From REI Academy
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
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 o 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
Don H Konipol has a BS in Economics and an MBA in Finance
from the University of Michigan and is a licensed Texas Real
Estate Broker and Mortgage Broker. Mr. Konipol is General
Partner of the Managed Mortgage Investment Fund LP, a private
limited partnership that invests in short term, high yield
private mortgage notes. He can be reached at 832.577.8838 or by
email at dkonipol@yahoo.com.
