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Commercial Real Estate Investing

ROI of Real Estate in 2022 and beyond

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ROI of Real Estate in 2022

The return on investment (ROI) of real estate is one of the most important considerations when buying a property. If I am buying it to rehab it and sell it, then here is how I do the calculations: Purchase price Rehab cost Duration and holding cost Value at the end as if that was in today’s market and how that would be compared to current, comparable sales Any trends in the market I should be aware of regarding price expected changes? If I will come out ahead, say within 12 to 18 months, and my ROI is at least 20% annualized, then I would want to proceed Then I discuss with various lender loan amounts and construction draw terms If I am buying it to rehab it and keep it, then here is how I do the calculations: Purchase price Rehab cost Duration and holding cost Value at the end as if that was in today’s market and how that would be compared to current, comparable rents and cap rates Any trends in the market I should be aware of regarding rent and cap rates expected changes If I will come out ahead, say within 2 to 4 months, and my ROI is at least 10% annualized, then I would want to proceed Then, I discuss with various lenders the loan terms and figure out my cash-on-cash return which should then be around 12% per annum There are some factors that affect the ROI in real estate: Location: The location of your property will affect its value and its potential for profit. Properties located in highly desirable locations tend to have higher values than properties located in less popular areas. Properties near airports, shopping centers, or schools are also likely to be more profitable than those in rural areas. Size: The size of your property will also affect its value and potential for profit. Larger properties tend to have higher values than smaller ones because they have more rooms to rent out or sell individually for higher prices per square foot. Property type: Houses typically have lower returns than commercial properties because they require more maintenance and they have a smaller return on investment (ROI) than commercial buildings. Condition: If your property needs repairs or renovations before it can be rented out, your return on investment may be affected. Rent control laws: Rent control laws can affect both how much rent you can charge and how quickly properties are rented out. General market trends: So many investors are concerned about the macroeconomy and forget to zero in and focus on a specific area and a specific type of property to understand the values. If you follow my formulas and above and you can come out ahead; you will understand values and will invest no matter the market because when interest rates are low, property prices are high, and when interest rates are high, property prices are lower so it is a numbers game and if you know the numbers and how to work with lenders and contractors, you will become super rich. Join us on our mastermind calls that are better than any Podcast because you get to ask questions live and get expert answers with formulas based on practical applications that work in today’s market Sincerely, Cherif Medawar www.CherifMedawar.com

How Inflation is going to affect commercial real estate in a positive way

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commercial real estate

Inflation is often a cause for concern, but it can be a positive force for commercial real estate. Inflation can increase the value of properties and improve cash flow. What is Inflation? Inflation refers to an increase in the general level of prices for goods and services in an economy over a period of time, which causes each unit of currency to lose purchasing power over that time period. Inflation is generally low for commercial real estate investors because it means that their properties are gaining value over time. The higher the inflation rate, the more valuable your investment will be. For example, if you purchase an office building for $100 million and then sell it five years later for $110 million, you will have made 10% on your investment annually — even though there were no major changes to the building itself! There are many ways that inflation will affect commercial real estate in a positive way, but one of the biggest ways that it will affect us is by allowing us to make more money off of our investments. Inflation allows us to make more money on our investments because it increases their value over time, which means we will be able to sell them at a higher price than what we paid for them originally!  Commercial real estate investing: how to get started How inflation affects commercial real estate It’s important to understand how inflation affects commercial real estate. There are two main ways that inflation can have an impact: Inflation drives up interest rates on loans. Interest rates on commercial real estate loans are usually tied to the Federal Reserve’s policy on short-term interest rates. When inflation rises, so do short-term interest rates, which means that lenders will charge higher interest rates on loans to cover the additional risk they’re taking by lending money at higher rates of return. Inflation makes real estate worth less in dollars. As prices rise over time, the same amount of money buys fewer goods and services — including commercial real estate. This means that owners’ net income falls even though their gross revenue may increase because they’re paying more in operating expenses such as property taxes and utilities. Inflation increases rents: Rents increase as a result of inflation because landlords pass on their increased operating costs to tenants. So, if the cost of operating your business goes up by 10%, then you will need to increase your rent by at least 10% to maintain the same profit margin. In some cases, landlords may even be able to increase their rents beyond these levels due to market conditions and lease clauses. Inflation increases the value of cap rates: Cap rate is a measure of return on investment (ROI). It tells you how many years it takes for an investor’s money to double when invested in a property or other assets such as stocks and bonds. For example, if an investor purchases an office building for $1 million with an annual net operating income (NOI) of $100,000 per year and sells it after five years for $2 million, his ROI would be 50%. That means that he earned $1 million from his original investment of $1 million in just five years instead of waiting 20 years before doubling his money at a 10% annual interest rate compounded annually; Bottom Line As the inflation rate increases, Commercial property and great deals of real estate will be on the rise as well. The demand will reach its peak as more people invest in apartments and commercial land. Real estate investors are looking for properties that are more affordable.   Do you want to Crack the Code on RE Funds? Reach out to our office and learn about the power of Regd 506 b/c and Cherif Medawar’s structures. 844-720-1031 info@cmrei.com Cherifmedawar.com

REIT vs. Syndication: The Ultimate Guide

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Differences between REIT and Real Estate Syndications

REITs and syndications are both types of real estate investments. REITs and syndications have a lot in common. What Is a REIT? REIT stands for “real estate investment trust.” REITs are companies that pool investor funds to purchase real estate assets like office buildings, apartments, and hotels. These properties are owned by the REIT and rented out to tenants. Investors receive a payout based on the property’s performance and an ownership stake in the company. The Securities and Exchange Commission (SEC) governs REITs and requires them to pay out 90% or more of their taxable income as dividends to shareholders. There are many different types of REITs based on their size, strategy, or focus. The most common type is an equity REIT, which usually focuses on owning commercial real estate properties such as apartment buildings or office buildings. Another type is a mortgage REIT, which focuses on financing residential mortgages instead of owning homes directly. What Is a Syndication? Syndication is an agreement between multiple investors and one or more property owners. In this agreement, each investor puts a certain amount of money into the deal in exchange for a share of ownership in the project, a specific project with a specific capital raise and end date. The Syndicator then raises and pools funding for the project and oversees its development and construction. Once the project is completed and sold, profits from the sale go back to investors based on their percentage of ownership and set terms of the syndication. The Syndicator may also be defined or called: Sponsor, Executive Manager; and may hold the roles of Property Manager (unless they hire on an outside Property Manager), Project Manager and overall CEO of the project. These roles and responsibilities will be defined in the Offering. How does real estate syndication work? Investors pool together money and use it to purchase properties that meet certain criteria determined by the syndicator or manager of the deal. In some cases, the manager then finds tenants for these properties who will pay rent on time every month, allowing investors to collect their share of the profits from renting out these units. An investor can make an interest return and get paid on the exit, as defined in the syndication. The Sponsor usually will hire a Property Manager who will then take care of everything else that comes up with managing a property – including repairs, maintenance and even leasing out vacant units if there are any left after all the tenants sign their leases. Main differences between REIT and Real Estate Syndications: Direct Ownership REITs offer direct ownership of the property through shares, while syndications involve indirect ownership through an investor group. With syndication, investors pool their cash together and purchase a share of property from a developer or seller. Shareholders don’t own any part of the property directly; they only own shares in the trust (or corporation). Value Volatility REITs are designed to provide stable returns with little or no volatility. This makes them ideal investments for retirement accounts or other long-term goals. Syndications, however, can be more volatile than traditional stocks due to their diverse nature and relatively short track record as an asset class. Tax Benefits REITs typically pay dividends at a higher rate than most stocks because they’re required by law to distribute 90% of their taxable income each year. This makes them an attractive choice for investors looking for yield without compromising liquidity. Syndications may also be eligible for tax benefits if structured as limited partnerships or corporations, but these benefits vary by state and type of partnership Diversification Real estate syndications are limited in the number of properties they can buy. Since they don’t have their own funds, they must rely on investors to fund each individual property purchase. This limits their ability to diversify by location or type of property. However, REITs have much broader diversification because they have their own capital and can purchase many different types of properties all over the country – as long as it’s in compliance with their charter. Liquidity Liquidity is important in real estate investing because it gives you the ability to cash out your investment quickly if needed. REITs are liquid because they’re publicly traded securities, but individual real estate syndication may not be. A REIT can be sold at any time, while syndication will take longer to sell because it involves several different parties. Investors who want the ability to sell their investments quickly should consider buying REITs rather than syndications. REITs vs. Syndications: Which is the Better Investment? Some investors prefer real estate syndications because they can choose specific properties and locations, while others prefer REITs because they offer more diversification and liquidity. Real estate syndications tend to have higher fees than REITs but give investors more control over the properties that they invest in. In addition, many people who participate in real estate syndications are able to profit from doing so without having to pay capital gains taxes on their earnings as long as they hold onto their shares for more than 12 months after purchasing them. Final Thought When it comes to the two types of passive income investments, many investors are hesitant to put their money in either one. Both Syndication and Real Estate Investment Trust (REIT) have their own pros and cons. It is up to individual investors to decide which investment is likely to give them the best return on investment.  We will leave you with one more concept…. Could there be a structure that incorporates the benefits of a REIT and a syndication, and creates an even more powerful structure for Sponsors, those raising capital for real estate deals, and investors looking for a return??? YES. Yes, and that structure is a real estate fund. We will Crack the Code on that structure in our next post.  Do you want to Crack the Code on RE Funds? Reach out to our office and learn about the power of Regd 506 … Read more

Commercial Real Estate Investing: How to Get Started

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commercial real estate

Commercial real estate investing can be a very lucrative investment strategy if you know how to find the right deals, structure and fund  the deals– and take them to their highest & best use. You can buy, fix and flip properties, or you can buy them for long-term appreciation. The money is in the follow up and the strategy to take the asset to its highest & best use. That’s a FACT. Commercial real estate is a very broad term that includes everything from office buildings to apartment complexes. It’s important that you understand what your goals are before you start investing in commercial property because it will dictate the type of property you buy and how much money you need to invest. There are many different types of commercial real estate investments, including industrial buildings, apartment buildings, retail space and even mobile home parks.. Things to consider before starting Commercial Real Estate Investing Commercial real estate investing is a smart way to build wealth and increase your net worth over time. But before you jump into this type of investment, there are some things you must consider first: How much money do you have available for investment? The minimum investment amount varies from property type and region, and the strategy you are using to get the property under contract , but it’s important to have enough money available so that you can afford at least one property for starters. Once you have one property under your belt, just like in residential, and begin receiving monthly rent checks, you can use those proceeds as an emergency fund/reserve or save up for additional investments down the road. What kind of properties are most attractive to investors? There are many different types of properties out there that could appeal to investors based on their individual needs and preferences — from a duplex all the way up to multi-family residential properties such as apartments or condos. Many people start with duplexes, as it seems safer, like a residential fix & flip. However, vacant stand-alone buildings can be much easier to start with coming out of the pandemic AND with the right knowledge to work with tenants. Newer investors may have an opportunity to get financing based on a NNN lease. The Monet is in the follow up. This is a FACT.  Are you willing to take on debt? If so, then commercial real estate is a great option for you because it allows you to leverage your assets and borrow money against them in order to control more property than you could afford outright. However, borrowing money means that there are more costs involved in owning property (such as interest payments) What Is Commercial Real Estate Investing? Commercial real estate (CRE) is property that is used exclusively for business-related purposes or to provide a workspace rather than as a living space, which would instead constitute residential real estate. Most often, commercial real estate is leased to tenants to conduct income-generating activities. This broad category of real estate can include everything from a single storefront to a huge shopping center. Commercial real estate investing involves buying and selling property used for business purposes rather than residential use. You may have heard of these properties referred to as “commercial” or “multifamily” properties but they’re not necessarily any different from what we normally think of as an office building or shopping center. The most common types of commercial real estate include office buildings, retail malls, apartment complexes and industrial warehouses. However, there are many other types of properties that may be suitable for investment purposes depending on local conditions, such as motels or hotels. The key to successful commercial real estate investing is finding properties that are located in areas where demand will support high rents or sales prices over time. The goal of commercial real estate investing is usually to make money through appreciation or cash flow (rent). With appreciation, you hope that the value of the property will increase over time because of demand or other economic factors within the market where it’s located. With cash flow, you receive income from tenants who pay rent on a regular basis each month until they vacate or move out of the building altogether. Investors typically look for properties with at least five years of positive cash flow and low vacancy rates. They also like to buy property in strong markets where rents are rising faster than inflation. FACT, there are strategies to take vacant CRE, lease it up and immediately increase the value of the building. This makes it easier to finance and a solid investment to leverage and increase your portfolio. This is why your strategy is important.  Commercial Real Estate Investing Strategies There are many ways to invest in commercial real estate, and it’s important to understand the differences between them. Here’s what you need to know about the different types of commercial real estate investing strategies: Buy & Hold: This is the most common type of investment strategy. With buy & hold investments, you purchase a property and then rent it out as-is or fix it up and lease it out until you sell at a later date. This can be a great way to build wealth over time because of the power of leverage — if done right, your initial investment can grow in value by 20% or more each year. Fix & Flip: With fix & flip investing, you purchase an older property that needs work and then renovates it before putting it back on the market for sale at a higher price than what you paid. Fix & flips can be very profitable if done correctly but they’re also risky since they require significant upfront costs in addition to rehabbing expenses before selling. Lease-Option Strategy: This strategy involves buying a property, leasing it out to tenants, then offering them an option to purchase the property at a later date for a predetermined price. There are many ways that this … Read more

How To Invest In Commercial Real Estate In Your 30’s

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If you’re looking for a new way to invest your money, commercial real estate may be the answer. Commercial property includes everything from office buildings and apartment complexes to warehouses and retail space. If you’re considering investing in real estate in your 30 Here are some tips for investing in commercial real estate. Know your goals: Before you begin investing, it’s important to understand what your financial goals are. Are you looking for passive income or do you want to use real estate as a way to build wealth? Knowing what you want out of your investment will help guide how and where you invest your money. Do your research: Once you know what type of property interests you most, it’s time to do some research. Learn about the market and other investors in the area so that you can make an informed decision about what type of property would be best for you. You may also want to talk with a broker who can help guide you through the process of buying or selling a building or piece of land. The more knowledge and experience he or she has with commercial real estate, the better off you will be when making decisions about which properties are worth pursuing: Learn from your mistake: If you’ve already made investments in property that haven’t worked out, don’t be discouraged. You’re bound to make mistakes as you’re learning about investing. The key is to learn from your mistakes so that you don’t repeat them again. For example, if you lost money on an apartment complex because it was poorly managed, don’t make the same mistake by buying another apartment complex without knowing who is managing it or how well they manage the property. Choose a niche market or geographical area: where you have experience or expertise and stick with it until you become an expert at it. For example, if you’re a plumber who knows how to fix plumbing problems in apartments, then focus on buying apartments with lots of plumbing problems (a sign of poor management). Or if you’re an accountant who knows how to manage finances for small businesses, then focus on buying small businesses with lots of financial problems (another sign of poor management). Types of Investment Strategies Investing in commercial real estate is a great way to build wealth and passive income. The benefits of real estate investing are cash flow and appreciation. As a young real estate investor, building wealth through real estate is appreciation and cash flow. Cash Flow – Commercial properties have tenants that pay rent on a monthly basis. The cash flow from your investment property will be used to pay off your mortgage balance and any other expenses related to owning the property such as property management fees and maintenance costs. This is one of the primary reasons why many people choose to invest in commercial real estate instead of residential properties because they can rely on consistent income each month after paying their expenses. Appreciation refers to the increase in value of a property over time as its market price rises due to changes in supply and demand. In other words, if there’s more demand than supply for a specific type of commercial property (or any property), it will tend to increase in value over time because people are willing to pay more for it than they were before — essentially bidding up prices until everyone agrees on a fair price point based on what buyers are willing. Types of commercial real estate investments Commercial real estate investing is a great way to build wealth and passive income. If you’re looking for a new way to invest your money, commercial real estate could be just the solution you’ve been searching for. There are many different types of commercial real estate investments, including: Office buildings Retail properties Industrial warehouse properties Multi-family housing units Apartments Parking Garages Gas station Building Self-storage investment Mobile Homes But before you jump in headfirst, there are some things you need to know. Here are some tips on how to invest in commercial real estate in your 30s: You don’t need a lot of money upfront Buy a property that needs work Make sure you have enough cash flow after repairs Never go into debt when buying commercial real estate Don’t use all of your savings to buy your first piece of commercial property Get professional advice about how much you should spend on repairs and renovations Be prepared for unexpected costs like insurance premiums and tax bills Don’t forget about taxes when calculating your return on investment (ROI) Don’t expect too much from your first property – results don’t come overnight! Final Thought Ready to dive into commercially investing? The suggestions and recommendations in this article can provide you with the tools and knowledge you need to get started. With the right amount of research, preparation, and attention to detail, investing in commercial real estate can add a source of steady income for life to your financial portfolio.  Learn the Steps to Invest in Commercial Real Estate Like a PRO by becoming a part of Cherif Medawar’s Commercial Real Estate Mastermind

What is a K-1 and How is it Used for Taxes in Private Real Estate?

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What is a K-1

A K-1 form is a tax form used to report the incomes, losses, and dividends of a business’s partners or an S corporation’s shareholders. K-1 forms are issued by partnerships, S corporations, estates, and trusts. The recipient of the income, loss, or dividend is responsible for reporting it on their federal tax return. Investors in hedge funds, private equity funds and real estate funds receive K-1 forms if they own interests in pass-through entities, such as partnerships. A K-1 is a tax form used by pass-through entities, including partnerships, S corporations and limited liability companies (LLCs). The form reports the income and losses of a business to its individual owners. Private real estate investors have many choices when it comes to investing, but there are several factors that make real estate investing unique. One of these is the K-1 filing for tax purposes. A K-1 is a form that must be filed along with your income tax return if you are invested in a pass-through entity, like a limited liability company or partnership. The form shows how much income you’ve earned from the investment and what types of deductions you can take. The first thing that you need to know about the K-1 form is that it is not the same as a 1099. A K-1 form is used to report your share of income, deductions, and credits from a partnership, S corporation, trust, or estate. Important K-1 and Tax Filing Information for Private Real Estate Investors Valuation When filing taxes, it’s essential to know the value of your investment at the end of each year. Private real estate funds provide both an estimated valuation at the end of each month as well as a final valuation at the end of each year. The value of the investment at year end may not be the same as the amount reported on the K-1 statement. The amount reported on the K-1 is the “book value” of the asset(s). The book value is typically the price paid for an asset adjusted for capital improvements made during ownership and depreciation taken since acquisition. Because private real estate transactions are complex and vary from property to property, it is not uncommon for there to be delays between when revenue is collected and when expenses are processed. Tax Basis Your tax basis is defined by your initial investment amount into a fund plus any additional capital contributions you’ve made over the course of your investment minus any distributions you’ve received during your holding period. Each investor’s initial investment in the partnership is recorded as their tax basis for the investment. Any additional capital contributions increase the investor’s basis in the partnership. Any distributions from a partnership reduce the tax basis dollar for dollar up to the amount invested in the partnership. If a distribution exceeds a partner’s initial investment, the excess distribution reduces any gain recognized if and when the partner disposes of his or her interest in the partnership. Losses When filing taxes as a private real estate investor, losses can be used to offset other income from sources such as wages or stock dividends. But if your losses exceed $3,000 or so in any tax year — depending on your filing status and income — you may have to carry over some of those losses into future years. To do this, first use all losses against other income in the year they arise; then carry over any unused portion to next year’s tax return; and finally use that remaining amount against other income in that second year. Tax Deferred Distributions Many private real estate funds will offer investors the opportunity to postpone (defer) the recognition of taxable income by reinvesting distributions in additional units or shares of the fund’s interest under a so-called “distribution reinvestment plan” (DRIP). This is advantageous because it allows investors to avoid current taxation on the distributions and instead defer taxation until the eventual disposition of the investment. Additionally, investors may be eligible for long-term capital gains treatment when they do eventually sell their investment. K-1 Arrivals If you are a passive investor in private real estate funds (either directly or through a 1031 exchange), you will be receiving a K-1 form for each fund in which you hold an interest. Once you have received your K-1 forms, please be sure to follow the below steps: Check that the Box 17 codes accurately reflect the tax treatment of your investment. Be aware that certain Box 17 codes may require additional information on your tax return to be properly treated. Be sure to discuss these with your tax advisor. Consult your tax advisor regarding any amendments to the underlying partnership agreements that may have occurred during the year. These changes could affect your allocation of income and/or basis, and may require additional actions on your part. Multiple Forms Some shareholders may receive several K-1s from different real estate investment entities. This can raise multiple questions for investors about how to best file their taxes. It’s important for investors to remember that a K-1 form is attached to each entity that you have invested in during that calendar year. With multiple K-1s in hand, it is also important to remember that each form must be submitted with its own tax return — there can be no bundling of multiple K-1s on a single tax return. Let’s say you have investments in multiple partnerships. Each partnership is required to generate their own K-1s, which means you could potentially have numerous forms to file and track. Keep in mind that each partnership is required to send out their K-1s by March 15th or April 15th at the latest (or soon after).* Composite Returns If you invest through a partnership or LLC, you may have noticed that most fund managers offer Composite Returns so that investors do not have to pay state income taxes on investor distributions. A composite return is a state tax return filed by an “agent” on behalf of two … Read more

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