know the market, the product, and what you can do with it.  It also depends on your investment goals. Most of the "distressed" product right now is either very high end developments that got caught in the downturn or the worst the market has to offer. There are a few good ones (good NOI/CAP rate, little or no deferred maintenance, etc) mixed in with the distressed deals as well.  

If you are a new investor, often it is best to team up with an experienced operator (like MEA) and learn or observe and decide if you want to do it on your own. It is not a passive business and many that I know that have approached it that way have lost money.  Particularly independent, out of state investors.  A management company is just that - a vendor -  not an owner with skin or “at stakeness” in the game.

Bank Owned “Value Add” Properties Acquired at Steep Discounts
1.         What were the prices of the two properties you just bought?  Purchase prices were $200k  for "Mingo" Ave. (purchased as Tenants-in-Common) and $219k for "Darwin" St. – purchased as California LLC).  Mingo was capitalized with $225k to include a $25k rehab budget (for a new full bathroom / master suite; new kitchen; re-finish wood floors, new carpet / tile / paint and landscaping).  Darwin was in better shape than Mingo.  We capitalized additional funds for Darwin new tile floor in kitchen, new carpet / paint, new appliances, new front and back landscaping, new decking and new rock fireplace surround.  After 6 weeks of re-hab, Darwin is now rented with 4% cash flow from rental income being distributed to the Equity Partners.
2.         What range of purchase price are you looking in for bank owned properties?  $180-220k.  Value for the properties referenced above were in the low $700k at the peak of the market.  Mingo had a loan of $585k and Darwin had $440k plus an equity line of credit.  The banks took a big loss on their books.

3.         What’s the min investment?  $50k.  Or, you can be the sole investor (own 100% of the property yourself) in the low $200k range. 

4.         Will you refinance following the all cash purchases?  In some cases, yes.  We are refinancing Mingo as soon as the rehab is complete and the tenant moves in.  We will not exceed 50% loan-to-value from the re-fi in order to keep the debt service expense down and obtain more favorable rates / terms. 

5.         What are your fees, i.e., % of return, flat, fixed, other?  MEA earns the Buyer's broker commission of 2-3%, paid by the Seller, which is standard.  Compensation for organizing Co-Investors with appropriate documentation (co-ownership. LLC, TIC agreements, as appropriate) asset management, issuing quarterly reports, co-coordinating the re-fi, implementing the asset level business plan and preparing for sale is zero until Equity Partners get their original investment money back plus a 12% preferred return.  After that MEA shares in the profits 50 / 50.  Based on conservative projections that equates to about 17%/year to Equity Partners including cash flow distributions during the holding period.  MEA brokers the sale on the back end for a discounted fee while offering the Buyer's broker full commission.

6.         I’m interested to use my pension funds like you have for some of these deals.  How do I get my money out of these IRA’s again?   First, find out if your fund administrator / custodian allows you to self direct investments using the funds.  If they do, go to their web site to obtain the forms to "direct" your custodian / fund administrator to send the funds where you want.  I've been through the process several times for Equity Partners and myself and can help facilitate this for you.  If your administrator does not allow you to “self direct” then you'll need to transfer the funds to an administrator that does.  You can transfer your entire funds to the other administrator or just the amount of funds you want to self direct into the investment property.  I use Pensco Trust Co. as my administrator (www.PenscoTrust.com).  They have "Investment Kits" on their web site and all the forms you need to direct the funds to an escrow or fund your share of an LLC, etc.  If you wish, tell me the name of your administrator and I can easily find out for you whether or not they allow their clients to self direct.  Again, if not, it's not difficult to transfer to one that does.

7.        Is there an active rental market?   Rental market is strong in Seaside due to entry level Monterey County location and proximity to diverse employment base.  Close to the bay, nice city lights and bay / ocean views from the area and cool ocean breeze.  2 and 3 bedroom homes in the area typically rent from $1400 to $1800/mo.  There is no shortage of tenants for these houses based on firsthand experience plus interviews with multiple local property management companies.  We just entered a one year lease agreement on Darwin for $1,700 per month.

Contact MEA for a sample profit and loss pro forma from one of the properties mentioned above which breaks down Equity Partner cash flow and appreciation return on investment. 
Additional Case Studies are under construction and will be added soon.

1031 Tax Deferred Exchanges and Tenants-in-Common

What is a 1031 Exchange? A 1031 tax-deferred exchange preserves equity and may indefinitely defer capital gains taxes, provided you comply with strict IRS guidelines. Four parties are involved:

1. The Exchanger: the party initiating an exchange to defer capital gains taxes on a relinquished property.
2. The Buyer: the party acquiring the Exchangers property.
3. The Seller: the party selling a replacement property to the Exchanger.
4. The Qualified Intermediary (Accommodation): the third-party entity holding the Exchangers sale proceeds for future disbursement upon the close of the replacement property acquisition

Tenants in Common
1. What is Tenants-in-Common?
2. What purchase amounts are normally required for Tenants In Common ownership?
3. What happens if I fail to close on my 1031 exchange?
4. Is there any liability exposure associated with Tenants In Common ownership?
5. What if I want to sell my Tenants In Common ownership?
6. What happens to my Tenants In Common ownership if I die?

1. What is Tenants-in-Common?
Tenants In Common is a form of real estate asset ownership in which two or more persons have an undivided, fractional interest in the asset, where ownership shares are not required to be equal, and where ownership interests can be inherited. Each co-owner receives an individual deed at closing for his or her undivided percentage interest in the entire property. Through Tenants In Common ownership, the average person is able to enjoy ownership in an institutional-type property with a minimum investment.

2. What purchase amounts are normally required for Tenants In Common ownership?
Revenue Procedure 2002-22 issued by the IRS allows up to 35 Tenants In Common owners in any one property. Minimum purchase requirements are structured to meet this limitation and can range as low as $150,000 equity. The typical entrance in whole commercial building begins at $1 million, but through Tenants In Common ownership, the average person is able to enjoy ownership in an institutional-type property with a minimum purchase. Besides reliable income and growth potential, these properties enjoy the economies of scale which is not commonly available to the individual landlord.

3. What happens if I fail to close on my 1031 exchange?
You will have to pay your capital gains taxes. Failure to close on 1031 exchanges is the top reason why people pay capital gains. By identifying a Tenants In Common property, you can reduce your potential tax risk, and avoid a failed closing.

4. Is there any liability exposure associated with Tenants In Common ownership?
The mortgages on most of the Tenants In Common properties are non-recourse. The Tenants In Common debt structure generally allows for the debt financing to be assumed.

5. What if I want to sell my Tenants In Common ownership?
On a decision requiring unanimous vote, such as a sale decision, a 75% vote by the Tenants In Common owners will typically be sufficient to initiate the impasse resolution procedure. This procedure allows the Tenants In Common owners with 75% or more of the property to make an offer to buyout the dissenting owner with 25% or less of the property. The dissenting Tenants In Common owners can either: (1) accept this offer, (2) buy out the 75% Tenants In Common owners at the same price per percentage ownership, or (3) change their dissenting vote to a consenting vote.

6. What happens to my Tenants In Common ownership if I die?
Your ownership interest will pass to your heirs pursuant to your will just like any other asset. Currently, the estate tax code provides that they will also receive a stepped-up tax basis to fair-market value, but you should check with your CPA or tax adviser because not all circumstances are alike. In this instance, the income taxes that were deferred because of your 1031 exchange are potentially forgiven forever. CURRENT OPPORTUNITIES (include link to this “Current Opps.” section in left margin of all Investment and Asset Management pages or ALL pages?)

Despite, and perhaps because of, the current economic situation, this is a fantastic time to invest in real estate. We continue to search for and close on profitable, multi-family investments across the country.

 

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