Archive for November, 2010
Of all the questions we receive from investors that are looking to purchase a Manufactured Home Community there are two questions that are asked most often:
1. How do I find a MH Community deal that makes sense?
2. How do I place a value on that MH Community?
These are important questions and there are several ways to find Manufactured Home Community investments and even more ways that one can approach evaluation of that investment. When I first started in the business about 12 years ago, I spent a lot of money driving across the coun-try looking at listings I found in major newspapers and on the internet. While this allowed me to see a lot of poten-tial deals, it was a big waste of time and money.
Many times I would get in my car and drive 1,000 miles only to find that the community I was looking at was com-pletely neglected, had unrealistic profit and loss projec-tions, or was already under contract by another investor. I soon realized that it was worthwhile to do a more thorough analysis before visiting the property.
If it passed the initial analysis, then I would try to get an accepted offer and request detailed financials from the seller. If it still looked good I would schedule a trip to visit the community. Before implementing this strategy, I was visiting about ten communities for every one I purchased. Now, that ratio is more like two-to-one and I am not on the road all the time. If the Manufactured Home Community looks good on paper, get it under contract before spending $1,000.00 in travel and two days to visit it!
How do I find a MH Community deal that makes sense?
In order to find a MH Community that makes sense financially the most important part is to be able to quickly identify and separate the good deals from the bad. The only way to acquire this skill is to educate yourself on this business (through books and other resources) and start looking at as many MH Community offerings as you can. With the availability of information on the internet you can accomplish this task quickly. Go to Loopnet.com and other internet websites such as MHPS.com where you can view over a thousand Manufactured Home Communities for sale.
Whether you are a new or seasoned investor in this asset class I would suggest getting the information on as many properties as you can and then put them side-by-side and analyze each one. You will get an idea of the capitalization rates, expense ratios, occupancy levels, and rental rates for different markets. You will find prices all over the place but if you invest the time and effort in evaluating deals, you will start to develop an idea of what to look for in terms of price-per-space, how community-owned homes affect values and other Important factors. Invest the time in evaluating as many deals as possible and invest the money on properly educating yourself on the business so that you can separate the good deals from the bad and concentrate on those with promise! So where is the best place to find a Manufactured Home Community to buy? The best answer to this question is that you should try as many logical approaches as possible. As mentioned above, I would suggest you start by checking out the websites that have thousands of MH Communities for sale. There are new listings daily on these sites and the best way to utilize these services is to sign up for notification of new properties for sale. This way you have a better chance of jumping on the good deals before they are available to the general public. I have purchased over 50 Manufactured Home Communities over the past 12 years and about 15 of those purchases came as a direct result of listings on the internet.
The next strategy that I would suggest is to start a direct mail campaign to MH Communities that are in the markets and states that you are interested in. This has accounted for about 20 of my 50 MH Community purchases. If you obtain a good list of addresses, you can target MH Communities with a certain number of spaces in select markets expressing your interest in purchasing a MH Community.
I have experimented with postcards, letters, and even actual purchase contracts and have found that the response is about the same for each of these. The key has not been in the type of piece but in the frequency of mailing. I have received many calls from MH Community owners saying that they have received our numerous mailings over the years and are giving us first shot at the community since they know we are a legitimate company. I actually had one seller pull out a file included over 25 mailings from us. In another instance I mailed out 1,000 letters to two states expressing our interest in buying MH Communities. I followed this up about 2 weeks later with the same mailing piece (in error) and found that my response rate was about 100% higher from the second mailing. So the key with direct mail is in getting a good list to mail to and frequency.
There are several other options that I have used with varying degrees of success. I have listed some of these below:
· Driving through MH Communities in markets you are interested in and talking with the onsite manager/owner or following up with cold calls or letters to communities that you would be interested in owning. The advantage of this method is that you will see the community before you start communication with the owner and it will give the owner a level of comfort dealing with someone that made the effort to see the community first. This works best with an owner that lives onsite and you can meet face-to-face. I have purchased several communities this way and there are many others I still have an open line of communication with the owner that I anticipate purchasing when they are ready to sell.
· Making cold calls to MH Communities in markets I am interested in. While this works best when the owner answers the phone, it can be very frustrating. I have been hung up on many times as have my employees. However, if you don’t mind the frustrations, this is a viable method of finding potential deals. Besides being hung up on, the biggest frustration I have had is that you often get the response that anything is for sale at the right price (which is usually more than it is worth).
Another option is to stay in contact with real estate brokers that specialize in the sale of Manufactured Home Communities. The key here is to stay in constant contact with these brokers in order to get a copy of all of their listings as soon as they receive them. Before they put the listings on the internet they will send out the information to the buyers they know are serious in hopes of making a quick sale. You want to be on that list so you get first shot at the good listings. Once you have a relationship with a broker and especially after you successfully close a transaction with them, they will know that you are a real buyer. I have one broker that I have purchased three communities from and he knows what I am looking for and contacts me anytime he gets something that fits those criteria.
· Along with staying in contact with those brokers that specialize in selling MH Communities and commercial real estate, you should contact brokers in those specific markets you are looking to buy communities. Many times these brokers will not have any idea about the internet sites that can help them sell the communities and otherwise do not understand how to value and market Communities. While many times their listings will be grossly overpriced you will occasionally find those listings that are priced right or even better… under market.
· Newspapers (online and offline), trade magazines, local and national MLS services, and other websites.
· County tax records, banks, appraisers, movers, dealers, and other industry professionals. The key to locating good potential Manufactured Home Communities investments is to be diligent in your search and use whatever methods work best for you. The best deals are usually found by finding those communities that are the least advertised. Once you find a potential MH Community that looks a winner, the next step will be determining the value of that community. This will be the subject of my next article and will include a discussion on the methods we use in the evaluation of Manufactured Home Communities.
By Dave Reynolds and Frank Rolfe at REI Club Online
Find and Evaluate Manf. Homes Invest….
By Dave Reynolds and Frank Rolfe at REI Club Online
The Internal Revenue Service sends millions of letters and notices to taxpayers every year. Here are eight things taxpayers should know about IRS notices – just in case one shows up in your mailbox.
1. Don’t panic. Many of these letters can be dealt with simply and painlessly.
2. The IRS might send you a notice for a number of reasons. They may request payment of taxes, notify you of changes to your account, or request additional information. The notice you receive normally covers a very specific issue about your account or tax return.
3. Each letter and notice offers specific instructions on how to satisfy the inquiry.
4. If you receive a correction notice, you should review the correspondence and compare it with the information on your return.
5. If you agree with the correction to your account, Then usually no reply is necessary unless a payment is due or the notice directs otherwise.
6. If you do not agree with the correction the IRS made, it is important that you respond as requested. You should send a written explanation of why you disagree and include any documents and information you want the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the upper-left-hand corner of the notice. Allow at least 30 days for a response.
7. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper-right-hand corner of the notice. Have a copy of your tax return and the correspondence available when you call.
8. It’s important that you keep copies of any correspondence with your records. If you get an IRS notice, don’t panic! And, as always, if you’d like some guidance, just give us a call. We’ll help you with next steps.
About the author: Marc Wallace, CPA, Masters in Taxation, is with the firm of Stegman Wallace, P.S. Certified Public Accountants. The firm’s mission is to help their clients achieve success by providing personalized attention and a commitment to service that addresses not only today’s needs but tomorrow’s plans. Their dedication to helping you achieve your financial goals means placing a premium on timeliness, thoroughness and accuracy.
Condominium investing as a buy and hold strategy can be very worthwhile. There is a building, and a unit in that building which you rent to a good tenant, and providing you purchase at the right price, life is good. The tenant‘s rent pays the mortgage, taxes, insurance and homeowner‘s association dues and some increment over that is left over for positive cash flow. This is what we all would like to see. But sometimes there are hidden financial perils awaiting the condominium investor. Think again of the building. You as an investor only own up to the inner surfaces of the unit you have bought. Everything else is what is called “common
area” or “limited common area,” which means you do not have a direct role in maintaining that structure. Especially in the case of mature buildings this can become a source of financial pain for the unwary buyer.
The homeowners‘ association may be required by the condominium declaration to maintain and replace the structure as parts wear out, and if so it is entitled to assess the owners of the units regular charges to pay for the cost of that maintenance and replacement. But owners generally do not like high monthly assessments, and that dislike can produce problems of deferred maintenance and a deficiency when it comes time to replace major portions of the building. And there is no statutory requirement that the homeowners‘ association actually maintain the building or replace worn out components. Any such requirement is in the declaration, which is part of the documents the prospective buyer receives before closing the sale.
Some parts of a building can be expected to last a fixed number of years before they need replacement. Examples are: an asphalt roof, wooden siding and vinyl windows. When the anticipated time of replacement of such items comes up, there should be a reserve account and there should be money in the reserve account to pay for that replacement. Otherwise the homeowners‘ association has nowhere to look for the money except to the current owners. And this can be the source of (in some cases) very large special assessments to replace deteriorated building parts. Such special assessments, if they are not paid currently, become a lien on the owner‘s unit.
In some cases the size of the assessment is enough, if it is financed, to cause an otherwise positively performing rental to become a negative cash flow producer, or “an alligator.”
Two years ago the Legislature adopted a law that generally requires homeowners‘ associations to conduct reserve studies annually of the physical condition of the condominium building. These studies are to be done after a physical inspection and are to be performed by a professional in the field of reserve studies. However, the homeowners‘ associations are not required by statute to make assessments on condominium owners to fund the reserves that the studies indicate will be required to replace life limited parts of the building when they need replacement. The declaration of an individual condominium may require such studies and proper funding of reserve accounts to cover expected maintenance and replacement costs.
It is a good idea therefore, as part of your pre-purchase inspection, to obtain a copy of the most recent reserve study for the building in which you are considering buying, and also to obtain the declaration and the most recent financial records of the homeowners‘ association. Check to see first that there is a reserve for building replacement required in the declaration; and second that the reserve is ?on track? for what it should be at the building‘s current stage of its useful life. Also check to see that the owners are paying reasonable assessments that are calculated to keep the reserve in the proper balance to building replacement cost over time. If you buy a unit in a building in which previous owners have not paid enough to build a proper reserve for replacement of worn out building elements, then it is you who will have to make up the difference at the time the replacement occurs. There is no way to recover those deficiencies from the previous owners, or from the homeowners‘ association board members or officers.
It is better to pass on purchasing a unit in such a building because once the special assessment occurs, your options as an investor are limited and bleak. Sometimes the best investments are those you do not make.
About the author: Doug Owens is a member of the REAPS legislation committee. Doug practices real estate law and general business law from his office in Seattle. He offers a 10% discount for REAPS members and he can be reached at (206)985-6679 or [email protected]
You are ready to invest in real estate; you even have found the right property and a willing seller, and now that pesky problem: where to find money?
Most buyers simply go out and borrow money using a conventional lender, i.e. getting a mortgage on the property. However, limits on the number of properties that can be mortgaged under one name, and the tightening of conventional lending requirements may make it difficult for some investors to finance non-owner-occupied properties this way.
Several other options are available. One option may be using your HELOC. A HELOC , or Home Equity Line of Credit, is extended to a homeowner by using his home as collateral. There is a maximum amount that the owner can borrow, but he may draw on that line of credit as desired. The interest charged is usually the prevailing prime rate. Repayment schedules, which can vary from 5 to 20 years, are negotiable as long as the interest payments are made monthly. This option can be particularly powerful for the investor if he has amassed equity in his home, especially as historically-low interest rates are now available. This may be a viable tool for investors, even in today’s market, if they have owned their homes for a long time.
Secondly, credit cards may be a viable option in the short run, if you are looking for funds that will be cashed out when the remodel is finished and sold, or if those funds will be replaced by a traditional mortgage or by other private funds. Hang on to those promotional offers from credit cards! Many offer a 0% interest rate during the promotional period, for a low balance transfer fee of 3-4%. Read the fine print, but keep this option open.
It is a good idea to periodically request increases to your credit card limits, if you are a good borrower. This will give you flexibility in financing options for the future.
Often times, relatives and friends are willing to partner in sound real estate investments. Don’t forget that rich Uncle! You may be doing him a favor in providing an investment with better returns than his other investments are currently paying. Sometimes co workers or clients are open to investment opportunities, and through pooling such resources, you can accumulate a sizable amount. Talk it up and ask around – people have pulled money out of the stock market and are looking for investment opportunities. REAPS featured a panel of private money investors at its August meeting, where this topic was discussed with real world examples from our own backyard.
Consider limited partnerships- such arrangements may give you the immediate cash flow benefit you need. The seller himself can often be creatively induced to enter into a funding agreement with you, particularly if he is highly motivated to sell, as many are in this economy.
Become educated on the dos and don’ts of private lending. REAPS invited the Washington State Department of Financial Institutions to our October meeting to discuss state and federal regulations and exemptions for borrowers and lenders.
Don’t forget retirement funds! You may self-direct your Individual Retirement Account (SDIRA) to invest in real estate, not just securities! Your 401 K is a great source of funds that can be partially liquidated, or you could borrow against the cash value of your insurance policy.
Stocks or other equities may be cashed in, and proceeds rolled into a self-directed IRA or used to fund purchases directly.
Of course, hard money lenders are always a possibility. Sometimes lenders can be flushed out by perusing the ‘wanted to buy” ads, or even a more direct approach- take out a newspaper ad yourself asking for potential lenders who may be eager to invest in a real estate project with you. Tell the potential investor how he benefits. An example may be: ” I have the opportunity to buy a $200k house for $100k, but I need a cash investor. I do the work, you invest the cash, and we split the profits.”
Sometimes YOU can be the best source for private money- and that’s OK! If you have cash under the mattress, pull it out and get in the game! Or partner with other investors.
The only limit to finding private money for your real estate needs is your own hesitation. With creativity and a little knowledge, you can be the greatest source of generating needed capital.
In january, we will host a seminar for new investors that provides an introduction to real estate investing and an orientation to member benefits of REAPS. Check the REAPS website for further details.
As REAPS Membership Coordinator, I welcome your feedback. Please let me know what topics you might like to see addressed in future articles for the novice real estate investor. I can be reached at [email protected].
Wendy Ceccherelli is the volunteer membership coordinator for REAPS. She has been a full-time real estate investor for the past six years, and is the designated real estate broker for Home Land Investment Properties, Inc. Prior to her career in real estate, she spent twenty-five years as a government arts funder. More information on real estate topics may be found on her website at www.HomeLandSeattle.com
#1— RENTAL INCOME TAX TIPS
The lower your rental income for the year, the less you will owe in taxes. By minimizing your rental income, you can reduce your taxable liability. This does not mean you should stop collecting rent, it just means you might not have to include all the rent you’ve collected in your taxable rental income. ? You don’t have to report your rental income if you rented out your property or vacation home for 14 days or less. ? Rental income is taxable in the year it is collected. If you did not receive the last month’s rent in the current year, do not report the income in the current year. ? Exclude Security Deposits from your rental income if you plan on returning the deposits at the end of lease.
#2— MINIMIZE TAXABLE GAIN USING SALE EXPENSES
Many real estate investors overlook deductions when they sell their property. If you sold your rental property for a gain, make sure to minimize taxes by accounting for sale expenses – like closing costs, which can be found on the property’s settlement statement. You should deduct Commissions Paid, Title Charges, Recording and Transfer Charges, and Additional Settlement Costs from the Contract Sales Price. This will help you minimize gain, and lower the tax liability on your sold property.
#3— LOOK FOR PROPERTIES WHILE ON VACATION
Be sure to deduct the cost of expenses incurred while looking for new property. Travel expenses in connection with the management of your investments are tax deductible if they are ordinary and necessary. At least half of the time you spent away on travel must have been spent doing business, and the primary cause for travel must be business.
#4— ORDINARY AND NECESSARY ADVERTISING EXPENSES
Common business expenses that you can deduct while scouting for new investment properties are fees for travel, lodging, and services. Be sure to deduct any advertising expenses that are considered ?ordinary and necessary? for your rental property. Common expenses can be advertisements on the radio, in the newspaper, classified lists, and phone books, signs, banners, and postage for mailers. You can even deduct the cost of advertising for vacancies, including the cost of building a website – just be sure that they are ?ordinary and necessary? for your rental activity.
#5— DEDUCTING TENANT UTILITIES THAT THE LANDLORD PAYS
Other expenses may include the cost of utilities paid by the landlord for tenant uses are fully deductible, provided that this is part of the rental agreement. Landlords often incur expenses to light common areas or operate security systems on their properties. Other common expenses include power, water, gas, and cable and internet. Any utility costs incurred during a period of vacancy are also fully deductible, but be careful. Deducting large expenses during periods of vacancy can be a reason for the IRS to become suspicious.
#6— DEDUCTIBLE START-UP EXPENSES
Business start-up costs are generally capital expenditures, but you can elect to deduct up to $5,000 of business start-up costs incurred. The $5,000 deduction is reduced by the amount your total start-up costs exceed $50,000, and the remaining cost must be amortized. Start-up expenses are costs incurred while creating an active trade or for investigating the creation of a business or trade. This includes expenses incurred when acquiring an existing for profit activity, as well as expenses incurred during the anticipated production of income. Common start-up expenses may include: accounting fees, analysis, survey, or study of potential markets, products, labor supply, transportation facilities, advertisements for the pening of the business, etc. Office equipment and furniture, setup costs, salaries and wages for employees who are being trained and their instructors. Travel and other necessary costs for securing prospective distributors, suppliers, or customers, salaries and fees for executives and consultants, or for similar professional services. Keep in mind that certain expenses must be amortized over 5 years. Such expenses include legal expenses and expenses for setting up the business structure (such as an LLC, etc…).
#7— SELL PROPERTY TO YOURSELF
Selling property to your own S-Corporation may be beneficial in some specific situations, like if you are trying to meet requirements for the two year rule ($250/500k exclusion), or if you are trying to take advantage of depreciation on appreciated property. For example, say you lived in a property for three years, and rented it out for the next seven years – since you haven’t lived there for two out of the last five years, you cannot sell the property as a primary residence to avoid the capital gain. However, after moving out of the property, you sell it to your own S-Corporation, which allows you to exclude capital gain (up to $250k, $500k if married filing jointly) because requirements for the two-year rule have been met. The other advantage is you can have a new basis for depreciation on your appreciated property. Selling to your S-Corp isn’t for everyone though. You should avoid using this strategy if you cannot take advantage of the exclusion amount.
#8 — PAY YOUR KIDS, OPEN THEIR IRAS
If it looks like you will have a large taxable liability at the end of the year, it’s not a bad idea to hire your kids to landscape your rentals. You can pay your kids to do work on your properties, and put the money in IRA accounts for them. This is especially a good idea if you’ve already maxed out on you and your spouse’s IRA contribution for the year. You’re better off avoiding the taxes on your extra income, and the money will be safe in a tax free shelter. And of course, it’s a great way to help your kids prepare for their first property!
#9— TRAVELING AWAY FROM HOME
You can deduct the expense of traveling away from home if the primary purpose of the trip was to collect rental income or to manage, conserve, or maintain rental property. You can also deduct expenses incurred while staying overnight when traveling for business. You cannot deduct the cost of traveling away from home if the primary purpose of the trip was the improvement of your property. You can read Publication 463 to learn the specifics.
#—10 HIRE FAMILY MEMBERS TO MANAGE YOUR PROPERTIES
Property management fees are fully deductible, so consider hiring someone that you don’t mind paying, like a family member. Obviously, the expense of your own labor cannot be written off, but that doesn’t mean your spouse or children have to work for free. By hiring family members, it won’t bother you to pay management fees because the expense is fully deductible, and the money stays within your FAMILY. Keep in mind you’ll have to withhold Social Security and Medicare taxes for the income you pay. AND of course, hiring a professional is always a good idea. Your teenager might not be the greatest candidate to collect rent.
Information was provided by TReXGlobal Inc.
Tax Season… another reason to Simplify’em!
March 9, 2010