The fix-and-flip market boomed a few years ago as the housing market recovered, and is still a viable and profitable business today. The number from RealtyTrac, a real estate analytics, and data organization, paint a clear picture of a healthy industry. The average house flipper saw a return of about 20% in 2011. In 2015, the average return had grown to 35%, and that trend hasn’t reversed. In some parts of the United States, over 10% of all single-family home sales are fix-and-flips; a big chunk of the market.
Large real estate players such as Goldman Sachs, Zillow, and Redfin have seen the potential in the fix-and-flip market and have begun to lend to fix-and-flip developers. Investors and lenders already invested in the market have indicated this is a sign that the market is reaching a greater level of stability and acceptance. During a recent panel at the Single Family Rental Investment Forum in Miami, Sean Tierney, executive vice president of A10 Capital, said, “Goldman coming in is a good thing. It shows that [fix-and-flip financing] is no longer just a trade. It shows that it’s not going away.” There’s also parts of the market that Goldman is unwilling to enter, such as buying occupied properties, due to the risk of potential headlines that make it seem like a big company is buying out lived-in properties.
This leaves plenty of room for outside players to enter the market, and will allow individual or crowdfunding investors to maintain their foothold in the fix-and-flip market.
House flipping is proving to be a profitable business for flippers, but they’re not the only people profiting from this trade. Most flippers must rely on loans to afford renovations for their project, and investing in those loans can grant returns of 10% or more.
Fix-and-flip television shows make the process looks easy, but in reality, flipping can cost a surprising amount of money. In addition to down payments on the home and renovation costs, flippers have all the costs that come with owning a home until they can sell it – including property taxes, insurance, and HOA fees. Even when the house is sold, the flipper must then pay recording, title search, and escrow fees. As a result, fix-and-flip loans are essential to the market, and those come in different forms. Bank loans are obviously an option, but there’s no room for investment there. There are hard money and private money loans, which requires either footwork or advertisement on the part of the investor. There are also real estate crowdfunding options, which offer the biggest opportunities for real estate investment.
Real Estate Crowdfunding
House flippers apply to a crowdfunding platform in order to list their project on the platform, and the platform screens those applications to ensure that they are eligible for funding and meet other criteria determined by the platform. If they fit the requirements and seem to be a good investment for a crowdfunding platform’s investors, it is listed and offered to potential investors. Crowdfunding websites allow investors to view a description of the flipper’s background and experience before making a decision on a specific project. There is also a summary of the project details, such as photos of the property, its size and location, and planned renovations.
Once an investor has found a real estate investment opportunity that fits their investment criteria, they can purchase a small share in the real estate fund or trust. This investment model is low-risk because it often involves small amounts of money and because it offers legal insulation. A crowdfunding investor is in no way tied to the properties that the real estate fund invests in.
An important element to consider when comparing crowdfunding platforms is vetting. There are quite a few real estate crowdfunding sites, and more appear every day, so it can be hard to tell the difference between legitimate good actors and scammers or predatory sites. An investor has to be savvy. Blindly following trends isn’t enough to succeed; investors have to do the research and ensure that they are protected and ensured a safe return on their investment.
As the flipping market grows, the demand for financing options outside of the rigid requirements of a bank has grown with it. Those who just use cash for their home purchases will be severely limited by rising home prices, but flippers that use financing will have the chance to leverage and expand their flipping portfolio at a considerably faster rate.
Lending for the Modern era
The proliferation of online lending platforms offers flippers access to financing that is available regardless of the flipper’s or building’s physical location and can connect interested investors with projects all across the nation. This is excellent news for the modern real estate investor, who has gained additional real estate investment options at a lower cost. Investors can also relax and know that a good crowdfunding site has already done preliminary vetting on any flipper that has applied to the site, which can save the investor valuable time.
Flippers are eager for diverse funding options. More than one-third of house flippers used financing options on their 2016 and 2017 projects. In the second quarter of last year, that percentage grew even higher, demonstrating that a wider variety of flippers are getting involved in the market than before. Ten years ago, a hard money loan would come with an interest rate of 15% or more, and financing options would be restricted to local, brick-and-mortar lenders. Modern investors can now shop and find the perfect project online. It’s a compelling path for flippers, as well, since crowdfunding platforms tend to have faster application response times than traditional loans.
The future of real estate investment is looking good, and the fix-and-flip market is proving to be a stable market. Real estate crowdfunding specifically presents new opportunities for flippers and investors alike and represents the cutting edge of real estate financing. Investors would be wise to investigate and weigh the benefits of crowdfunding in comparison with traditional real estate investment opportunities.
For investment success, it’s important to create an asset allocation that considers your financial circumstances and long-term goals. Diversification doesn’t ensure gains over losses, but it can help mitigate risk and volatility in one asset class over another. Marketplace lending has become an increasingly valuable investment option for those looking for steady returns in the real estate sector.
How Marketplace Lending Benefits Investors
Marketplace lending can offer several significant benefits to investors, as its driven by the dynamics of the market, or the wisdom of crowds. Through the right MPL platform, it’s possible for investors to achieve significant returns on their investments, from 7-11% on average; more than investing in bonds and with less risk than equity investment options. What’s more, investors will receive monthly interest payments during the life of the loan and a return of capital at maturity.
The short-term nature of MPL real estate loans means that investors get their principle back quickly, as opposed to waiting years for a bond to mature. As an alternative investment channel, investors can diversify their portfolio with a unique product that doesn’t have a direct or causal relationship with the stock market. There are various risk levels associated with each MPL opportunity, which investors can hand-pick to meet their overall investment diversification strategy.
Common Real Estate Investment Options
MPL investments come in many different forms. It’s worth noting that a real-estate investment trust (REIT) and marketplace lending are not one and the same thing. A REIT uses investor money to purchase real estate properties for a portfolio. Shares in REITs are purchased and sold on major exchanges – like a stock. MPL investment in a crowdfunding platform, on the other hand, allows investors to select individual properties they want to invest in; not just a share in a portfolio of properties.
MPL sites allow real estate investors to buy into real estate properties with relatively low minimum investments. Some sites allow investors to input as little as $1,000, which opens the door to many more opportunities for investors to start diversifying their portfolio within the real estate world than before. Investors in the MPL space can cherry pick from specific asset classes, loan types, valuation metrics, risk assessments and more. This offers a new level of control and transparency to those interested in real estate investing versus more opaque options offered by a REIT.
Community and interconnectivity are important human needs that are best supported by compact development. The intention of compact development strategies is to bring people and resources closer together to reduce the need for travel and fuel usage, making urban processes more efficient. Walkable communities offer users benefits in terms of health, convenience, and productivity. Quality public transportation provides additional economic and personal benefits to residents and businesses. This is important for investors as they consider the design, development, and ongoing operation of commercial and residential properties.
Reducing Carbon Emissions
Public transportation and walkability support the reduction of carbon omissions by removing vehicle-produced pollutants from the equation. This results in higher overall air-quality within the community. Reduced emissions also protect groundwater by minimizing the amount of toxins that percolate down to the water table. Many public transportation vehicles use alternative propulsion sources and contribute less to the greenhouse effect. The reduction in air pollution supports human health and increases overall appeal and demand, contributing to sustained and increasing property values.
Encouraging Exercise and Reducing Healthcare Costs Through Walkability
Walkability and public transportation have the added benefit of encouraging occupants and building users to get more exercise in their day. Walking to and from the transit station, or using public bike rentals such as OFO or Lime, provides the opportunity for exercise and reflection, supporting physical and psychological well-being of citizens and professionals. Open areas and opportunities for walking and biking have been proven to bolster employee productivity and satisfaction. An added benefit for your business, active employees lead to diminished health care costs and lower rates on health insurance.
Supporting the Labor Market and Enhanced Mobility
Providing public transportation and planning communities for walkability increases the appeal to potential laborers seeking employment. If your portfolio holdings are intended to be used as rentals, which they almost certainly are, local industry and the availability of labor will be vital in assessing the viability of the market for investment. The potential cost savings due to the availability of public transportation represents a valuable benefit for relocation that can drive population growth and availability of skilled laborers. Additionally, public transportation and walkable paths provide more opportunities for mobility-limited citizens, increasing the overall economic output of the community.
Encouraging Retail Growth and Tourism
Walkability is also important for the local economy, especially retail. Strong foot traffic is an important element for urban retailers and reduces the consumer’s time spent traveling to acquire resources. It provides ample social opportunities, strengthening rapport within the community. Walkable communities tend to be more appealing to tourists. Well planned-out communities make it easier for tourists to enjoy the cultural and economic features of the community. Tourism supports local growth, business revenues, and the diversity of the community. If your niche is vacation rentals, tourism demand will be an important factor to consider.
Reduced Traffic Congestion and Greater Safety
Additional benefits of walkability and public transportation are reduced traffic congestion and greater transportation safety. Buses, trains and other public methods are more reliable, provide economical travel options, and result in fewer accidents compared to the use of individual vehicles. The associated reduction in traffic congestion makes the community more appealing to prospective residents. Business and industry are drawn to communities that provide quality transportation infrastructure. Local traffic conditions that hamper logistics interfere with economic growth and decrease appeal to investors. Well planned traffic systems that incorporate public transportation create the best environment for strong rental demand and lease rate appreciation.
Limiting Hardscapes and Preserving Open Space
Compact urban design also emphasizes the limitation of paved and other built surfaces. Limiting the building footprint diminishes the need to disrupt natural habitats. Sustainability conscious designs incorporate open space and natural elements of the habitat, allowing harmony with native species. Smaller footprints also allow more rainwater to reach the soil, allowing it to be naturally filtered and treated by the earth. Rainwater that hits hard surfaces collects oil and other toxins. The storm runoff typically finds its way into rivers, streams, and other bodies of water.
When you’re conducting your due diligence for a potential acquisition, or selecting a site for new development, it’s important to review how the environment, human health, and the local economy is supported by a walkable community and the availability of quality public transportation. Investments within compact urban environments typically experience strong demand. Partner with a proven investment platform that helps provide the data and insight required to make strong investment decisions.
There is perhaps nothing more important than location when it comes to real estate development. Selecting a location for a future development or investment project requires many considerations in connection with the location and the market factors it represents. The best planned project will more than likely fail if implemented in a region that doesn’t demonstrate the demand and growth needed to support the success of the venture. This discussion will address numerous factors that influence the selection of market including industry growth, population, regulatory environment, tax rates, and demographics.
The first consideration in the evaluation of a market is the growth of local industry. Are new players entering the market? Have other developers already started to invest in the region? Examine the primary economic drivers of the local economy to determine if the dominant industry is in the growth or decline phase. Is the industry likely to thrive over the next 20 years? If the primary industry is focused on producing outdated technologies or employs processes that have negative consequences for the environment, it will not be a good candidate for forward thinking industries and developers.
Labor and Employment Trends
The availability of skilled labor is the crux of successful business and real estate development operations. Without a sufficient and quality labor force, it is impossible to achieve sustainable growth, much less get started. If the industry is new to the region, observe how housing availability will either support or limit the growth of the labor force. A developing industry is best served when the local population has the experience and skill sets to support the business model. Bringing new workers to the area is typically extremely expensive and often not feasible on the scale need for larger operations. Additionally, consider how the community is likely to appeal to ideal industry recruits.
Sustainable Real Estate Development
Sustainability is an additional concern that can dramatically improve the long-term financial outcome of real estate development projects. Choose a location that will have the least impact on the natural environment. Where possible, build within existing developments that already provide the infrastructure and utilities need for operations. This will reduce the expense, time, materials, and energy required to complete the new structures, while also reducing the impact on the ecosystem. Consider the availability of building materials and resources needed by the growing economy. Locally produced goods often come at a lower cost and include reduced transportation expenses, supporting sustained growth and minimizing the carbon footprint.
How well does the planned usage conform to the current and proposed regulatory environment? Will the project be viable in the long-term considering the regulatory direction of local and regional governments? These are factors that should be identified as part of the due diligence process. Participation in the local civic process by project representatives will ensure an awareness of emerging regulatory issues and that strategic planning includes initiatives and contingencies to capitalize on and cope with regulations. Zoning and planned changes are extremely important to verify before acquisition of the property. Also consider tax rates and what impact they’ll have on operations, and well as on the demand from incoming laborers and residents.
Population Growth and Availability of Housing
Industry growth typically means population expansion as well. When new residents are moving into the area to seek gainful employment, it stimulates demand and growth in the local economy, further driving the demand for housing and commercial space. As the population grows, the availability of housing tends to decrease, raising prices and rents. When housing is limited, it can hinder growth in the industrial and commercial markets. As you evaluate potential markets, consider the balance between these economic forces and how they move interdependently.
Prevailing Lease Rates and Real Estate Development
The best opportunities are found where the prevailing lease rate for office or residential space is on the rise. There are exceptions, such as in speculative acquisitions, but in most cases strong lease rate appreciation is an excellent indicator of increasing demand or limited available space. Increasing demand can mean growth in startups, population expansion, and overall economic prosperity. Lease rates also tend to rise when there is insufficient space available to meet stable and increasing levels of demand. This signifies the need, and opportunity, for developers to create new structures to accommodate the demand.
Demographics and Target Market
If the firm plans to invest heavily in the local distribution of products and services, it’s important to determine in advance if demand exists for the product or service that will be produced in the proposed property. You’ll want to determine if the industry is in the growth or decline phase, and how far into the future operations will be viable. As most commercial and multi-family structures are intended to last for at least several decades, and often much longer, ample forethought must be given to determine if sufficient long-term demand will continue to exist for the anticipated life-span of the project.
The Right Market
Selecting the best market for investments is a complicated task that can take months of research and visits to many local markets to get a first-hand perspective on the economy. Working with an online real estate investment platform, one with extensive experience in due-diligence and evaluating proposed projects, will make your investment growth more efficient and less time consuming. Partnering with other investors allows the distribution and mitigation of risk and enhanced access to high-value opportunities.
Short sale real estate investing is when a developer purchases a property for less than the mortgage amount owed. These types of deals became more popular after home prices collapsed several years ago. As values took a serious dive, many homeowners owed a lot more than their property was worth. From the perspective of a lender, a loss on a sale can be much better than the complexity of a foreclosure.
For real estate investors, short sales can be an amazing opportunity, but they also have distinct rules to follow too. For every investor who does everything they can to avoid short sales, there are still some that thrive off them. Like any other decision, it’s important to form an opinion before making a final choice, by looking at the information available.
How to Short Sale an Investment Property
Finding real estate financing for a short sale property might not be as difficult as some developers think. The most obvious benefit of short sale real estate investing is that it’s possible to pursue a property for a huge discount. This means that it might be easier for experienced borrowers to get the support they need just by tapping into crowdfunding resources.
There are plenty of good discounts available, and once an investor finds a property that appeals to them and gets the seller on board, all they need to do is present their case to the lender. Usually, for those wondering how to short sale an investment property, the process is very similar to traditional real estate investment. A short-sale financial package can be offered to the lender including statements, and other important documents.
The Benefits of Short Sale Real Estate Investing
Aside from the discounts available with short sale real estate investing, it’s worth noting that this solution also helps the seller, even if it seems as though the investor is paying much less than they should be. A short sale is one of the last options a seller will often have before foreclosure, and foreclosures remain on a buyer’s credit report for a number of years, making it harder for them to buy cars, apply for credit cards and more.
Additionally, investors will be able to work with lenders to negotiate over the deals available for the property in question. With a short sale, investors will often have more scope to influence the decisions of investors, particularly if they can supply information like comparable sales, cost of repairs, and other negative items that might affect a lender’s ability to see the value in an investment.
Addressing Short Sale Real Estate Investment
While short sale real estate investing does have a lot of benefits to offer in the right circumstances, it can also be a lengthy and complicated process. There is a great deal of paperwork that needs to be filled in before a deal can be put across, which means that it might not be the ideal option for an investor that wants to jump into action as quickly as possible.
Additionally, to close a short sale, everyone will need to be on the same page. This means that it’s not necessarily enough for a buyer to want to buy and a seller to want to sell. Lenders must agree to the offer too, which is often why crowdfunding is such an appealing alternative option.
There are times when getting your client’s project funded turns into a challenging task. Maybe the money market is tight, private investors are conservative, or the project doesn’t fit conventional lending criteria. When this scenario arises, it’s valuable to have additional sources of working capital available to meet the needs of your brokerage clients. With advancements in real estate financing technologies and online funding platforms, there is much greater opportunity available. The global network of capital provides a rich resource to secure the funding that will provide the value to your clients needed to achieve your brokerage goals.
Working Capital for Brokerage Clients
Every project is unique, but not every finance partner will see and appreciate the value and potential that it represents. Even projects that are clearly suitable by all objective criteria can face financing challenges. This depends on market conditions, the availability of capital, and the networking reach of your clients and brokerage. In these instances, it’s beneficial to seek a lending partner that can bolster your reach. It will help you obtain the capital needed to carry these projects forward. If your brokerage meets overall volume criteria, there is excellent potential to access working capital through online funding platforms. Consider those that specialize is high-value and time-sensitive real estate development projects.
Going forward with this approach, it’s important to properly qualify your clients and gather the needed financial documents. Sometimes the need for alternative capital sources isn’t driven by the factors previously mentioned, but by the client’s need for expedient working capital to meet project milestones on schedule and keep holding costs to a minimum. Conventional financing sources typically take months to close transactions. They also have complex and tedious underwriting requirements that can sideline projects with excessive construction delays. Crowdfunding can provide financing solutions to meet diverse investor needs including working capital, bridge funding, construction loans, cash out, and more.
Benefits for Your Brokerage
Working with an online real estate investment platform to supplement your funding needs can offer tremendous benefits. One of the most significant benefits are referral fees that you’ll earn when bringing new clients to the platform. You’ll continue to earn referral fees on all subsequent loans originated for that client. What’s more is you will retain exclusive control of your relationship with your client and over your autonomous brand as a brokerage. A reputable financing partner will respect the time and effort you put into building the rapport and trust needed to secure a loyal client.
Another benefit of forming a financing partnership is that it will allow you to service a broader range of clients and provide them with a supply of unlimited potential capital. This will help build your firm’s reputation, profits, and marketing advantage. Online funding platforms offer tailored solutions, whereas most conventional lending institutions are bound by rigid bureaucratic policies and underwriting criteria. These dynamic solutions help meet the strict timelines of high-value real estate development projects. Additionally, much lower interest rates are available than through comparable private money sources.
Streamlined Underwriting and Lending Support
When you choose to work with a reputable and flexible funding platform, you’ll have access to convenient online tools. These will allow you to submit applications, track clients, manage documents, and ensure a smooth closing. Your lending partner can relieve you of underwriting duties and allow you to focus on developing client relationships and refining your marketing strategies. Rather than continuously searching for private capital sources, those with excessive rates and complex terms, you can rely on a stable source of financing that provides additional revenue and lead generation opportunities.
After solidifying the partnership by agreement and establishing online underwriting systems access, you’ll be ready to harness the vast capital that online funding platforms can provide. In addition to lending as a first position lien holder, alternative vesting is also available. Subordinated debt and equity shares are additional options. The flexibility is there to meet the unique needs of your clients. After you submit your client’s application, a risk profile assessment is developed. Upon approval, pre-funding of the project will get your clients the working capital they need. This will ensure they can move forward with their real estate development projects on schedule.
Working with a crowdfunding platform to supplement the lending capital available to your brokerage can create tremendous benefits for your clients. This is true in terms of financing costs, closing speed, and referral fee opportunities. Carefully review the terms and operational stability of the partners you consider working with. No matter which funding solution you select, ensure that you maintain control over your clients and business.
The real estate business is tough. You know what I mean: generating leads, closing transactions, and getting paid is a constant struggle. For brokers, agents, loan officers, title reps, escrow officers, appraisers, attorneys, and anyone involved in real estate, it’s critical to offer maximum value. How can we create the most value? One proven strategy is helping clients find the financing they need to make time-sensitive acquisitions and development plans happen. This article will discuss how guiding your clients toward reliable and efficient commercial real estate loans will secure their appreciation and loyalty. The more funding your clients obtain, the more deals you’ll close, and the more fees you’ll take home.
Sources of Commercial Real Estate Loans
Today, it seems as though there’s many options available in the lending marketplace. Consequently, it should be easy enough for clients to obtain the commercial real estate loans they need independently; however, this typically isn’t the case. While there are many funding sources available, many clients do not have the awareness or expertise to locate and secure them. As a trusted professional that knows the industry behind commercial real estate loans, you’re in an excellent position. You can offer the insight and guidance they’re looking for. Additionally, the array of options available and the complexity of the funding process often overwhelms and intimidates borrowers.
Even experienced real estate developers often have trouble finding the financing they need due to the limited availability of credit for specific project types or markets. Individual credit factors and the level of development experience can also hinder clients in finding the financing they need to move forward. Finding financing requires extensive networking, research, due diligence, and time, many things of which busy developers don’t have. There is a wealth of untapped opportunity available to real estate professionals that can bridge the funding gap for clients.
Partnering with a Reliable and Experienced Lender
You know the opportunity is there. How can you take advantage of it for the benefit of all stakeholders in your real estate industry business? Start by considering the type of clients you serve most. Are they multi-family, or commercial developers? Do they focus on land acquisitions, or infill development? Knowing your client’s needs will help you identify the type of funding they require, what they can afford, and where to start looking. Reach out to your professional network. Get on the phone and speak with successful clients and professionals in your niche and inquire about their funding sources.
With this in mind, take your search online and seek out conventional lending sources, private money lenders, and crowdfunding platforms that serve your industry. Give special emphasis to lenders that have experience in your industry and have underwritten substantial loan amounts, and numbers of projects. Moreover, the funding platform you choose to collaborate and establish a relationship with will have a tremendous impact on your credibility. In addition to supporting your reputation, working with established lenders will increase the potential for successful closings.
Securing Commercial Real Estate Loans and Closing More Deals
Referral and collaborative relationships are an integral aspect of success in real estate, but what about the technical side? What will be your responsibilities and how will you work with underwriters? Will you retain and control the relationship with your client? Or, will the lender take over and remove you from the equation (and continued earnings). Every lender is unique and will have varying practices. Look for a partner that will respect your relationship with your clients. Ensure they will respect your right to earn whatever fees are due to you given the nature of your relationship with your client. Likewise, consider what is customary and legal for your profession.
If your lender side-steps you in interactions with your client, it will diminish your status and lead to less repeat and referral business. Additionally, working to find and secure commercial real estate loans for your clients can also create extra work for you. If you’re already inundated with tasks, it can be difficult to manage the additional load. Consequently, lenders that offer a streamlined underwriting and approval process will make you more efficient. The less time you spend gathering the needed documentation and communicating with both parties, the more effective you can be. Finding the right balance in working with a lending partner allows you to focus on generating new leads. Correspondingly, it will allow you to devote more attention to existing transactions to ensure successful closings.
Building Your Business
Doing more than what you’re required, what Napoleon Hill calls ‘Going the Extra Mile,’ is a proven way to establish your unique value and brand position. Finding commercial real estate loans for your clients is an effective way to achieve this without creating excessive extra work. Creating a working relationship with a reputable funding source is the fastest way to embrace this opportunity. Please reach out to us today or click here to learn more about working with a leader in commercial real estate loans.
The key to a good Sharestates rehab investment is a healthy exit plan and an accurate renovation timeline. These factors are not just important for a real estate investment borrower, but also for accredited investors.
Every real estate developer knows that renovating the interior and exterior of a property can be a tedious process but is essential to realizing one’s profit. Most buyers desire a turnkey property that requires little to no renovation after the purchase. Needless to say, it is an important bargaining tool to have a well renovated and designed property.The Sharestates Commitment to Quality Real Estate Investments
To keep our investors notified on the progress of their rehab investments, we inspect each property before releasing another draw of capital to the borrower. From appraisal to inspection, Sharestates tracks the updates of each of our investments to protect our investors.
To see some of our favorite before and after renovations, check out the below!
Also, check out some of our most recently funded projects:
To view the company’s historic performance, check out our statistics page!
To look at more properties that Sharestates has funded or to look into funding for your next real estate project click below.
Any business that frequently profits from the sale of an asset is classified as an active business. The profit you make could come from selling a vehicle, a piece of inventory, or even a real estate investment. Selling your own home and flipping multiple investment properties are two very different concepts in the eyes of the IRS.
If you’re actively buying homes to fix them and sell them on the property market, then you’ll be considered a “dealer” in real estate. This contrasts with the passive investment income that comes when you rent a property to another family or person. If rented properties are eventually sold, you will be taxed at far more favorable “capital gains” rates.
Determining Your Position with Real Estate Tax
The code provided by the IRS is a little vague when it comes to defining active and passive income. There are many factors to consider, including how many properties are “flipped”, whether those properties were rented or owned for a period before the sale, and how long they’re held.
Usually, a person who flips a single house after a long period of house or sells a rental property won’t be an active real-estate dealer. However, a fix and flip investor who sells multiple houses per year will be subject to a higher real estate tax rate, because their property profits are a source of income.
If you’re classed as a dealer, then the profits from your investment properties will be taxed at ordinary income rates. While there are some exceptions, this means that your profits could be taxed at a rate of 10% and 39.6%.
Calculating Real Estate Investment Tax
Ultimately, the tax that you’ll have to pay for your investment properties, and whether it’s at capital gains or ordinary rates will depend on the profit you’ve derived from your fix and flip process. To calculate the amount you’ve earned, you’ll need:
- The purchase price of the home: This includes the cost of the house and nothing else. Closing costs and other fees are best treated as “expenses” when your business is in flipping houses.
- Expenses: The expenses are the things beyond the purchase price that you needed to deal with, including loan fees, materials, taxes, professional services, and supplies.
- Profit: This is the amount that you cleared on the sale after the purchase price and expenses are considered.
In simple terms, the basic formula for calculating tax is Selling Price – Expenses = Profit. Because expenses are crucial in making sure that you can keep your taxes to a minimum, it’s important to keep track of every expense involved in a flip – no matter how small or insignificant it might seem.
How to Pay Less for Property Investments
If you’re worried about the costs of real estate tax for your property investments, then there are some things you can do to reduce the risk that you’ll be subject to ordinary income tax.
For instance, you could hold the property for a year or longer, turn your property into your primary residence before you flip and sell it, or do a “tax-deferred exchange” as part of the flip. A tax-deferred exchange allows you to roll the gains from one property to another, but you will need to hold the property for at least a year to qualify for this.
Finding capital to fund your real estate projects is one of the greatest challenges in the real estate development business. If you know where to look, you can find capital that is inexpensive, and that comes from a source that supports your business objectives. If you’ve taken the time to prepare yourself, and your investment business, you will find few challenges in capitalizing your multi-family residential and commercial deals through the use of modern online real estate investment platforms. This article will discuss the common sources and considerations in efficiently obtaining capital now, and over the long-term.
Sources of Real Estate Development Financing
Traditional sources of capital include private money, hard money, convention loans, and commercial mortgages. Obtaining financing from these sources typically requires extensive networking, time investments, and committing to higher interest rates. The emergence of online real estate investment technologies has increased the availability of capital for real estate development and streamlined the funding process. By allowing many investors from across geographic regions to pool their funds, while reducing risk, crowdfunding platforms have made it substantially easier to access capital, and provided an alternative to project leaders that were underserved by the conventional funding model.
Preparing Your Personal Finances & Considering Your Track-Record
Obtaining financing for risky real estate development projects requires a strong personal history of reliability and performance. A career in real estate development requires careful forethought to maintain your credit score, and use your available credit wisely. Although your credit score isn’t necessarily a reflection of your credibility, it is one of the few objective metrics available to financing platforms to ascertain the level of risk associated with partnering in a project with you. For those whom credit may be a challenge, there are alternatives; however, it may be more difficult to coordinate funds, and they will come at a commensurately higher interest-rate.
In addition to your credit score, lenders will also consider your track-record as a borrower, and success of your previous, especially recent, projects. Underwriters will consider the level of returns that you achieved, losses incurred, the timeframe for completion, and whether your projects were completed under or over budget. Each project is akin to an employment experience on your resume; it’s important to treat every project as though it will be part of your permanent record, and will be reviewed by potential investment partners in the future.
Your level of experience, and the management team that you put together, provides a strong indication to investors of your ability to successfully complete the proposed project. When your personal experience is limited, you can bridge the gap by hiring qualified professionals with cross-functional experience in every category of technical and administrative skills that your endeavor will require. Consider hiring a professional business plan writer and consultant to assist you in developing your team and properly representing them in your strategic plans and investor proposals.
Your real estate experience is cumulative. With every project that you complete, your credibility will gradually expand according to the class of property, scope of the project, total project value, efficiency, and profitability. You will experience the greatest success in obtaining financing, if you incrementally increase the scope of your projects according to these metrics; however, don’t pass up on a good opportunity simply because you feel you aren’t ready: just go for it and gather whatever experience you can, regardless of the outcome (as long as it’s likely to be positive).
Risk Factors of Various Transaction Types
The risk profile associated with your proposed project has a tremendous impact on the availability and cost of financing. Significant factors include loan-to-value ratio, lien position, occupancy, and development phase. The lending criteria for property classes varies. Underwriters will have different expectations and limits for 1 to 4-unit residential properties, small multi-families, larger multi-family projects over 20 units, and commercial and industrial properties. Of these criteria, loan-to-value ratio is a primary consideration.
The loan-to-value ratio (LTV) is an indicator of the overall leverage in place, or anticipated, on the property. Acceptable LTVs for commercial projects generally range from 70 to 90% depending on the class of property, investor experience, and other factors mentioned. Lenders will look at the existing LTV as a risk factor for lending additional funds on the property. A high LTV will indicate to investment partners and financiers that the property may be over-leveraged. Excessive LTVs are typically associated with large debt servicing requirements, and potential cash flow issues in the event of high vacancy rates, lease rate declines, or market corrections.
The loan position that is available to the prospective lender also plays a part in underwriting approval and interest rate offered. When a senior lender is already in place, and they are not willing to subordinate to a new lender, this leaves only junior positions available to incoming debt financing. Second, or junior position loans, leave lenders at additional risk; in the event of default, the second position lender may be left with no right of recovery. When the borrower defaults, and foreclosure proceedings are pursued, the senior position lender will have first entitlement to proceeds.
Build Your Record of Success
Getting the funds needed to push your projects forward has never been easier. While there are many project and borrower vetting requirements, the availability of capital afforded by the online real estate investment model is providing more cost-effective financing to the organizers of qualified and profitable projects. Collaborating with leaders in the crowdfunding space will allow you to build your track-record and lay the groundwork for consistent successful ventures going into the future.