November 10, 2021

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Industrial Real Estate

What is Industrial Real Estate? Industrial real estate consists of properties used to produce, store and distribute goods produced such as warehouses and fulfillment centers. What should you know about investing in industrial real estate? Pandemic: Industrial real estate was one of the greatest performing asset classes throughout the COVID-19 pandemic. E-Commerce: Investors have benefited tremendously from the rise of e-commerce as warehouse development has increased exponentially. People are increasingly shopping online which increases the demand for warehouse space to store and distribute these goods. Vacancy: Investors have seen historically low vacancy rates in this asset class since the rise of e-commerce. E-commerce will only continue to grow, and industrial real estate will benefit from this growth. Appreciation: E-commerce has been the leading contributor to industrial real estate’s rapid appreciation growth. The U.S. didn’t have nearly enough warehouse space available which made space scarce and property values high. How can you invest in industrial real estate? Real Estate Investment Trusts (REITs): REITs make owning real estate accessible to the average investor. REITs are companies that focus on acquiring and managing real estate investment properties. Certain REITs focus on acquiring and managing industrial real estate. An investor can purchase an industrial real estate focused REITs shares in the stock market and become a partial owner. The shareholder will benefit from the property’s appreciation and rental income through the stock’s growth and dividends. Examples of Industrial Real Estate focused REITs Duke Realty (DRE) is a REIT that invests in industrial real estate. The trust’s market capitalization sits at $15.6 billion with 534 properties (majority warehouses) and tenants such as Amazon and UPS. DRE offers a 2.43% dividend yield. Terreno Realty (TRNO) is a REIT that invests in industrial real estate. The trust’s market capitalization sits at $4.05 billion with 222 properties in New York City, New Jersey, San Francisco, Los Angeles, Miami, Seattle, and Washington D.C. TRNO offers a 1.97% dividend yield. Innovative Industrial Properties (IIPR) is a REIT that invests in industrial real estate. The trust’s market capitalization sits at $4.12 billion with operations in 17 states. IIPR offers a 3.06% dividend yield.

Non-Owner-Occupied Investment Property

What is a non-owner-occupied investment property? Non-owner-occupied means the owner of the investment property doesn’t live in one of the units nor uses it as their primary residence. Lenders use the term non-owner occupied when analyzing 1-to-4-unit investment properties. Non-owner-occupied investment properties require insurance before the landlord can move tenants into the property. Why do lenders care if an investment property is owner occupied? Lenders want to ensure that the property is cash flowing at its maximum potential. If the owner of the property is occupying one of the units then the property is missing out on a unit that could be producing recurring rental income. This classification helps lenders issue the correct interest rate as they want to be properly compensated for the risk they take when lending money to a real estate investor. How is non-owner occupied seen as a negative? Although lenders want to see an investment property cash flow at its maximum potential to limit the risk of lending to this investor, when an investor lives at the investment property, the probabilities of defaulting on a loan decrease. Therefore, the lender’s risk decreases, and the borrower’s interest rate decreases. Properties that are non-owner occupied have a higher probability of defaulting which is followed by a higher interest rate for the borrower. Occupancy Fraud Due to the fact that interest rates are higher for non-owner-occupied investment properties, investors will attempt to classify their property as an owner-occupied investment property to try and achieve a lower interest rate. This is considered occupancy fraud and the borrower, loan and property can face serious consequences such as large fees. Benefits Non-owner-occupied investment properties allow for a greater cash flowing property, increase in diversification, and return on investment. In turn, the investor will be able to pay off the property much faster than if the property were not cash flowing at its maximum potential.

Multi-Unit Rentals (Duplex, Triplex, Fourplex)

What are multi-unit (2-4 unit) investment properties? Multi-unit investment properties are residential assets with two to four units in a single property. For example, duplexes are two-unit properties, triplexes are three-unit properties and fourplexes are four-unit properties. What are duplexes, triplexes and fourplexes? Duplexes are multi-unit rentals with two to four units under one rooftop. Each unit has a private entrance. The living spaces are typically split equally with a similar square footage. Tenants tend to favor 2–4-unit rental properties over apartment buildings as they offer more privacy since these properties only house up to four tenants. What is the difference between a duplex, a triplex and a fourplex? These three property types fall under a multi-unit (2-4 unit) property type. The three different property types don’t differ significantly. The biggest difference is the increase in income sources per property. As income sources increase, diversification, profitability and return on investment increases, all while risk decreases. Investors are attracted to this real estate property type as it offers more than one passive income source under one roof. What is house-hacking? New investors favor these three property types as they can house-hack the property. House-hacking means the owner lives in one of the units and rents out the remaining units. The owner is essentially living on the property for free as long as the other units generate enough rental income to cover the monthly mortgage alone. House-hacking also allows first time buyers to secure a lower interest rate and lower down payment as they will be living on the property. This is an easy and affordable way for new investors to get started in real estate. Where can investors find these investment opportunities? Investors can find duplex, triplex and fourplex investment opportunities through numerous sources such as: Zillow Redfin MLS Opendoor Wholesalers

Special Purpose Property

What is a special purpose property? A special purpose property is a property that has limited options for use. A special use property may be designed and built for only one specific purpose. A few examples of special purpose properties: religious buildings, public and private schools, hospitals, and railways for a transportation system. What do investors need to know about a special use property? Investing in a special use property is a long and difficult process as convincing a city to approve a proposal and acquisition is challenging. Investors should be aware that a special use property could require a significant amount of investment to adjust the property to the investor’s intent. This could decrease the return on investment, the profitability of the project and increase the project’s duration and risk. Lenders view these projects as high-risk deals and demand a higher interest rate. Pricing the property Special use properties don’t typically have any comparables to accurately price the property. The appraiser will have to approach the project with a unique strategy to try and give the most accurate price possible. The appraiser will value the land, building, equipment on the property, and intangible assets separately. Eminent Domain Investors should also be aware of the government’s right to seize private property for public use. Investors run the risk of the city demanding the previously special use space back. Historically, the government has paid owners below market value prices when exercising their right to eminent a property. For example, let’s say your home is in an area where the city needs to put a metro system. The city can eminent domain the property and purchase your home to build the metro system. Additional Examples of Special Purpose Properties Amusement parks, car wash properties, cemeteries, sports arenas, wineries, marinas, golf courses, gas stations, funeral homes with crematoriums, all types of health or medical facilities, farms, dormitories, railroads, and cold storage facilities.

Raw Land

What are the types of raw land investments? Investors can buy raw land that will be used in the future for residential development, commercial development, grow crops, mineral production, timberland, livestock-raising, orchards, recreational land, vineyards, vegetable farmland, industrial development, parking spots, etc. Why should investors purchase raw land? Purchasing land can produce a tremendous return on investment. Why? Land is scarce. For example, think about the previous owner of the land the Staples Center sits on. Imagine the payout that owner received when the Staples Center approached him with the intention of buying his land for development. The goal is to buy land in a prime upcoming market with population growth and metrics that show signs of future economic prosperity. Why? This will allow the investor to get in at a discounted price and benefit from the value of the land appreciating over time. How to invest in raw land? Investors can invest in raw land with numerous different strategies. The first strategy is called buy and hold which means investors will acquire a parcel of raw land and hold it until they can sell it for a higher price. The second strategy is called flipping land which means investors acquire raw land and increase their property’s value by preparing the raw land for a development project. Real estate developers pay big money for raw land that is ready to go for a development project as it saves them time and money. The third strategy is buying raw land to develop the property. This strategy is more common amongst experienced real estate developers. How can small investors invest in raw land? Investors who aren’t capable of allocating the capital to acquire a piece of land can still benefit from these opportunities with the purchase of Real Estate Investment Trust (REIT) shares. As a shareholder, you will benefit from the land’s appreciation and dividends. Real Estate Investment Trusts (REIT) Vanguard REIT ETF (VNQ) offers small investors the opportunity to be invested in a diversified portfolio of raw land developments in different property types. The VNQ ETF offers investors a dividend yield of 4.03%.

FIX AND FLIP

What does it mean to fix and flip real estate? The fix and flip strategy has grown exponentially since the 2008 global financial crisis. Investors who have built their real estate investing business plan around the fix and flip strategy purchase distressed properties at a discount, rehab/renovate them and sell them at a higher price. This strategy profits from the property’s appreciation post-renovation. How to calculate the fix and flip value (FAFV)? Fix and Flip Value = Purchase Price + Cost of Repairs Example: An investor from Bali acquires an investment property that he is looking to fix and flip in Detroit, Michigan for $75,000 but the surrounding properties are valued at an average of $130,000. The property is in poor condition and will require $15,000 in rehab. Fix and Flip Value = $90,000 Purchase Price = $75,000 Cost of Repairs = $15,000 How to calculate the after-repair value (ARV)? After-Repair Value = Fix and Flip Value + Profit Example: The investor from Bali finished rehabbing the property in Detroit, Michigan and is ready to sell. However, the investor discovered that the property only needed $10,000 in rehab rather than the expected $15,000. The market’s average property value is $130,000. After-Repair Value = $130,000 Fix and Flip Value = $85,000 Profit = $45,00 Profit = $45,00 Average Value = $130,000 Fix and Flip Value = $85,000 Fix and Flip Value = $85,000 Purchase Price = $75,000 Cost of Repairs = $10,000 Calculation notes: The after-repair value of a fix and flip project should be calculated pre-rehab and post-rehab. This investor from Bali generated two different after-repair values as the cost of repairs was $5,000 less than anticipated. In this example, the investor was greeted with a pleasant surprise post-rehab as his expenses were less than expected. However, buying distressed properties can also come with unexpected repairs which means a property may require additional rehab expenses than expected. This will increase the fix and flip value, decrease the profit, and decrease the after-repair value.

Single-Family Residential (SFR)

What is a single-family residential property? Single family residential properties are often referred to as an SFR property. Often the homes we live in. Why are single family residential investment properties so profitable? Single family residential portfolios are notably profitable with robust profit margins per unit. Why? Tenants pay for utilities and high demand in the space leads to property appreciation. High property appreciation is currently being noticed across the nation as property values are at all-time highs. The advantage for investors in the single-family residential space is that it’s more customary to pass utility expenses onto the tenant. This allows the landlord to increase his profit margins per unit and his portfolio’s return on investment. Investors have become more aware of the SFR space which has pushed home prices and homes sales to historic highs. Single-family residential properties are affordable and accessible The single-family residential property type is the most affordable real estate investment vehicle and significantly more accessible to the average investor compared to multifamily investment properties. Why? The average investor can easily find loans and funding for single-family residential acquisitions. Investors can find a surplus of opportunities for as low as $50,000 in numerous markets in the United States and start cash flowing as soon as the following month. What are the benefits of being an investor in the SFR space? Investors benefit from low barriers to entry: low down payments, access to numerous financing opportunities and affordable investment opportunities. Investors currently in the space benefit from a monthly cash flow, robust profit margins, low tenant turnover, low risk, property appreciation, opportunities for diversification in different markets and the feasibility of selling and managing. Investors also benefit from the opportunity to build an SFR rental property portfolio that they can place under one blanket loan. Portfolios allow investors to qualify for lines of credit and portfolio loans to acquire more properties or to refinance. Where can investors find these investment opportunities? Investors can find single family residential properties through numerous sources such as: Zillow Redfin MLS Opendoor Wholesalers

Refinancing Real Estate Loans

What does it mean to refinance a real estate loan? Refinancing a real estate loan means you are replacing the current loan with a new loan. Investors do this to attain better terms for their loan. When should you refinance your loan? Investors should only look to refinance their loan when the market is offering lower interest rates. Investors shouldn’t refinance their loan if the market is charging higher interest rates. Why do interest rates rise and fall? Interest rates increase when lenders believe market conditions are risky and they decrease when lenders believe market conditions are less risky. What are the advantages of refinancing? Investors can benefit tremendously from refinancing their loan as the market can offer lower interest rates that will allow the borrower to pay less in interest and more towards the principal. Refinancing could also allow a borrower to increase their month-to-month profitability and return on investments. Investors will also benefit from refinancing as it allows investors to cash out on the property’s equity. The investor can use the cash to rehab/renovate the property, acquire more properties or put it towards the new loan. The investor can increase his rental income with the cash if the investor uses the cash to add an additional unit to the property. Example An investor from Italy financed a real estate rental portfolio at an interest rate of 6.5% in 2017. Today the investor is able to lock in an interest rate of 4.1%. In this case, the investor should refinance the properties as the portfolio will benefit from the new and lower interest rate. The investor will walk away with an interest rate 2.4% lower than the previous interest rate. This will allow the portfolio’s return on investment and profitability to increase and the risk to decrease.

Mobile Park Loans

What are mobile park loans? The financing of mobile home parks using a commercial mortgage that is made up of numerous mobile home lots and recreational vehicle parks. Types of mobile park ownership One type of proprietorship includes the borrower owning the parcels on which the mobile homes stand. The land encompasses the following: pools, roads, utility frameworks, club houses, and different amenities. In this type of proprietorship, the owner owns the land with added amenities to attract tenants who will lease out one of the mobile parks lots. In this form of ownership, the owner doesn’t own any of the mobile homes. These investors are focused on creating a stream of income from tenants looking for a place to live in their mobile home or lease their mobile home. The other type of proprietorship includes the borrower owning the parcel, all the amenities, and the mobile homes. In this situation, the owner intends to cash flow from the actual tenants living in the mobile homes standing on the property. Why do lenders offer mobile park loans? Mobile parks are highly capable of producing a robust cash flow level and return on investment; therefore, trailer parks are alluring to numerous loan specialists. What are my financing options? Banks and credit associations offer low rates and appealing manufactured home park financing terms. Non-banks and private money lenders offer greater flexibility with their loan terms to serve borrowers who need a uniquely structured mortgage. Mobile home park investments have a numerous number of alluring characteristics, yet quite possibly the most engaging is the wide range of financing choices accessible to purchase a trailer park. Wrap Mortgages In a wrap mortgage the borrower accepts the main property lien without informing the bank. This allows the borrower to avoid any type of credit check or bank board. Master Leases Master leases are only available for mobile park investment deals. This financing option is tailored for a deal where the entire trailer park is leased out for a certain number of years. The borrower can then go and sub-lease the lots on the mobile park. Conduit financing / Commercial mortgage-backed securities (CMBS) These loans are originated at traditional institutional banks but are then sold on Main Street.

Modular Building Loans

What are modular buildings? Modular building is the combination of individual modules which are constructed in a controlled, off-site manufacturing complex and are combined into one at a building site. What does the process look like? The modular construction method is like building blocks as each building section is constructed to fit exactly with the other. This prioritizes efficiency, quality control, and durability. Each module is roughly 12-14 feet wide. How are they made? They are manufactured off-site as 60-90% of the work is done in a factory-controlled environment. Manufacturing these modules off-site allows for the opportunity to use lean manufacturing techniques to create prefabricated modules. Modular buildings are built to standards that are either equal to or greater than a module built on-site. This ensures greater levels of quality control. Advantages of using Modular Construction Wastage control Construction can be extended to all hours of the day Modules are complete in 8-14 weeks No weather delays Modules are more durable as they need to meet the regulations for assemblages and travel Disadvantages of using Modular Construction Large spaces could be required for transportation Room sizes could be limited due to transportation restrictions Understanding the loan process The borrower will obtain a prequalification estimate of how much capital will be needed for the modular construction project. The lender will then request the borrower’s financial information such as bank statements, personal financial statements, and real estate owned schedule. The borrower will then need to present the property that the modules will be on to the lender. The borrower will need to provide the lender with all the property information. If approved by the lender, you’ll need to provide the lender with a draw schedule and wait for approval. Once the draw schedule is approved, the lender will provide the borrower with the final loan documents. The borrower will then only be responsible for interest payments until the construction is complete. This is of huge benefit to the borrower. Then the lender will order third party reports to complete the due diligence process. If the module meets all the requirements, then the loan will be converted into a permanent mortgage and monthly mortgage payments will begin.