The 2020 great transfer of wealth is coming to real estate
The greatest transfer of wealth is underway
Wow, what a journey we are on. The real estate market is going crazy during this pandemic. It seems everyone and their brother is looking to buy real estate. Some people want to get into bigger spaces as more and more people are doing the home office gig, while others want to take advantage of the extremely low interest rates.
The interesting thing is many people thought this pandemic would slow real estate sales, and even perhaps lower prices but the opposite has happened. BUT WAIT THERE IS MORE! Real estate is not like other activities or other investments. Real estate tends to respond to market fluctuations at a delayed pace.
While many people are out buying property because the event surrounding the Pandemic has enticed them to do so there is a quiet challenge unfolding for many other people.
Create your own opportunities
Many people have lost their jobs and or businesses. These people will soon be forced to make changes in their lives. Some will down size, some will move to other locations and some may even move in with other family members.
Having studied market trends for some time now these changes are inventible. This will create buying opportunity for those who are prepared. Now, it is extremely important to point out that as investors you can take advantage of this transfer of wealth, but you want to do it effectively and create win win situations and not by praying on victims miss-fortune.
I use to shy away from wanting to invest in these properties that are distressed as I was not comfortable investing in a win for me while others were losing their homes. I then learned that (When done constructively) we are actually helping them out.
When you are in financial despair you want to do everything possible to get out from under your financial obligations. When you come in as an investor and buy property that has become a financial burden, we actually are helping them as long as we do it from a capacity of finding their pains, helping to solve their pains and not magnifying their pains. If you go for the juggler and try to capitalize on their misfortune I believe karma has a way of coming back and making your investment a challenge for you as well.
When you start an investment that actually helps the past owner to get rid of their financial problems and assist them in getting back on their feet with perhaps some seed money to get back into some housing, you created a win-win situation.
Multifamily Riches
Another great way to capitalize on this transfer of wealth is through multi-family investing. When the markets are good it is easy to make money and therefore people often get sloppy and do not run the property to its most efficient capacity. Multifamily property is typically simple investment real estate. As a result the properties values are derived from the income they generate.
When the properties are not utilized for their highest and best use they often have huge opportunity to create a Value play. Let me explain:
When money flows in swiftly such as during economic good times the highest and best use for the property is often overlooked. As a result property is simply rented out, rents collected and cashed and the process repeats.
Example of a value play: The opportunity may be in utilizing the property a bit differently. Does a simple upgrade from a C class to B class property have merit? Often when properties are in the path of progress and demand for higher end B class properties are in high demand the C Class property is sitting there under performing. A few simple upgrades such as fresh paint, stainless steel appliances, and granite countertops can quickly upgrade the property to its highest and best use. This allows you to rent to a higher income bracket tenant that can afford to pay more and happy to do so to live in a premium location. This Increases the cash flow and in turn increase the value of the property. (Hint: there is a reason I use this illustration as my example, they exist more than you may think)
Example II: convert multi-family into condos. One of my earlier deals of converting a property to its highest and best use came in the form of a multi-family to condo conversion. I was actually able to make a $286 k profit in 7 months
The purchase was a four unit apartment building in the suburbs of Minneapolis Minnesota. I paid $364,000 for the 4 unit. To put it to its highest and best use, the next month I hired an architect to give me an architect’s opinion on the property. I hired a surveyor to survey the property and I hired an attorney to draft the paper work. This was all done to convert it from an apartment building to 4 individual condo units, complete with declarations, bylaws and Condo docs.
So the purchase price was $364k (including all acquisition costs). I spent roughly $7,500 to hire my surveyor, attorney and architect. By separating these 4 units into individual condo units I was able to increase the value considerably. This was the highest and best use of the property. The process took about 4 months. During this time I had the property rented out and was enjoying a 9 percent return on my money. I did not purchase it however for the 9 percent return. Not a bad return for the interim.
After a 7 month time frame, I sold these units off for $175,000 apiece. $175,000 times the 4 units equals $700,000.
The increase in property value was $336,000 less the $7,500 in professional fees to convert to condos and less another 6% or ($42,000) in liquidation cost, meaning that I manufactured $286,000 in 7 months’ time. This $286,000 was much more important to me than the 9% return I was getting on my annual returns. This money represents manufactured growth and it allowed me to further leverage more investments.
As I sold this property the seller received his 15% seller financing money plus interest after only 7 months. As we were in a new tax year his tax need was accomplished. He also received a $14,000 premium on the sale and did not have to pay any realtor fees to sell the property. All Wins for the seller.
Win-Win
Creating win-win situations is what real estate investing as all about. Focus on doing this everyday and you will be known as the go to guy in real estate. You will find that deals will come find you as you exercise this creativity.
These stories are not intended to impress you but rather to get you thinking of possibilities on how you too can manufacture growth. I have hundreds of stories like these and love to work them. If you have opportunities run with these kinds of advanced real estate investing techniques, do your diligence and be prepared to capitalize big.
The great wealth transfer will happen with or without you. Do you want to ride along to see what happens or get in the driver seat and create the wealth.
Happy Investing
The author’s opinion cannot be construed as tax or legal advice, and may not represent the views of HTBUSA or its stakeholders. HTBUSA is not a legal service or professional tax service. As with any investment, there is an inherent risk in investing in real estate.