Passive Real Estate Investments
|Many investors are turned off by real estate because they do not have the time or inclination to become landlords and property managers. Both of which are in fact, a career in themselves. If the investor is a rehabber or wholesaler, real estate becomes more of a business rather than an investment. Many successful real estate "investors" are actually real estate "operators" in the real estate business. Fortunately, there are other ways for passive investors to enjoy many of the secure and inflation proof benefits of real estate investing without the hassle. |
Limited partnerships are a way to invest in real estate, without incurring a liability beyond the amount of your investment. However, an investor is still able to enjoy the benefits of appreciation and tax deductions for the total value of the property. LPs also can be used by landlords and developers to buy, build or rehabilitate rental housing projects using other peoples money. If you are seeking passive real estate investments, or have the ability to do a project and are willing to do the work, but need to raise capital, the concept may be right for you. The primary purpose of LPs is to limit investor liability to the amount of their investment. But LPs allow the "pass through" of all the property's tax benefits to the investors, and also unlike corporations, their profits are only taxed once. They allow centralization of management, through the general partner. They allow sponsors/developers to maintain control of their projects while raising new equity.
Who makes decisions in a Limited Partnership? The terms of the partnership agreement, governing the on-going relationship, are set jointly by the general and limited partner(s). Once the partnership is established, the general partner makes all day to day operating decisions. Limited partner(s) may only take drastic action if the general partner defaults on the terms of the partnership agreement or is grossly negligent, events that can lead to removal of the general partner.
Who owns what? Ownership interests of the Limited Partnership are split between the limited and general partners according to a negotiated formula. Limited partners can buy up to 99 percent ownership of profits/losses and cash flow (excluding fees to the general partner). The general partner retains the 1 percent or more remaining ownership of profits, losses and cash flow (plus any agreed upon fees).The limited and general partners split any profits from sale or refinance of partnership assets. The split generally provides an incentive to the general partners who may receive up to 50 percent of profits.
Partner's Rights: The specific rights of each party are negotiated in the Partnership Agreement. In general, the general partner has the right to make all the day-to-day and development decisions, to determine how much cash to distribute to the limited partner(s) versus how much to hold in reserve, and to assess possible sales
proposals. The limited partner's rights are to be informed of operating conditions: to approve a sale or refinancing; and to remove the general partner for gross negligence or breach of contract.
The General Partner's Obligations: The general partner must complete the project as proposed, must manage the partnership and the business as agreed upon in the partnership agreement. and must, generally, guarantee any additional funding needed to complete the project (repayable with interest) In addition, the general partner oversees construction, leasing. property management. and maintains the books and records of the partnership. It must submit periodic reports to the limited partners(s) on the project's financial condition and status, including analyses oŁ the property's sale potential. The general partner may not withdraw without the approval of the limited partner.
TRIPLE NET LEASED COMMERCIAL PROPERTY
Exchange Into Management-Free And Headache-Free Ownership: Are your real estate investments giving you a management headache? Are you tired of tenant complaints and property destruction? As a real estate investor, are your goals security, predictable partially tax-sheltered income with an inflation hedge, if so, then commercial triple-net lease property is an excellent vehicle to create wealth through real estate.
This real estate investment product requires little or no management, has little risk, and produces monthly income from lease payments. The lease agreement can also provide the opportunity for rent increases as a hedge against inflation.
What Is A Triple-Net Lease Property? Over the past several years, owning commercial property under a triple-net lease arrangement has emerged as a highly popular and effective strategy in real estate investing. A triple-net lease property is an investment where one owns real estate (land and building). Leases to a tenant for a 15-25 year term, who agrees to occupy the property, operate their business on the premises, pay rent and all the property operating expenses (taxes, maintenance, and insurance) with the opportunity for rent to increase over time as a hedge against inflation.
How Does This Differ From Owning Other Investment Property? Unlike owning duplexes, apartments, land, or an office building, owning a commercial property under a triple-net lease agreement to a business tenant is a passive investment (management and headache-free). In most real estate investments such as mini-storage facilities, apartments, and office buildings you as the property owner must perform property management duties, and pay operating expenses. You rent the property, collect the rents, refurbish the premises, pay the property taxes, insurance premiums, maintenance, accounting, legal, and other operating expenses. Whereas, under a triple-net lease arrangement the tenant agrees to perform all these functions for you as the owner of the property in return for a long-term lease agreement.
With a passive real estate investment, such as owning commercial property under a triple-net lease arrangement, the tenant operates its business in the location. As the owner of the property, you do not have to contend with monthly renters and operating expenses. This type of real estate investment is passive, similar to owning stock in Sears, you receive the dividends or, in this case, lease payments. Further, these types of commercial tenants are positive business renters. Unlike apartment renters who tend to abuse the property and then move out leaving the owner to refurbish and find new renters, commercial tenants have a vested business interest in seeing that a location is well maintained and attractive to customers. As a result, there is an economic incentive to enhance the owner's property over time.
Some Examples Of Commercial Triple-Net Leased Property
If you drive through the business district of any city or town you will see commercial triple-net lease properties: for example all the major restaurants such as; Burger King, Taco Bell, Kentucky Fried Chicken, Pizza Hut, the automotive after-market such as; Goodyear Tire, Pep Boys, Jiffy Lube, retail outlets such as; Toys R Us, K-Mart, and Home Depot to name a few. Most of the real property occupied by these companies are owned by real estate investors and leased to these companies under a triple-net lease arrangement.
What Are Some Advantages Of A Triple-Net Leased Property
There are several advantages. First, the monthly lease agreement provides a very predictable, long term income stream to the property owner. Second, since there are no property expenses (taxes, maintenance, or insurance) to be deducted, the income stream is not impacted by future increases in property operating expenses. The property owner (investor) can enjoy a rental income stream, without property management or property expenses.
Subject to the credit worthiness of the tenant and the terms and conditions of the lease agreement, the investor can enjoy a high degree of security and should expect to have additional rental income over time as the inflation hedge feature of the lease agreement comes into play.
Can a Triple-Net Leased Property Be Used To Complete A Real Estate Exchange? A triple-net leased property can be an excellent replacement property in completing a real estate exchange transaction. Many real estate investors dispose of their management intensive properties such as apartment buildings, duplexes, and office buildings, hoping to find management-free properties producing long term, predictable income. If you are thinking of disposing of your business or investment-held property, would like to "Pay No Capital Gains Tax" and reinvest into a management and headache free property, the purchase of a triple-net leased property through a real estate exchange, can be just what the doctor ordered.
PRIVATE MORTGAGE NOTES AND TRUST DEEDS
In this environment of low interest rates and uncertain returns, you can still find opportunities to earn high yields and obtain large gains. The answer lies in understanding and investing in alternative investments. These are investments that are not offered by the wire houses or broker-dealers or mutual funds. In fact, these investments will seldom appear on the radar screen of your financial planner or investment advisor. The alternative investments that I specialize in are private mortgage notes. Carefully chosen, they can return 14-18% annually to the passive investor with relatively little risk, making them ideal for any investor needing more income or a safe haven from a possibly overvalued stock market.
If you're retired or saving for retirement, it's likely that your stock-laden portfolio looks a little less invulnerable than it did a couple of years ago. It's possible, too, with interest rates on bonds, money market funds and bank CDs at all time lows, that you're counting on a fixed income that doesn't fully meet your needs.
"If only I could increase my monthly income without depleting my nest egg," you think, "and without losing sleep over the stock market." Well, there is a way to make this happen: by investing in trust deeds, or private mortgages notes, or investment partnerships that specialize in investing in these debt instruments.
Private Mortgage Notes
Simply put, private mortgage notes, commonly referred to as trust deeds in the western states, are short-term loans made to real estate investors secured by the value of the real property as collateral for the loan. Investors who invest in private mortgage notes or trust deeds typically earn a 12 to 18 per cent return, paid out monthly, with a minimum investment of just $5,000 and relatively low risk. As a result, they are able to enhance their lifestyle significantly without threat to their principal, or build a large nest egg, safely, in a relatively short period of time.
When you invest in a mortgage loan or note, you are in essence buying a mortgage secured by real estate. You receive fixed monthly payments from the borrower based on the terms of a promissory note.
You can invest in trust deeds on your own, lending your money directly to a borrower. But it wouldn't be advisable unless you have the time and expertise to evaluate property and to screen out borrowers, and know your way around the legal maze of real estate transactions. Or, you can invest in trust deeds through companies that specialize in this type of investment.
By far the biggest attraction of investing in private mortgage notes is their high yield. Borrowers, often real estate investors, are willing to pay interest rates of 12 percent and higher because they need a quick short-term loan to purchase or refinance a property without the hassles and red tape they may run into at a bank.
Or sometimes borrowers may not qualify for traditional financing at lower rates because of minor credit problems or liens against the property. Or the property may be too small or located in an area that makes conventional financing difficult.
Your protection against default is the property that secures the promissory note. That's why it is so important to invest in trust deeds (notes) with a low "loan-to-value ratio."
In other words, the loan should be only for a certain percentage of the appraised value of the property (and you must use a reliable and experienced appraiser). As a guideline, investors should seek loan-to-value ratios no higher than 70 percent for single-family homes, 65 percent for apartments and 65 percent for commercial and industrial developments.
One risk of private mortgage notes is lack of liquidity - you typically can't get your hands on your principal until the loan is paid off. Trust deed loans often are for a year or two.
Another risk is the possibility of default and foreclosure. True, you are likely to recover your money eventually and even make a profit from the sale of the foreclosed property. But in the meantime you may go months without receiving any interest payments.
That said, trust deeds available through reputable and experienced firms offer an attractive combination of risk and reward.
But what happens in a recession, particularly one in real estate? If you believe property values are going down 10 percent, you are still protected by having claim to property assessed at a higher value than the loan amount. Of course, if you believe property values are going to go down 50 percent, then you are not protected.
|Don Konipol holds an MBA in Finance from the University of Michigan and a B.S. in Economics from the City University of New York. In 2002 he formed the Managed Mortgage Investment Fund LP as a high yield real estate mortgage fund, and serves in the capacity of General Partner. The fund invests in a diversified portfolio of short term, high interest real estate mortgages secured by investment real estate.|
Upon receiving his MBA in 1975, Mr. Konipol went to work for Societe General De Survalliance S.A., Geneva, Switzerland in investment banking. He left in 1978 to come back to the United States and went to work as a commercial realtor for First Equity Company in Houston, Texas. In 1984 Don, formed the Investment Realty Group to purchase distressed real estate at auction.
Don Konipol has successfully invested in numerous real estate deals, operating businesses, high yield commercial mortgages, and REITs. Currently, Don Konipol, invests his capital and client/investors capital in real estate, real estate debt and real estate securities.
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without the express written permission of the Author and/or REIClub.com.
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