A Quick Guide to Business Structures
for Real Estate Investors
The difference between amateur and professional real estate investors has nothing to do with the size of their portfolios. The fundamental difference is this: while amateurs make a hobby of buying and selling properties, professionals treat real estate as what it is—a business.
If you’re going to succeed in multifamily real estate investment, you need to go and do likewise. Part of that means setting up the legal structures that define your business as a stand-alone entity. As you advance, that’ll also involve structuring multiple entities depending on the specific properties and investor relationships you want to protect.
Structuring your business, however, is about more than making yourself look and feel like a professional. More importantly than all that, your legal structure will provide you two key benefits: personal liability and tax sheltering.
In today’s post, I want to look at four of the most common types of business structures to help you decide which one will be best for you.
A sole proprietorship is just as it sounds: a one-man shop for real estate investment. This is otherwise known as the no-structure structure.
What are the advantages?
Ease and simplicity. To buy real estate as a sole proprietor, all you have to do is use your legal name and social security number. You could use a DBA to buy and sell property under a company name, but the legal structure will essentially be the same.
What are the disadvantages?
As a sole proprietor, you’re on the hook for any and all damages resulting from lawsuits filed by tenants and business associates. If a judge were to rule against you in court, they could go after all your assets, including your personal home.
As if that weren’t bad enough, sole proprietorships do nothing to shelter you from unnecessary taxation. In fact, all your non-passive income will be subject to an additional 15.3% self-employment tax.
Is it good for multifamily real estate investment?
On the opposite end of the spectrum from the sole proprietorship, incorporation forms a more rigid, tangible business structure. There are two types of corporations you can set up: a C-Corp and an S-Corp. Let’s look at the C-Corp first.
What are the advantages?
Two significant advantages attend incorporation. First, using your corporation to hold property will protect your assets from any potential judgments against the corporation. Second, you can borrow funds in the company’s name, which can also be a useful tool in shielding yourself from personal liability.
What are the disadvantages?
In a C-Corp, your income properties will be subject to double taxation: first, at the corporate level, and then at the personal level for any distributed income. If you try to get clever and hold back that income from distribution, the IRS will hit you with a 15% personal holding company (PHC) tax.
Double taxation will also bite you when it comes time to sell properties you’ve owned for more than a year. Whatever gains you realize will be taxed at a high corporate rate. Any distributions you take from those proceeds will again be taxed at your personal rate.
Is it good for multifamily real estate investment?
In some circumstances, investors will use a C-Corp primarily for purposes of financing. In most cases, however, there are better options for offering liability protection without having to take on an additional tax burden. The S-Corp is one of them.
The S-Corp is similar to a C-Corp in terms of its legal structure and filing requirements. The S-Corp, however, enjoys a special taxation status under the Internal Revenue Code Subchapter S.
What are the advantages?
The S-Corp is not subject to double taxation. Instead, profits and losses pass through to the company’s shareholders. As an added benefit, shareholders can be “hired” as employees of the corporation. This gives you the flexibility to distribute a portion of profits as bonuses which are not subject to ordinary Social Security and Medicare taxes.
What are the disadvantages?
Not all states recognize the S-Corp’s special status and, consequently, tax both corporations in the same way. Also, only individual U.S. citizens can participate as shareholders. Other entities (other C-Corps, partnerships, LLCs) cannot own a stake in your S-Corp.
No more than 25% of an S-Corp’s income may be passive—including rental income. Any excess will be charged at the max corporate rate of 35%. For multifamily real estate investors, that represents a serious problem.
Unfortunately, whether you go with a C-Corp or an S-Corp, you won’t be able to avoid paying up to 35% in capital gains taxes. While you may be able to use a 1031 exchange to mitigate that tax burden, each shareholder will need to be eligible for the exchange.
Is it good for multifamily real estate investment?
If it weren’t for the added tax on excess passive income, the S-Corp would be an attractive option for real estate investors. With a long-term strategy focused on generating passive income, however, that makes the S-Corp functionally equivalent to a C-Corp, only with a free-pass on double taxation for 25% of your income.
Somewhat like incorporation, partnerships are a legally binding arrangement between two or more entities with specific guidelines for how the business will be run. Unlike a corporation, however, the partnership is not a legal entity in and of itself.
There are two types of partnership: general and limited.
What are the advantages?
Since partnerships are not legal entities, they’re not subject to double taxation. All income and losses pass through to the partners themselves and are taxed individually.
What are the disadvantages?
General partnerships offer nothing in the way of liability protection. For that, you would have to up a limited partnership, which is made up of at least one general partner and then one or more limited partner. As a passive investor, the limited partner is shielded from personal liability judgments. That partner must, however, remain truly passive. If they participate materially in any part of the business, they will lose their limited status.
Is it good for real estate investment?
Partnerships used to be more widely used, but their precarious liability protections have caused investors to look for a better solution.
Limited Liability Company (LLC)
In recent years, the LLC has emerged as a great hybrid solution for real estate investors. With the liability protection of a corporation and the tax advantages of a partnership, the LLC as the superior choice for most real estate investors.
What are the advantages?
Like a corporation, an LLC requires an operating agreement, only without the requisite annual meeting and elected board of directors. Instead, an LLC can be managed directly by its shareholders or indirectly by a designated manager.
In most cases, using an LLC to buy and hold your real estate investments will protect your assets from any judgments levied against the LLC itself. If the LLC is set up as a pass-through, then you get to enjoy this benefit without having to pay any additional corporate tax.
Also, in an LLC you can distribute profits and losses as you see fit, allowing you the flexibility to negotiate tax-preferential treatment for certain outside investors based on their individual needs.
What are the disadvantages?
An LLC won’t protect your personal assets against every legal judgment. If a tenant sues after being discriminated against by an on-site manager, for example, then you’ll be protected because the suit took place entirely within the LLC. If, on the other hand, you yourself were to cause someone harm—a motor vehicle incident or an instance of proven personal negligence—both you and the LLC could be on the hook.
Using personal finances to fund an LLC can weaken the barrier between your company and your assets. If you fail to keep all your finances strictly insulated from the LLC, a lawyer can and will come after your assets in court.
On the financing side, any recourse loan written for a property within the LLC will likely require a personal guarantee from each member. If you sign that guarantee, then you’ll be liable for any remaining debt obligations should the LLC default on the loan.
Is it good for real estate investment?
Of the structures we’ve looked at, the LLC is your best bet. It gives you all the personal liability advantages of using a legal entity to buy and hold real estate with none of the additional tax burden.
Based on what I’ve shared above, the LLC will be the better choice for most of the investors who read this blog. Of course, your best bet will be to chat with your lawyer before you make any final decisions.
A parting word of advice: whichever structure you decide to employ, supplement your personal liability protection with a high-value umbrella policy. These policies are relatively cheap and could potentially save you millions of dollars in the long run.
The Incredible Power of Visualization to achieve all of your dreams in Real Estate and in Life, and How to Create your own Vision Board.
Have you made your own vision board yet? If so, please share! Visualizing your dreams will allow you to achieve them! Learn how I use this process to continually remind myself of my goals and motivations.
As a thank you for joining me today, I’d like to offer you a free vision Board Blueprint to help you attain your goals by visualizing the success you want in your life. Click to download for FREE –> https://goo.gl/bFkpua
And also invite you to my new private group of multifamily real estate investors, visit –> Multifamilycommunity.com
To Your Success! -Rod
Have you ever considered how the United States government can help jumpstart your real estate investment business? A loan backed by the Federal Housing Administration (FHA) just might be the perfect option for investors looking to acquire residential multifamily property (2-4 units).
Today, I want to offer an overview of FHA loans, along with the pros and cons, and a closing recommendation about whether and how multifamily investors should use them.
What’s an FHA loan?
Established by the National Housing Act of 1934, the FHA has been a useful tool in promoting home ownership. Strictly speaking, the loan doesn’t come from the FHA, but from your lender. The government’s role is to insure those funds, which allows the banks to widen its lending parameters to give you a better deal.
Who can get an FHA loan?
From a financial standpoint, FHA loans are among the easiest to secure. As long as you have a credible work history, a credit score above 580, sufficient monthly income to meet FHA’s debt-to-income requirements, and at least 3.5% of the purchase price to put towards a down payment, you can qualify.
Who can’t get an FHA loan?
The FHA loan program was designed primarily to motivate residential home ownership. For that reason, FHA won’t back a loan for commercial property investments, which would include any multifamily property with 5 or more units.
Moreover, FHA requires purchasers to establish occupancy within 60 days of closing and maintain primary occupancy of the property for at least one year. While it is possible to open up a second FHA loan on a future property, you’ll have to give your lender a convincing reason (family growth, job relocation, etc.) to approve it.
So, where does that leave a multifamily real estate investor?
I wouldn’t rule out FHA just because of its occupancy restriction and ban on commercial property. I’ve known plenty of multifamily investors to build a firm foundation by using FHA to purchase their first small multiplex, live in one of the units for the first year, and grow their business from there.
Deciding If an FHA Loan is Right For Your Investment Business
Why would you want to consider an FHA loan? Here are several good reasons:
- More Affordable Down Payment – With FHA, you can get away with a minimum down payment of 3.5% of the purchase price. That’s far lower than the 10-20% you’d pay on a conventional loan. Additionally, there are down payment grant programs available that could lower your down payment to 0%.
- Lower Rates – Because of their government backing, the base rate on FHA loans is typically lower than what you’d find on a conventional loan. Needless to say, lower rates make for cheaper mortgage payments and better cash flow.
- Looser Credit Requirements – This is one of the main benefits of an FHA loan. Just be warned, lower credit scores tend to fetch higher interest rates.
- Seller Concessions – In most cases, FHA allows sellers to contribute up to 6% of the purchase price towards your closing costs, prepaid expenses, discount points, and title expenses. This is especially valuable for investors who want (or need) to minimize out-of-pocket costs as much as possible.
- Assumability – This valuable benefit often goes overlooked. Let’s say you take out an FHA loan today at 4%. Now imagine, 10 years down the road, we find interest rates at around 7 or 8%. If you decide to sell at that time, you can offer buyers the option to assume your loan at 4% rather than the current market rate. That’ll give you a huge competitive advantage against other sellers.
These advantages add up to a fairly compelling case for FHA. But, that’s not the whole story. Let’s look at a few of FHA’s disadvantages:
- Upfront Mortgage Insurance Premium (MIP) – If you put down less than 20% on an FHA loan, you’re going to have to pay an additional 1.5% of your purchase price to help insure the lender’s interests against default. This fee will be added to your total loan amount at closing.
- Monthly Private Mortgage Insurance (PMI) – In addition to MIP, you’ll have to pay monthly PMI on any FHA loan originated with a loan-to-value ratio (LTV) lower than 80%. Depending on the purchase price and the amount you put down, annual PMI can range from .45% up to 1.05% of the loan amount. FHA used to knock out the PMI once you hit 78%. But now, if you put down less than 10%, it will stick with you until you either pay off the loan or refinance.
- Property Condition Requirements – To insure your loan, FHA requires that the property meet their minimum standards for safety, security, and soundness. In the event of a foreclosure, the government doesn’t want to be stuck with a dump. This requires a FHA-approved appraiser to evaluate the property and, if necessary, require additional repairs before closing. That process in itself can lead to forced renegotiations on repairs, closing delays, and headaches all around.
My Closing Recommendation
I want to commend the FHA loan as a strong option for investors just starting out in the multifamily investment business. If your family situation allows it, I wouldn’t be put off by the occupancy requirement. Purchasing a plex and living in one of the units is a fantastic way to learn how to own and manage a multifamily.
My biggest piece of advice would be this: purchase a property that’s going to give you stable, reliable cash flow even with the additional monthly PMI expense. When you do, move in and start adding value right away. As soon as you can get your LTV up to 80%, make sure to refinance and get rid of that monthly PMI so that you can increase cash flow.
What Every Landlord Needs to Know about
Rent Control, Eviction, and Anti-Discrimination Laws
The landlord/tenant relationship seems simple enough: “We sign a lease. I give you keys. You give me rent.” Unfortunately, there’s a lot more to it than that.
The history of tension between landlords and tenants in this country has contributed to a developing menu of laws meant to regulate the rental market. Most of the time, these laws heavily favor tenants over landlords. That means it’s up to us to know the law so that we can observe our tenants’ rights and protect ourselves in the process.
Today, I want to talk about three of the most important areas of law that apply to landlords: rent control, eviction, and anti-discrimination.
A Quick Note About Lawyers
I’m going to give you enough information to get started on your own legal research. That said, I’m not a lawyer. I highly recommend you find a local real estate attorney. They can help you navigate these issues more carefully than anything you find on the internet.
The history of rent control traces its origins to the early 20th century when public outcry against rent-profiteering seemed to be at its height. Over the last century, these laws have evolved in various ways to keep landlords from taking advantage of their tenants.
Rent control laws typically regulate the following:
- How Much, and How Often You Can Increase Rent
- Services You Can Withhold from Tenants
- Methods and Procedures for Adjudicating Disputes About Rent
- Acceptable Grounds for Eviction (see below)
Thanks to a Supreme Court ruling in 1924, the federal government has left rent control up to states and cities to decide for themselves. The upside of that is that Washington, D.C. doesn’t get to tell landlords in Atlanta, GA what they can do with their rents.
There is a minor downside, however, in that every landlord needs to track down and study the rent control laws (if applicable) that govern his or her market.
Thankfully, Landlord.com has compiled a helpful chart with links to everything you need to know for your state and municipality. You can find it here.
Like rent control laws, the rules that govern the eviction process are determined by each local jurisdiction. These laws can be quite detailed, spelling out the exact process needed to serve a tenant an eviction notice properly.
Generally speaking, there are three types of termination notice a landlord can serve:
- Pay Rent or Quit – The tenant is given a certain number of days to pay overdue rent, or they must vacate the property.
- Cure or Quit – Similar to the previous notice, but reserved for lease-violations that don’t relate specifically to rent (noise complaints, occupancy violations, etc.).
- Unconditional Quit – As the name implies, this notice gives the tenant no recourse. It’s usually served in response to some form of breach, repeated late rent payments, and/or severe damage to the property.
If the tenant fails to comply, the next step is to file a lawsuit to have them evicted. As long as the tenant doesn’t put up a fight, this process can be completed in less than a month. If, however, they decide to challenge the eviction in court, things can take much longer.
As you wait for judgment, do keep up utility payments and do not remove the tenant’s personal property. Trying to lock or freeze out a tenant will hurt your case in court and expose you to a world of legal liability, including charges of trespass and wrongful eviction.
If the court rules in your favor, you’ll be required to make contact with local law enforcement. It’s their job to serve and enforce the eviction order. Once the tenant is gone, you’ll have to follow additional state guidelines for storage or disposal of any remaining personal property.
Discrimination is one of the thorniest social issues in our society today. For landlords especially, even the slightest hint of impropriety will be enough to land you in a courtroom.
That’s why it’s vital that you internalize the following lists of protected classes. Review your screening and application process regularly to make sure you’re not discriminating against any of them in any way.
Federally Protected Classes
Under the Fair Housing Act, a landlord may not refuse a tenant based on any of the following reasons:
- National Origin
- Disability or Handicap (Physical or Mental)
- Sex (Gender)
- Family Status
Further State Regulation
Many states in the union have determined that federal protections don’t go far enough and have voted to expand upon them. California, for example, adds the following classes:
- Sexual Orientation
- Gender Identity and/or Expression
- Genetic Information
- Marital Status
- Source of Income
A Warning About Professional Scammers
I’m sorry to say there are people out there who make their living by baiting landlords into discrimination and then suing for damages. Don’t fall victim to these scammers. Protect yourself by knowing the law and reviewing your policies regularly.
In this post, we’ve looked at the three most important areas of rental law for landlords: rent control, eviction, and anti-discrimination. As we’ve seen, each area has its own particular concerns.
This may seem like a lot to keep track of, but with a little bit of research and a conversation or two with your lawyer, you can easily run a profitable business without violating anyone’s rights under the law.
The 10 – Step Quick Start to Multifamily Investing
Small Multifamily (2 – 30 units) is a niche with little competition that’s ripe with opportunities. The majority of the owners of these size properties are mom and pops, which often means below market rents, value add potential, and seller financing possibilities. Don’t overlook these small properties! Follow the quick 10-step plan below to take one down and start building Life Time Cash Flow!
- Evaluate personal finances.
Before you start looking for deals, you should do a self-evaluation of your current financial situation. Do you have money to invest or do you need investors? Can you qualify for an FHA loan? How about an income property mortgage or commercial mortgage? What can you do to improve personal finances?
- Identify if you want to focus on residential 2 – 4 units, or a small commercial property, 5 – 30 units.
You can clearly focus on both, but it’s important to know that there are a variety of differences between residential and commercial multifamily. If you’re interested in “house hacking” or FHA loans, you’ll need to focus on residential. There are many other differences as well such as the loan process, balloon payments, and even your exit strategy options.
- Determine where you will focus.
There are 2.25 million multifamily properties in the U.S, and you can’t chase all of them. When selecting your market area, focus on four things: employment and job growth, income growth, population growth, and multiple large employers.
- Connect with a local agent/broker and a local banker.
As you know, the journey to Lifetime Cash Flow is not one you take alone. Two of the most important team members you will need include a motivated and active agent/broker that focuses on multifamily, and a local banker that you’ve discussed loan options with and/or have a relationship with. The first team member will help you find deals, and the second will help you take them down.
- Start to build relationships with potential investors.
Whether you think you need investors or not, I recommend starting to build those relationships. Remember, you are building relationships, don’t just talk real estate! They key is to find commonality and build strong and sometimes lifelong relationships.
- Become professional.
One of the most common mistakes new investors make is treating their multifamily endeavors as a hobby, not a business. Don’t go and form an LLC yet, but spend a few bucks and order yourself some business cards, a basic website off of Fiverr.com, and a free business phone number via Google Voice.
- Buy or build your property and owner database.
Having a properly built property and owner database is worth its’ weight in gold. This will be a vital resource for direct mail marketing, cold calls, and overall knowledge of the area. You download records from your county assessor websites and you can build your list in Excel or use a free or low cost CRM.
- Get that first direct mail campaign out the door!
Direct mail is one of the best strategies to find off market deals for any type/size of real estate, especially small multifamily. As stated above, a lot of these owners are older moms and pops, and you’re not going to reach them via Facebook or PPC ads. I recently interviewed a young couple in Houston that took my advice and mailed 300 letters and just closed on a 36 unit property which will ultimately net them 10k per month.
- Implement other marketing strategies.
Don’t put all of your marketing eggs in one basket! Implement other strategies as well to ensure you have a consistent deal flow. Utilize auctions, driving for dollars, Craigslist, and the dozens of other ways you can find great off market deals.
- Practice, practice, practice analyzing deals.
When it comes to small multifamily you need to become an expert at analyzing both residential and commercial deals. You need to know that 2 – 4 unit properties are valued based on comparable sales, and that 5 unit and up properties are based on the NOI and Cap Rate. The only way to become great at analyzing deals is to practice! Spend time everyday reviewing deals and kicking the tires. Practice, practice, practice!
On Finding the “Perfect” Deal
Leo Tolstoy once wrote, “If you look for perfection, you’ll never be content.” On one level, that might sound defeatist: “You’ll never be perfect, so why even try?” On the other hand, Tolstoy’ might just have offered a wise insight for real estate investment.
I’ve heard plenty of would-be investors go on about finding the “perfect” deal. Sometimes the word’s used as an excuse to rationalize poor decision-making: the “perfect” deal is whatever deal they happened to run across last week. Sometimes it stops people from taking any action whatsoever. Other times, it’s used to justify inaction: “I’ll never find the perfect deal, so I might as well stay home.”
Here’s what it all comes down to: there is no such thing as the “perfect” deal, only deals that more or less conform to your idea of a successful acquisition. Put simply, you get to decide what “perfect” means when it comes to buying real estate.
But, how do you do that?
Set Investment Criteria
Investment criteria are the parameters you’ll use to flesh out your idea of the “perfect” deal. Without investment criteria, you are shooting with a shotgun instead of a rifle. In this business you cannot be all things to all people. You must focus to be taken seriously by brokers, investors and lenders. In what follows, I’m going to walk you through some of the most important criteria you need to consider before you start looking for deals.
Keep in mind: In ways that will become clear as we go along, these categories all feed into one another. As you get to know your market, be prepared to fine tune as you go.
Where do you plan to look for multifamily properties? It’s always best to focus on markets you know firsthand rather than those that seem interesting.
Here are four markets to consider first:
- Backyard –Looking for properties in a market in or near your current place of residence offers some significant advantages: firsthand knowledge of the real estate market, “insider” information on the best locations, ability to see properties in person, and hands-on management are just a few.
- Hometown – When it comes to analyzing a market, familiarity with the terrain is incredibly valuable. While you may be long removed from your hometown, you’ve probably held on to a strong intuitive sense of how the market and the area work. If you have family in the area, they can help you as well.
- Boots on the Ground – Speaking of family in the area, it’s a great idea to look for multifamily investment properties in markets where you have close, trusted friends and associates. With these representatives in place, you’ll have the local support you need to find and service properties in those areas.
- Retirement/Vacation Destination – If you already own a vacation home or are planning to spend your retirement in a particular location, then why not add that market to your list? You’ve already gotten acquainted with it through travel and or market research for your retirement/vacation home. Moreover, when the time does come to retire, you’ll have easy in-person access to your portfolio.
- If None of these Areas work – Draw a circle the equivalent of a 2 hour drive around your home and look there. You can easily find and manage property that close to your home.
How many units are you looking for? For a newer investor, you may want to start with a smaller “residential” multifamily property (2-4 units) to help you learn the ropes. Residential multifamily is less threatening and the mistakes are smaller. Over time, however, you’ll find it difficult to scale your business with smaller properties. At that point, you can advance to larger commercial multifamily properties (5 plus units). You’ll find they are the same amount of work to purchase as the smaller residential multifamily properties.
What type of property are you looking for?
- Class A – Premier and luxury properties fall into this category. They’re situated in prime locations and are usually among the newest properties in a market. You’ll pay a premium, but high rent, stable tenants, and low vacancy make Class A properties a worthwhile investment and the investment of choice for institutional investors. From a value perspective, these properties will normally appreciate at a high rate. Rental growth, on the other hand, can be slow and cash flow margins slim.
- Class B – Better suited to middle-income residents, these properties aren’t quite as new and exciting as their higher-end counterparts. They have some mid-level amenities, but nothing as posh as Class A. These properties may not be highly placed, but they do offer more opportunity for forced appreciation and rental growth. For that reason, the Class B market can be highly competitive.
- Class C – Properties are 30-50 years old and offer little (if anything) in way of amenities. They can be located in stable or declining areas. Those factors make Class C properties more affordable and easier to rent. The relative lack of stability in tenants, however, will make it harder to maintain high occupancy rates. The great advantage of these properties is that they offer plenty of opportunities for investors to improve the property and grow rental rates. (value add)
- Class D – As you could imagine, these properties lie at the low end of the spectrum. They’re often old, rundown, and located in the worst parts of town. The advantage of Class D properties is that they’re cheap and offer substantial cash flow. Managing tenants, however, can be incredibly time-consuming. Defaults will be common, turnover will be high, and you may end up spending more of your of time dealing with various management headaches than anything else. These properties are a cash flow play only.
Closely related to the type of property is its level of stability. On one end of the spectrum, you can purchase a relatively turn-key multifamily rental investment (stabilized). On the other end, you’ll find the proverbial clean slate (fully vacant).
- Stabilized – The property condition is solid, occupancy is reasonably high, and rental rates are in line with the market. So long as your numbers add up and cash flow is strong, there won’t be much for you to do to this property after closing.
- Value Add – Perhaps the property could use some updating, and rental rates could be bumped up to get them in line. This type will require more work and capital than a stabilized property, but the potential reward will be greater.
- Occupancy Less than 80% – Like the value add, this property will require more work from you than a stabilized property. At a relatively low rental rate, you’ll be taking on an additional risk which may also complicate your ability to secure funding. Nevertheless, with added risk comes added reward.
- Fully Vacant – Vacant properties are challenging in that you may have to go several months or longer with no income—forcing you to cover the mortgage bill yourself. Still, if you can buy a vacant property for the right price and renovate it to match current market standards, you’ll likely recoup those lost months and more in forced appreciation and increased rents. Important to know why it was vacant to begin with.
Your price range will have to consider a number of factors: the market you’ve chosen, the types of properties you’d like to pursue, the size of those properties, and so on.
Of course, all of that depends on how much funding you can get your hands on. If you’re planning to secure a conventional loan on a residential multifamily property, speak with a lender as soon as possible to obtain pre-approval. If you’re going after larger properties, secure your equity funding and lending sources before/during your search.
How involved do you want to be with your property?
- If you’re just getting started in your investment career and you’d like to handle all of the management yourself, then you may opt for a smaller-sized, higher-class property. If you try to self-manage a Class D property, you just might bounce yourself right out of the business. I have owned and managed D properties and I do not recommend them.
- If you’re planning to hire an on-site manager, this can be accomplished on just about any sized property. The larger properties will require a full time person with a salary, but even a property as small as a duplex can allow you to give one of the residents a small rent credit to keep an eye on things, pick up trash and show empty units.
- Working with a management company is prudent if you don’t have the time to deal with it, or you’re in full acquisition mode. If you listen to my podcast, you are likely aware that I am a proponent for self- management whenever possible and certainly once you have enough of an infrastructure to support it.
There are no “perfect” deals out there, but the more carefully you define your criteria, the more likely you’ll be to find the perfect deal for you.
These are the categories I’ve found to be the most important when setting out investment criteria. You may prioritize them in different ways or even add your own (you might care about aesthetics, for example).
What matters most is that you define your criteria as clearly as possible. Revisit them regularly to make sure they align with the realities of the market, your comfort level, and your goals. As you grow into this business, expect your criteria to grow with you.
If you ask any major league hitting coach, the secret to hitting a fastball is all in how you time your swing. As Yogi Berra said, “You don’t have to swing hard to hit a home run. If you got the timing, it’ll go.” In a sport where milliseconds matter, timing is everything.
I’ve often encountered this in would-be real estate investors:
- Is this the right moment to buy my first rental property?
- Did I miss my window by not buying back in 2009 when prices were low?
- Should I be worried about an upcoming market correction?
- Should I wait for the next market correction?
Timing matters in real estate, but I’m glad to say that buying a rental property is much easier than hitting a major league fastball. Instead of dealing with milliseconds, we get to look at how trends evolve over longer periods of time. And, as far as I can see, those trends are all still pointing in one direction: If you remember to focus on cash flow, now is still a great time to become a landlord.
Here are 7 reasons to back up that claim:
- Homeownership Rates are near the lowest they’ve been in 25 years.
At the end of July, the homeownership rate in America came in at 63.7%. While this represents an improvement over the 62.9% rate in mid-2016, it remains quite low.
This drop in homeownership has nothing to do with decreased demand for housing. Rather, an increase in demand, coupled with drastically low levels of inventory across the nation, is what’s making it difficult for buyers to find and secure housing.
For landlords, this means there are plenty of people out there looking to rent, not because they can’t afford a mortgage, but because they can’t find something to buy.
- Rents are rising higher than inflation.
In most areas, rental rates have outpaced inflation for quite a while. While there’s some indication that this is softening in high-end luxury rental markets, the rest of the rental market is holding steady.
In short, this means that a well-located property with positive cash flow is positioned to grow nicely relative to the economy in general, creating a compound effect over time.
- Rents weathered the recession better than home values.
According to the U.S. Census Bureau, the median asking rent for rental units rose from $660 to $710 per month during the 2008-2009 recession. The median asking price for homes for sale during that time dropped from a peak of $190,000 to $160,000.
As I’ve written about elsewhere [link to the cash flow post], betting on appreciation and market-timing is a bad way to invest in real estate—especially when the market takes a turn for the worst. If you’re focused on cash flow, however, you don’t have to worry nearly as much (or at all) about the market turning against you.
- The shape of the American economy is changing.
Whereas manufacturing was dominant in the 90’s, service sector jobs have surpassed manufacturing as America’s top industry. Still, despite the fact that these jobs now represent about 80% of the U.S. economy, service sector wages remain relatively low.
The vast portion of workers in the U.S. who work in service-related jobs don’t make enough to purchase a home. These workers are nevertheless stable and well employed, making them a fantastic pool of potential renters from which to draw.
- Family norms are shifting.
50% of Americans between 18 and 23 still live at home. Marriage rates have also been in steady decline; the percentage of married adults dropping below 50% for the first time in 2014. Those who do choose to marry are waiting longer to do so than ever before.
Because social norms surrounding family life are evolving, so are people’s housing needs. As the life events that typically trigger homeownership (marriage, childbirth, etc.) get pushed back later into life, the need for rental properties will continue to rise.
- Because millenials.
In addition to the stats mentioned above about living at home, members of the millennial generation are deliberately choosing to rent rather than buy. Why?
- Renting is perceived as the more frugal option.
- Millenials prefer the freedom and flexibility of a lease vs. a mortgage.
- Renting allows millennials to live in otherwise unaffordable neighborhoods.
- They’re afraid of prematurely committing to a neighborhood.
- Younger professionals or those with “alternative” forms of employment often have trouble obtaining a mortgage—despite stable, consistent income.
Whatever we might make of those reasons, the fact remains that nearly two-thirds of Americans under age 35 are choosing not to purchase a home. For a landlord, that means an entire generation of people who would rather rent your property than buy their own down the street.
- There will always be a need for affordable housing.
After we’ve analyzed all the recent trends, one trans-historical fact remains: everyone needs a place to live! Whatever the market does or doesn’t do, there will always be human beings in need of a place to call home. By becoming a landlord, you’re signing up to sell a product that will never go out of style.
For the reasons I’ve laid out above, right now is a fantastic time to invest in rental property. And, as I’ll continue to argue until I’m blue in the face, the best way to do that is to use multifamily investment properties to build a lifetime of sustainable cash flow.
If you’re interested in learning more about multifamily real estate investment, I’ve written a book just for you. Best of all, it’s 100% free. Click here to grab your copy.
Of course, none of that can happen if you don’t have access to a cache of investors ready and willing to dive in on your syndication offering. That makes developing a list of qualified, interested investors every bit as important as scouting out your next deal.
In today’s post, I want to help you establish your public persona as a real estate syndicator. More importantly, I want to show you how to get the kind of attention that’ll help you build a strong list of potential investors in no time.
Before you dig into branding yourself, you need to build a team. Multifamily real estate investing is a team sport and you can supplement any deficiencies you may have with people on your team. When you’re putting together your team you need to be sure you have the following things covered: income and net worth sufficient to qualify for debt. Multifamily ownership and/or management experience on your team to satisfy potential investors, brokers and lenders. Once you’ve put together your team you’re ready to brand.
Overview: The Bicycle Model
Thanks to the internet, marketing a business is easier than it’s ever been. With little more than a web browser, you can get your operation off the ground in a matter of days.
To be as simple as possible, let’s think about marketing in terms of a bicycle:
- Frame – Strong, straight, and sturdy, the frame is what holds everything together. Without it, you won’t get far. When it comes to marketing your syndication business, your frame consists of your overall brand image.
- Wheel Hub – This is the critical point of contact where the wheel fixes to the frame. If the hub is deficient, the bike won’t move. For our purposes here, you can think of your website as the hub of your marketing operation.
- Spokes – A hub won’t do you much good if it isn’t securely attached to the outer rim of your wheel. In terms of marketing, the spokes are the various channels you’ll use to connect people to your website hub.
With that basic framework in mind, let’s flesh out each of these parts.
The Frame: Branding Your Syndication Business
For millennia, farmers have used a hot iron to mark out their livestock from all the others. Eventually, “branding” made its way into modern marketing as the means by which we mark ourselves out from all our competition.
As a business owner, you have a brand whether you know it or not. The name you carry, the clothes you wear, the cards you hand out, the way you talk about your business—all these elements come together to constitute what other people perceive as your brand.
In developing your own brand, here are some of the most important things to consider:
Naming a new business venture can be one of the trickiest branding decisions you make. You want something compelling, but not so complicated that it doesn’t easily roll off your tongue.
As important as your name may be, try not to overthink this part. If you’re truly stuck, pick two words that resonate with you personally (Blue Sky, Mountain Spring, Desert Run, Sandy Beach, Ocean Wave, etc.) and then add one of the following:
- Equity Group
Don’t skimp on this one. Your logo will speak volumes about you and your brand. Invest in having a simple, yet attractive logo designed by a professional.
Every business has a story to tell. What’s yours? When it comes to developing marketing collateral and pitching potential investors, you’ll need to offer a compelling story that sets you apart from all the other investment opportunities out there.
Spend time learning how to describe your mission. What is it that gets you up in the morning? Think big about your place in the real estate world. Invite investors to share in that vision. That’s how you convince people to trust you with their money.
The Wheel Hub: Building Your Website
With the essential elements of your branding in place, you’re ready to build a website that effectively puts words to your syndication business.
Don’t know how to build a website? Not to worry, there are a number of inexpensive or free platforms (SquareSpace and WordPress, to name a few) designed to help people with no experience put together professional-looking websites in minutes.
Real estate is a people business. Potential investors want to know who you and your team are. When you’re asking them to trust you with their hard-earned money, you need your website to establish as much of a human connection as possible.
Perhaps more important, however, is your business’s story. This includes your mission/vision (see above). It also encompasses your track record (past acquisitions, recent results, investor testimonials, etc.) as well as your investment methodology.
When it comes to web marketing, there’s more to cultivating potential leads than directing them to a landing page and converting them with a hard pitch. You need to take your time and provide plenty of value—proving to investors that you’re both knowledgeable in the field and committed to enriching their lives directly.
Practically, this means populating your site with valuable information. Whether that includes PDF guides to investing or a regular blog, come up with creative ways to overwhelm your potential investors with as much value as possible.
Your web site should have no dead ends whatsoever. Using internal hyperlinks, design every page to lead to more content. Ultimately, you want to direct web visitors to a contact form or landing page designed to capture, at a minimum, their email addresses.
The best way to capture contact information is to offer something valuable in exchange:
- A free guide to real estate syndication.
- Weekly newsletters.
- A short webinar
The sky is the limit on the number and nature of collateral pieces you hand out. Just create something of value and “sell” it in exchange for email addresses. This is an incredibly simple, yet powerful way to build up your list of potential investors.
The Spokes: Marketing Channels
With your website firmly established as a hub, you’re ready to start building the spokes that attach it to the outside world. Each one should drive people back to your website. From there, you can further develop relationships with your potential investors.
These are some of the most important spokes to consider:
In-person connection + digital cultivation = meaningful conversion. Using your website to develop the relationships you initiate in real life can be a powerful and efficient way to recruit investors and “warm” them in advance of your next offering.
This is going to take a lot of talking to strangers at networking events, on airplanes, or at your kids’ soccer games. To get started, you need to perfect your elevator pitch—that short, compelling response to the question, “What do you do for a living?”
Grab a pen and paper; here’s a quick way to craft your own elevator pitch:
- Identify Your Goal – What do you want your pitch to accomplish? Unless you think you can close your new contact on the spot, design your pitch to create enough interest for a potential investor to visit your website.
- Tell People What You Do – Find a clear and succinct way to tell people what you do. Be specific. “I help regular people outperform the stock market” works much better than “I make dreams come true.”
- Distill Your Unique Value Proposition – What sets you apart from every other real estate syndicator, hedge fund manager, or stock broker? Be sure to include that in your elevator pitch.
- Pose a Question – Don’t let your pitch hang in the air. Come up with a thought-provoking question meant to lead either to further conversation or to a little soul-searching on the part of your contact.
- Tie It All Together – Using what you’ve jotted down above, tinker with your notes until you’ve got a short, sweet pitch. Say it out loud and with a stopwatch. Keep massaging it until it rolls off your tongue naturally in under 30 seconds.
There are only so many hours in the day and so many new people you can meet. Thanks to the internet, however, you can leverage digital marketing to draw in more potential investors than you could ever hope to meet in person.
Here are three ways to use the power of digital media to scale your outreach efforts:
- Email Marketing – As I mentioned above, one of your website’s primary goals should be to capture contact information. Using that contact information, you can develop a broad email list. Systematically distribute regular newsletters and other valuable offerings (free webinars, seminars, video guides, etc.) to stay in regular contact with your potential investors. Concentrate on value and encourage people on your list to share your content with their friends.
- Social Media – When developing valuable educational content for your website and email lists, be sure to advertise those offerings on social media (Facebook, Instagram, LinkedIn). Link those social media posts back to your website, where visitors can download resources for free after submitting their email address.
- Paid Advertising – Using Google AdWords or Facebook Advertising, you can direct targeted visitors to specific resources on your website. This allows you to leverage the power of long-tail keyword advertising to deliver high-value, high-conversion traffic straight to your website.
Customer Relationship Management
For each email address you record, it’s important that you store that information in a reliable database. From there, you can establish a plan for follow-up with that contact.
Not only is this good marketing, but if you’re doing a 506(b) offering it will help you prove to the SEC that you’ve established a pre-existing relationship with your potential investor and that there’s been a sufficient passage of time between your first contact and your pitch.
Recording and systematically developing customer relationships in this way doesn’t have to be complicated. In fact, there are software applications designed to make it quite easy. Here are a few of them:
Of course, I haven’t spoken the final word on marketing your real estate syndication business. There’s plenty more to learn on each one of the elements I’ve laid out above.
Still, with what I’ve shared above, you’ve got everything you need to get your name out there as soon as possible. Don’t wait until you’ve learned everything there is to learn about marketing. That will never happen.
Instead, put these basic pieces together and start working on your investor list today. With a little perseverance, you’ll have a solid list built in no time.
Want to know more about real estate syndication?
I’ve devoted an entire module to syndication in my Lifetime Cashflow Academy course and coaching program. It is actually taught by one of the best syndication attorneys in the business. Not only will you learn more about marketing, but you’ll learn all the technical ins and outs of putting together a successful syndication deal.
So you want success? Success in your life, success in your business, success in your relationships? Financial Success? Taking 100% ownership of every aspect of your life is the secret to that success. Most people spend their time denying their mistakes, bemoaning their circumstances, and giving excuses for their lack of results. Most people don’t realize that accepting 100% responsibility for their actions, being totally accountable for their results, and taking 100% ownership for their lives including any mistakes they made, is one of the biggest secrets to success.
Gary Keller the founder of Keller Williams was quoted as saying taking complete ownership of your outcomes by holding no one but yourself responsible for them is the most powerful thing you can do to drive your success. If you want to be a leader you have to take ownership. If you want to effectuate any change in your life you have to accept ownership for your life. In fact when you can accept complete ownership for everything in your life you can literally change anything in your life. Sure, you’re influenced by your background and past circumstances but you are fully responsible for who you become.
You can’t change the past, the seasons you’ll goal through in life and the circumstances, but you can always change yourself. If you want to become a leader, and if you’re listening to my show I know you do, you must know that leadership equals 100% ownership with no excuses. When you blame others, you lose your power to change. If you asked me why many people have self-esteem problems, my answer would be that they don’t take 100% ownership for their lives. Instead a victim mentality is adopted and someone else is blamed when negative things happen. When you don’t take ownership of your life, your thoughts and dreams and hopes just remain thoughts.
When you take total ownership, it creates forward momentum and you take action. Whenever you take total and complete ownership, it doesn’t matter if you have lazy coworkers or a boss that’s an idiot, all that matters is that you took ownership and did everything you possibly could in a situation. I’m not saying accept blame, I’m saying accept ownership. They’re not the same thing. When you evaluate issues and problems that have popped up in your life you’ll realize you or other people involved in a negative situation likely failed to take ownership. This dynamic can manifest in several different ways for example. You or someone else involved had a bad attitude, or just didn’t care about the situation, or spend more time complaining than doing, or the involved parties are only interested in themselves.
So I invite you my friend to take a look at your own life and honestly answer some questions. Are you living the life you want to live? When you go to bed at night, do you feel fulfilled and satisfied? Are you showing up the way you want to in your life with your family and at work? Are you doing the things that you want to do? If you answered no to any of these questions, then you’re not taking 100% ownership for your life. Do you let other people control your life? Are you envious of other people that took action to change their lives, and you’re frustrated because you’ve remained in comfort? I know these are tough questions and please know that I’m not judging, blaming, or trying to offend. I only want you to have an extraordinary life. So I want you to ask yourself, how would your life change and be different if you took 100% ownership for it? How would it affect your family? How would you show up differently? What might you do differently? Correct me if I’m wrong, would this not be a completely different life, a magnificent, extraordinary life that you own?
The height that a man or woman can take their success is dictated by their self-mastery. Lao Tzu said mastering others is strength mastering you is true power. When I talk about self-mastery, I’m talking about having a discipline around learning, self actualization, and personal growth. All of the super successful people that I know that have high levels of self-mastery and are always focused on expanding their own abilities to create extraordinary results in their lives. Self-mastery is not about perfection, and it’s not about the destination. It’s about your growth on your journey.
A master is someone who stays on that path day after day, month after month, and year after year. A master is not afraid of failure. A Master grows and learns from their setbacks and just keeps on trying. Personal mastery requires that we choose. Making a choice in and by itself is actually a courageous act. Your destiny is shaped when you make a decision. Mastery includes mastery over your thoughts. Mastery comes much easier if you love what you do, and then it requires the discipline to practice, to stay focused, to visualize the ultimate outcome you trying to achieve, and to get outside your comfort zone and take risks. When we achieve self-mastery in a particular area of our lives we get into the flow. That amazing place where everything happens easily and with very little conscious effort. Self-mastery requires courage, honesty, strength, and willpower. It tests our integrity and our character and requires us to sometimes do things we don’t feel like doing but know we should be doing. Leonardo da Vinci said, one can have no smaller or greater mastery than mastery of oneself. Socrates said a life unexamined is a life not worth living. And Aristotle said knowing yourself is the beginning of all wisdom. All three of these brilliant men said basically the same thing. Study your life and work on mastering your life. A master is constantly learning and growing. A master is typically a student more than a teacher.
To master any part of your life you need a vision, a positive vision from which you create specific and measurable goals that excite you, challenge you and motivate you to attain them. Then you have to push forward on those goals, develop a plan, and maintain a positive attitude. You must commit to continual practice, because repetition is the mother of skill. You must expect challenges and setbacks and not be derailed by them. You should set small attainable goals and celebrate when you reach them. Self-mastery requires you to focus, focus on the outcome, and focus on what you want, Not what you don’t want. Self-mastery requires passion and willpower. There will always be distractions and temptations but the more we decide to embrace self-mastery the less distracted we’ll become. If you want to achieve self-mastery you also need to be okay with being alone and be still with yourself on a regular basis. Learn to enjoy a few minutes of silence and solitude as often as possible. You need to make sure that your peer group consists of like-minded positive and driven people who are committed to excellence and continual improvement. Don’t allow negative people into your life or negative thoughts into your head. If a negative thought pops into your head. Immediately replace it with something positive. You also need to craft a personal mission statement and decide what values you plan to embody on your path to greatness. So set empowering habits that propel you towards self-mastery. Get outside your comfort zone and embrace the life you know you deserve