Real Estate

Profits Without Ownership: Sandwich Lease Options

November 3, 2014

Guest article by Augie Byllott:

You may be asking yourself, “What’s a sandwich lease option?” It’s an incredible financial instrument for creating profits without ownership. Let me explain.

It gets its name for the way everything is structured between the seller, you (the investor), and the tenant-buyer. You step in and negotiate a long-term option agreement with the seller, which gives you the right (but not the obligation) to close on the property within 1-5 years. Often, you also negotiate in the ability to assign the contract, and to let someone else other than you live in the property.

You then go find a potential tenant-buyer, perhaps someone who is a good person that has had a few financial knocks. Individuals who don’t qualify for traditional financing are prime clients for this sort of transaction. Often they will make ideal homeowners, but simply need a few years of documented on-time payments to help repair a spotty credit record. You then place them in the property with your own option agreement. If you structure it correctly, you can earn a spread on both the sales price and monthly payment amounts that you make to the original seller.

This is, of course, is a highly simplified explanation of sandwich lease options. But my intent is to show you how it is very possible for you to start earning money through sandwich options.

By targeting areas with “pretty” houses in good neighborhoods, you will vastly increase the potential number of buyers you can attract. Since you don’t actually own the home, finding properties that are already in good condition is paramount. To make the most of your investment dollar, you will want to spend most of your money on marketing rather than repairs and cleanup. Additionally, properties in nicer neighborhoods minimize your risk exposure, as you won’t have to worry as much about vandalism or depreciating home values.

Sandwich lease options are an ideal strategy for the new investor because they carry limited
risk and great upside potential. Further, they are an ideal match to the current market
conditions. Motivated sellers and potential buyers with damaged credit are much easier to find. This technique of options has the potential to earn you a nice sum of money, but it does require work.

As with any investing technique, you need to find the right strategy that works best for you, learn it inside and out, and most importantly, TAKE ACTION!

Augie Byllott helps people buy and sell homes and investment properties in all price ranges without using lots of cash or credit. He is a full time real estate investor, speaker and coach with Personal Action Coaching & Training. He is also a founding member of Common Wealth Trust Services, LLC a land trust service provider.

Self-Directing How To: Leveraging IRAs

September 30, 2014

Article by NuView President, Glen Mather:

We’re often asked during our seminars and continuing education classes on self-directed IRAs whether investors can use their IRA to make a down-payment on investment property, and the short answer is yes. But there are two rules to be aware of when leveraging IRAs:

First, the IRA must purchase the entire property, not just provide the down-payment. The property is titled in the name of the IRA (NuViewIRA, FBO (client’s name) IRA). The mortgage then would also be issued in the name of the IRA.

Second, the loan must be non-recourse, which means that in the case of non-payment the lender is limited to only taking the asset secured in the loan that is owned by the IRA. The IRS actually prohibits a disqualified party of your IRA, which includes yourself, to provide credit to your IRA (IRS Section 4975).

There are considerable benefits to leveraging IRAs. It certainly could provide a way for the IRA holder to purchase higher-valued property than the balance their IRA account may allow. While partnering can provide additional funds, leveraging IRAs allows you to retain all of the net gains rather than just a partnered portion. It may also permit several properties to be purchased instead of just one, increasing diversification inside the IRA.

So, is it even possible to get a non-recourse loan? The best source may actually be the seller of the property, although that would normally require that the property has sufficient equity in order for the seller to offer such terms to your IRA. There also are several banks that have created a special loan program for IRAs that clients often find attractive.

Lenders to IRAs normally require not only an appraisal, but also an assessment as to the likely cash flow of the property, including rental history and projections. After all, the lender to an IRA cannot assume that the IRA holder can or will make future contributions to his account. At NuView IRA, we can set up automated payments to the lender, ensuring that available funds are transferred according to the agreed-to terms of the loan.

Before you get started with leveraging IRAs, be sure to seek guidance about potential taxes your IRA could incur, Unrelated Debt Financed Income, which takes effect when an IRA makes a profit of more than $1000 per year from the leveraged portion of the rental property. Also, state laws may differ on the exact protection for the borrower of the loan.

Our transaction experts at NuView to answer any questions on the process of leveraging IRAs, and, as always, tax professionals and advisors can help with specific investment details you wish to make within your IRA.

A Walk in the Woods – Investing in Timberland

September 25, 2014

Guest article by Tom Brickman:

With the stock market at all-time highs, many have forgotten that six years ago everyone’s stock portfolio lost a gut-wrenching 40 percent in eight months, and with money market rates around 0.4 percent, cash is not keeping pace with inflation. High volatility with a low yield is an unpleasant combination for anyone, and while alternatives seem scarce, investing in timberland tends to satisfy many security needs.

People are beginning to turn to timberland investments, in fact in America there are 23 million private timberland owners. Prices for stocks and bonds can go up and down dramatically over short periods of time, sometimes as short as a single day, but timberland values tend not to fluctuate. Over 50 percent of the return from timberland comes from biological growth – trees get bigger at a steady rate independent of market factors. Diversifying a portfolio by investing in timberland can reduce value swings.

What are the different types of timberland?

In the south there are a few different types of timberland: land that will grow pine trees (dryer ground), land that will only grow hardwood trees (wetter ground), and farm land.

The kind of land you buy depends on the mix of motivations you have for buying it. Those motivated purely by financial benefit will seek investment-grade pine properties. In the south, this is land that has been planted with genetically improved loblolly pine. Those more interested in hunting, which means less return, will seek properties that have more hardwood land, perhaps with a lake or river frontage too. Investors motivated by conservation may seek longleaf pine or hardwood land along major rivers. Investors motivated by a farming lifestyle or by crop and livestock markets will seek land suitable for cultivation or pasture. Returns from farmland tend to be more volatile than returns from timberland due to government involvement in the markets. Many investors have a mix of motivations and accordingly seek a mix of land types.

How do you go about investing in timberland?

In general, there are two ways to go about investing in timberland. One way is direct private investment where the investor owns the asset. The other is indirect investment where you purchase stock in a public company that owns the asset. The way you invest depends on your motivations.

Direct Investment

Direct investment gives the investor more control over the decision of when to sell timber. This can have a very beneficial impact on returns. You can purchase land to meet a variety of motivations. Disadvantages include the task of finding assets to buy, discerning fair value, finding asset managers, and finding buyers when you are ready to sell (lack of liquidity).

A key issue with direct investment (mostly affecting smaller non-institutional investors) is that markets for privately owned rural land are notoriously difficult. For example, finding assets to buy is difficult because there is no central clearing house of properties available for purchase and the for-sale-by-owner market is huge (our experience is up to 50 percent of private land sellers do not use an agent to find a buyer). Also, discerning fair pricing requires expertise in appraising land and standing timber. Consequently, most investors engage professionals to assist with finding, buying, managing and selling land.

Indirect Investment

Publicly traded forest products companies seek to maximize financial return. Buyers with this motivation find a good fit here. Advantages to indirect investment are that it simplifies the task of finding, buying, managing and selling timberland assets. The price is published every day so there is low price uncertainty. And, the companies have professionals to manage the assets (selling timber, planting trees, fixing roads, paying property taxes, etc.). A disadvantage to investing in a public company is that quarterly demand for dividends, which affects share price, forces these companies to sell timber even in poor markets.

Institutional investors (pension funds, endowments, sovereign wealth, etc.) and high net worth individuals often address these issues by investing through Timberland Investment Management Organizations (TIMO’s). These are private companies that specialize in finding, buying, selling and managing timberland assets. Although most have financial return as their mission, some specialize in conservation timberland. The best TIMO’s offer geographic diversity (US & global) and have decades of experience identifying deal flow, managing the purchase process, managing the asset on a day-to-day basis, and finding buyers when it’s time to sell.

People who don’t meet the minimum investment threshold for a TIMO (most investors) can get professional assistance from an enormous network of rural land and forestry professionals. Many of these are small, local companies or individuals with deep knowledge of the asset and long experience with local land and standing timber markets.

Is investing in timberland right for you?

This is a question only you can answer. The purpose of this article is to give you a starting spot for further investigation. Here are some thoughts to consider:

Get professional assistance for direct investment. A key issue is that the hardest mistake to overcome is paying too much. The saying is you make your money the day you buy it.
A diverse portfolio is your best protection against loss of value. So only add land if you are looking for diversity.
Direct investment in land requires patient money. Getting in and out of the asset takes time. So only use funds you can afford to invest for 10 years or more. Using your self-directed IRA to buy land is allowed and is the perfect kind of money to use.
Land does not service debt well. Be careful that your reach does not exceed your grasp.

Learn More:

Data on ownership & financial performance of land:
1. The National Council of Real Estate Investment Fiduciaries (NCREIF):
  - Timberland returns
  - Farmland returns
2. The Forest Research Group
3. U. S. Forest Service Resource Bulletin WO-1
4. Family Forest Owners: An In-depth Profile. By The Sustaining Family Forest Initiative
Direct investment & management professional
1. All individuals – farm and timber land:
  - Association of Consulting Foresters
  - Realtors Land Institute
2. High Net Worth Individuals and Institutions:
Timberland investment & management professionals
Farmland investment & management professionals
1. Hancock Agricultural Investment Group
2. American Society of Farm Managers and Rural Appraisers
3. UBS – Agrivest
4. TIAA-CREF Ag Investments

Located in Birmingham, Alabama, Tom Brickman has 37 years of experience in timberland investment and management businesses across the United States and Central America. He is a Registered Forester, Certified General Appraiser and Real Estate Broker, and helps people buy, sell, and care for rural land. Tom can be contacted via email at tbrick@CyprusPartners.com or by phone at 205-936-2160, and for more information on buying rural land in Alabama, you can visit Tom’s website at www.CyprusPartners.com.

10 Tips for Successful Real Estate Investing

May 30, 2014

Guest article by Marco Santarelli:

I came up with the following rules of successful real estate investing over my many years of successes and failures. These are the same rules I follow today and share with our clients at Norada Real Estate Investments.

1. Educate Yourself

Knowledge is the new currency. Without it you are doomed to follow other people’s advice without knowing if it’s good or bad. Knowledge will also help take you from being a “good” investor to becoming a great investor, and that knowledge will help provide a passive stream of income for you or your family.

2. Set Investment Goals

A goal is different from a wish; you may wish to be rich, but that doesn’t mean you’ve ever taken steps to make your wish come true.

Setting clear and specific investment goals becomes your road map and action plan to becoming financially independent. You are statistically far more likely to achieve financial independence by writing down specific and detailed goals than not doing anything at all.

Your goals can include the number of properties you need to acquire each year, the annual cash-flow they generate, the type of property, and the location of each. You may also want to set parameters on the rates of return required.

3. Never Speculate

Always invest with a long-term perspective in mind. Never speculate on quick short-term gains in appreciation, even in a heated market experiencing double-digit gains. You never know when a market will peak and it’s usually 6 to 9 months after the fact when you find out. Don’t chase after appreciation. Only invest in prudent value plays where the numbers make sense from the beginning.

4. Invest for Cash-Flow

With few rare exceptions, always buy investment property with a positive cash-flow. The higher, the better. Your cash-on-cash return is directly related to the before-tax cash-flow from your property.

Cash-flow is the “glue” that keeps your investment together. Your equity will grow over time (through appreciation and loan amortization), while the cash-flow covers the operating expenses and debt service on your property.

5. Be Market Agnostic

The United States is a very large country made up of hundreds of local real estate markets. Each market moves up and down independently of one another due to many local factors. As such, you should recognize that there are times when it makes sense to invest in a particular market, and times when it does not. Only invest in markets when it makes sense to do so, not because you live there or you bought property there before. There’s an element of timing and you don’t want to buck the trend.

6. Take a Top-Down Approach

Always start by selecting the best markets that align with your investment goals. Most investors start by analyzing properties with little to no regard of its location. This can be a big mistake if you don’t consider the investment in light of the market and neighborhood it’s in.

The best approach is to first choose your city or town based on the health of its housing market and local economy (unemployment, job growth, population growth, etc.). From there you would narrow things down to the best neighborhoods (amenities, schools, crime, renter demand, etc.). Finally, you would look for the best deals within those neighborhoods.

7. Diversify Across Markets

Focus on one market at a time, accumulating from 3 to 5 income properties per market. Once you’ve added those 3 to 5 properties to your portfolio, you would diversify into another prudent market that is geographically different than the previous one. Typically that means focusing on another state.

One of the underlying reasons for diversification within the same asset class (real estate), is to have your assets spread across different economic centers. Every real estate market is “local” and each housing market moves independently from one another. Diversifying across multiple states helps reduce your “risk” should one market decline for any reason (increased unemployment, increased taxes, etc.).

8. Use Professional Property Management

Never manage your own properties unless you run your own management company. Property management is a thankless job that requires a solid understanding of tenant-landlord laws, good marketing skills, and strong people skills to deal with tenant complaints and excuses. Your time is valuable and should be spent on your family, your career, and looking for more property.

9. Maintain Control

Be a direct investor in real estate. Never own real estate through funds, partnerships, or other paper-based investments where you own shares or other securities of an entity you don’t control. You always want to be in control of your real estate investments. Don’t leave it up to corporations or fund managers.

10. Leverage Your Investment Capital

Real estate is the only investment where you can borrow other people’s money (OPM) to purchase and control income-producing property. This allows you to leverage your investment capital into more property than purchasing using “all cash”. Leverage magnifies your overall rate-of-return and accelerates your wealth creation.

As long as you have positive cash-flow and your tenants are paying off your mortgage for you, it would be foolish not to borrow as much as possible to buy more income property.

Marco Santarelli is an investor, author, and the founder of Norada Real Estate Investments — a provider of turnkey investment properties in growth markets around the United States.

Critical Questions to Ask a Property Management Company

April 2, 2014

Guest article by Eddie Miller:

You probably already understand the amazing benefits of a self-directed IRA, you may even own rental property or are considering the possibility, yet you might not be sold on utilizing a property management company.

Why should you? Well, let’s first look at this from a technical and then a practical perspective.

Technically, the IRS stipulates “when purchasing rental property in a self-directed IRA you may not personally perform any repairs or maintenance of property held within your IRA. Doing so would be considered ‘sweat equity’ and a contribution to your account. Sweat equity cannot be properly measured in value, and the IRS only permits contributions to an IRA to be made in cash. Repairs and maintenance must be paid for at current market rates and must be performed by a third party.”

“Property management can be handled by the IRA owner. However, you must not perform sweat equity or pay for expenses out of your own pocket. You can decide who performs maintenance duties on your own. Or you can hire a third party property manager to perform these duties for you. Again, all income and expenses flow directly in and out of the IRA funds, not your own.”

Now, let’s look at a practical perspective…

When I started investing in real estate my partner and I purchased, rehabbed and sold property, then we also began holding and managing some of our own properties as rentals. As our business grew, we became advisory board members of our local Real Estate Investment Association and, as a result, we met other investors who were challenged with managing their properties.

We found that managing rentals can be a hassle! Yet, because it was a core aspect of our business we figured out how to overcome these challenges to create profitable investments.

Throughout the process we actually uncovered six key points to creating profitability:

Purchase the property that will provide the desired annual rate of return with consideration of the cost of the purchase, repairs, taxes, insurance, vacancy, management, etc.
Hire an efficient, effective and reputable property management company.
Have a sound lease agreement with clear rules and regulations.
Market for qualified tenants.
Conduct a thorough background screening.
Have effective, ongoing communication with tenants.

Quite simply attempting to manage your own property can be a daunting task, and a mistake at any of these points can be costly, which can dramatically lower your desired rate of return.

The core business of a property manager is managing property, which of course is logical, but easily overlooked. By selecting an efficient, effective and reputable management company, you will decrease stress and increase profits.

Below are the top 15 questions to ask property management companies during an interview.

How long have you been managing properties?
How many properties do you manage? Some companies have on-site mangers that manage a lot of doors, but few properties. These companies don’t typically make the decisions that can impact your profitability. Make sure the firm manages enough properties to know what they are doing, but not so many that you become just a number.
Do you have a company website, and can I get the address? Websites are a minimum for management companies. The site should be informative, professional, and showcase properties.
How many people do you have on your team? You don’t want a one-person shop that could be faced with trade-offs between accounting functions and showing functions. In addition, small offices can often lack the resources to immediately address any situation, causing a small problem to become big.
Can I get references from at least 3 owners? Any reputable company that has been in business for a few years should have success stories.
Where’s your office, and what geographic areas do you operate in? Office location is important when considering how frequently your property will be shown or what the travel charge will be for maintenance calls.
How will you market my property? A full service marketing program will use professional signage, online advertising, MLS, etc. Ask how many websites they utilize – the more the better.
What is your tenant screening process? This is a critical question to ask, and their process should be comprehensive. Inquire about the application process. All tenants over 18 years of age should be screened for verification of income, employment, credit, criminal history, eviction history, terrorism list, and sexual predator history. References should also be called.
Can I review your lease agreement as well as your rules and regulations, and have these documents been reviewed by your attorney? A bullet proof lease is your best defense against a tenant that is trying to take advantage of a situation. Not all lease agreements are created equally.
How do you handle maintenance requests? Someone should be available 24/7 to handle maintenance emergencies. After an issue has been reported to the management company, the company should dispatch a qualified technician to first determine whether the repair is general wear and tear or tenant neglect. Tenant negligence should be paid for by the tenant after the repair is complete. If the repair is no fault of the tenant, the owner will be responsible for the cost of the repair.
What training and licensing do you have? Both the property manager and management company must be licensed/registered with the city and state (i.e. Real Estate Broker/Associate). In addition, inquire about other professional property management training and affiliations.
What happens if a tenant does not pay rent? The delinquency process and eviction process should be explained; the company should have a clear, aggressive collection process for tenants who are not paying on time. Progressive companies will track their internal tenant delinquency rate monthly and should be able to share that information with prospective clients. Inquire about the eviction process and costs (this is why a strong screening process is critical to assist in preventing the need for evictions).
What insurance do you carry and what should I carry? Inadequate insurance can leave the owner high and dry if a catastrophe happens. Most management companies are required to carry Errors and Omissions insurance, Workmen’s Compensation insurance (if there is an in-house maintenance team) as well as general liability. Minimum coverage should be $1 M. (For landlords Hazard, Liability and if necessary Flood insurance is suggested for each property.)
How often will you inspect my property? Some type of walk through or inspection should be performed annually. Ideally, there should be a move-in inspection, a 6-month inspection, and an 11-month inspection prior to the tenant renewal or move-out. If a tenant is moving out, then an additional inspection is conducted after the tenant has moved out before the security deposit is returned.
How often does the company send out financial statements and reports? This is the critical factor of your relationship with the management company. It is important to receive and review monthly financial statements and maintenance repair updates.

By utilizing these targeted questions to interview the management company you are considering working with, you will ensure you have selected the right company to represent you, which should help to limit the risk of a low return on your investment.

Eddie Miller is the CEO of Pristine Property Management and Miami 4 Investors, co-director of the Miami Landlord Association, and two-time best-selling author of “Living Inside-Out: The Go-To Guide for the Overwhelmed, Overworked and Overcommitted” and “The New Masters of Real Estate: Getting Deals Done in the New Economy.”

Pitbull Conference to Spur IRA Private Money Lending

February 26, 2014

Investing in real estate through a self-directed IRA might not be for everyone. For many, being a landlord is daunting – hassling with tenants, upkeep on maintenance, and all the other elements of owning rental property. Although IRA holders have the ability to hire third-party property managers, some do not prefer all the moving parts associated with owning investment real estate.

However, there are other investments that take advantage of the reemerging real estate market that don’t require the day-to-day involvement of property management. Last week in Ft. Lauderdale, we had the opportunity to address a packed room of eighty private money lenders at the Pitbull Conference, and from all reports, that business is booming.

The need for private money is significant, so much so that real estate-backed lending is one of the fastest growing self-directed choices in IRAs. The lenders, representing funds from $1-60 million, were eager to learn how IRAs could be put to use for financing buying, fixing up and flipping, and renting investment property. It just so happens that the time for their business couldn’t be better.

According to BankRate, current 5-year CD rates garner approximately 2%. At that rate, it would take about 36 years for an investment to double in value. It’s no wonder that people are looking for alternative ways to make their retirement funds work at a more efficient rate. Is the stock market better? It certainly has done well over the past two years, but how much higher can it go? And what type of gains can you make while you still hold the investment, or must you sell out to earn your gains?

When lending private money out of your IRA, the rate you charge is based on the outcome of your negotiation with the borrower. It can be a conventional 30-year mortgage, or a six-month loan to a rehabber. At NuView, IRA lending has had anywhere from 5 – 18% interest, depending on the client’s loan terms and collateral.

To seriously misquote Shakespeare’s Hamlet, “Either borrower or lender be.” An IRA can do both. Look through our site or give us a call to learn more. We will help you unlock your IRA and let you make all the decisions.

Great Returns on Secured Real Estate Loan Transactions

February 20, 2014

Guest article by Mark Fixler:

You have probably asked yourself, how can I take advantage of the real estate market? Before I answer you, let me share a little history: Lenders owned nearly 660,000 foreclosed homes in April 2008, up from 493,000 in January 2008 and 231,000 in January 2007, according to First American CoreLogic, a real estate research firm based in Santa Ana, California. This surge in defaults has increased the inventory of bank-owned homes, known in the business as REO, or real estate-owned, properties. For investors in distressed properties, never in American history has there been such an attractive buyer’s market.

And now, with a self-directed IRA, you can seize the opportunity to generate an 11% annual return secured by a private real estate transaction at a 60% LTV, or loan to value. Whether you participate in a real estate loan transaction with Jag Enterprises or another company, it affords you the interesting option to receive a monthly income stream of higher interest than what is currently available in CD’s, etc. This type of transaction allows your self-directed IRA to receive a great return without the need for you to do the work in the real estate market. These types of transactions are truly passive in nature, suggesting a rare win-win scenario.

Ask yourselves: Do I want my IRA to just invest in the stock or commodities markets with potential volatility, or is there room in my portfolio to self-direct my IRA for a great income stream secured by a private real estate transaction?

Mark Fixler is the owner of Jag Enterprises LLC. Through his company, Mark has participated in more than 400 real estate transactions since 2008. He has been in business for 15 years, living and working in the Cleveland area. Mark can be reached at 440- 951-2170.

Tips for Title Insurance

February 3, 2014

Guest article by Deborah Farnell:

When evaluating an investment in real property, whether for purchase or to hold a note on, one of the most important aspects in your risk assessment is making sure the property has a clear title. Typically, there are no IRS or custodial/administrator requirements to obtain title insurance on IRA-owned real estate. As the primary fiduciary of your self-directed IRA, the decision to insure the title to the investment property is entirely yours.

If you chose to simply have a title search of the property performed without actually purchasing the title insurance policy, you may gather useful information, but there is no coverage to protect you as the homeowner or lender. Quite often investors will rely on a pencil search or ownership and encumbrance report to inform them of any issues with the property and then forego the actual purchase of a title insurance policy to save money. These title search products provide no protection and are often performed as preliminary searches without the formality of a title search that is required to issue a policy of title insurance. In the current market of abundant foreclosures, short sales, bankruptcies, and fraudulent activity it is more important than ever to protect your investment. Title insurance is a one-time premium that protects your investment for the entire time you own the property.

Here are some helpful hints to consider when obtaining title insurance for your transaction:

Work with a title company that is familiar with complex transactions and is considered investor friendly. Quite often when you are shopping for title insurance and do not have an established relationship with a title insurance professional, you will get objections and claims that the transaction you are proposing is illegal when all that is needed is a better understanding of the structure of the deal.
Be proactive in getting the information on the transaction to your IRA administrator and title company as soon as possible. My title company does not charge a cancellation fee for transactions that do not close, and we ask our clients to get us the contract as soon as it is accepted so that we can begin our title work immediately and get any objections or problems solved before deadlines come due. Since there are often a number of parties involved in these transactions that need to review, question, and revise documents as the deal concludes the more proactive you can be to allow the parties time to perform their necessary due diligence, the smoother the transaction will be.
Review the title commitment carefully. Make sure you understand the requirements and exceptions listed on the commitment and that all items are satisfied as needed. Quite often when purchasing from national banks or servicing agents, a national title company may be used that is not familiar with state or local rules and customs. Perfect examples of this in Florida are the issues with unrecorded utility liens and code violations, which vary by city or county.
If you are purchasing property to be held in your IRA, you can typically get the seller to pay for the owner’s title insurance policy. If you are lending money and holding the note, you can require your borrower to purchase a lender’s or mortgage title insurance policy that covers your interest in the property.

Deborah has been in the title industry for more than 18 years and is the owner of Southeast Professional Title, LLC, in Maitland Florida. You can reach her at Deb@seprotitle.com or 407-539-0781.

Private Money Loans from a Self-Directed IRA – High Returns at Low Risk

January 23, 2014

Guest article by Fern C. Burr:

For more than 20 years, I have worked as a Realtor, a mortgage lender and broker, and a real estate investor. My reason for success is this – I always try to maximize my profits in a way that is as safe, secure, and as careful as possible. Now, however, I spend a lot of my time teaching other people how to be successful real estate investors.

While I still tinker in the stock market, I prefer investing in real estate. I was introduced to the concept of a self-directed IRA 10 years ago, the same time that NuView opened their office in Lake Mary, and I have been a client ever since. I am always happy to spread the word about self-direction and what a useful tool it has been for me and for many of my clients.

People think of a mortgage broker as someone who originates institutional mortgages for primary residences and for buy-and-hold rental properties. These types of mortgages are referred to as Conventional and FHA loans. While we do originate those products, we are also known in the real estate investor community as THE place to go for private money. These private funds often come from people who use their self-directed IRAs to invest in mortgages secured by real estate, in essence these people lend money from their IRA to the borrower.

Why do people need private money? Sometimes the property needs work or it won’t qualify for Conventional financing; other times, private money satisfies “the need for speed.” Recently, I got a call from a buyer on a Monday telling me his offer on a property was accepted. It was a great deal, but it had to close on Friday. Because the buyer got us everything we needed quickly, and because of the great relationship we have with the owner of the IRA and the excellent work relationship we have with the staff at NuView, we were able to close that loan in less than one week.

We treat our loan applications for private mortgages the same way we treat a loan application for an institutional mortgage: We get information on income, liquid assets, and a full tri-merge credit report. We also always get an appraisal on the property. The name of the game is Due Diligence. We want to love the borrower and love the property. Every borrower has to have some “skin in the game.” We gather all this information, then the lender just has to make a “common sense” decision.

Fern is a State of Florida Licensed Loan Originator/Mortgage Broker and Owner of Mortgage Professionals of Central Florida, and she is also a State of Florida Licensed Real Estate Broker. You can reach her at Fern@cfl.rr.com or 407-330-2855.

Crowdfunding vs. REITs for Real Estate Investment

Guest article by Jilliene Helman:

The recent trend toward online “crowdfunding” has begun to make some private real estate investment opportunities more accessible to investors at relatively small minimum investment amounts. Diversification remains a key concern however, and the real estate investment trusts (REITs) that would seem to solve that problem for “average” investors continue to be given short shrift by the larger financial institutions. What gives?

REITs operate pools of many different properties and their shares offer at least a degree of liquidity. Yet recent surveys estimate that institutional investors continue to place between 80% to 95% of their real estate allocations into private real estate investments, rather than publicly traded REITs. Crowdfunding sites tend to similarly focus on private opportunities.

Many market participants insist that there are simply some things that private real estate investments can do better than public REITs. Some of these purported advantages are:

Public REITs are driven partly by underlying market sentiment, rather than real values
REITs are limited by asset class or geography; but cycles don’t always track either of those groups, so private opportunistic buying makes more sense
Private equity is better managed and investor-aligned because sponsors are highly invested, and so focused on achieving high returns
Private equity is disciplined by its focus on achieving a successful exit
The liquidity of public REITs is illusory (only the biggest REITs are liquid)
Private equity can be nimble, with more ability to buy at the bottom of the market and sell at the top
Private transactions use a bit more leverage, so should be able to outperform public funds

It seems that part of the issue with REITs is essentially their nature. A creation of the Internal Revenue Code, a REIT is a real estate company or trust that has elected to qualify under certain tax provisions to become a pass-through entity that distributes to its shareholders substantially all of its taxable earnings in addition to any capital gains generated from the sale or disposition of its properties. To qualify for this tax treatment, a REIT must follow several legal requirements, probably the most significant of which is that distributions to shareholders must equal or exceed 90% of the REIT’s taxable income.

This requirement would seem to be beneficial to investors, but it can prove to be a handicap. Because they must distribute nearly all of their income, both mortgage and property REITs must regularly sell equity in order to grow, i.e. acquire more assets. Institutional investors holding REIT shares are continually being approached to increase their existing positions, a circumstance that can worsen liquidity issues at smaller REITs whose shares are already largely held by just a few institutional holders.

Refinancing risk includes not only the risk associated with the cost of debt, but also that relating to the availability of capital. In 2008, the subprime mortgage crisis resulted in a very severe credit crunch in which many REITs were unable to refinance corporate or property-level debt when it came due, regardless of operating performance. The focus of discussion became “survivability,” and there was a massive sell-off in REIT shares. One very high-profile REIT, General Growth Properties, which had been one of the largest REITs in existence, sought bankruptcy protection.

REITs also face other issues that tend to reduce their attractiveness to some investors. They tend to focus only on the highest “Class A” assets, and are often unable to take advantage of “core-plus” or “value-added” properties needing some remodeling or more extensive renovation to get their cash flows up to desired levels, but which also offer greater potential returns. Another drawback is that the value of REIT shares can fluctuate constantly, just like any other stock. If one purpose of real estate is to provide true asset class diversification, some people argue that REITs fail that test simply by being publicly traded. Private real estate investments are somewhat insulated from – or at least not closely correlated with – the equity markets.

The debate over whether private real estate investments or publicly-traded REITs are better overall investments will surely rage on for some time. REITs suffered greatly during the recent recession but have come back strongly recently, with many institutional investors taking a greater stake in them than in previous years. Nevertheless, most large institutions – and crowdfunding sites – remain focused on private investments for reasons of reduced volatility, exposure to a broader range of opportunities, and true asset class diversification.

Jilliene is the CEO and co-founder of RealtyMogul.com. Realty Mogul is crowdfunding for real estate – a marketplace for accredited investors to pool money online and buy shares of pre-vetted real estate investments.