Real Estate Investing and Brain Surgery

by  Randy King  on  Friday, August 11, 2017


I hate flying.  Not only do my arms get tired, the whole process has become encumbered with ridiculous charges and even more ridiculous assertions – like the fact that 3.5 ounces of shampoo has the potential to bring a Boeing 777-300ER widebody out of the sky and smash 396 passengers into the dirt.  Really.

Sorry for that “arms tired” pun – too much CaddyShack, I guess.  I used to fly so much that I had one of those super frequent flyer special god-like cards that often whisked me into first class.  Trust me, it’s not all that glamorous, flying is just annoying and stressful; even more so now.

So, we drove to North Dakota last week, and the nice thing about a couple of real estate investors driving in the car is that we will often detour through interesting neighborhoods – because we CAN – with a fair amount of ooo’ing and ahhh’ing and the frequent exclamation of “send ‘em a letter”.

It made me think – how much different is real estate investing in Bemidji, Minnesota than in Madison, Wisconsin?  Well not much, but the devil’s in the details.  True, there are distressed properties and, more importantly, distressed owners, and the real estate law is similar, so what’s different?

For one, real estate investing is a contact sport, and what you need to play are lotsa contacts.  From contractors to REALTORs to title company to attorneys to suppliers – all relationships that need to be built and nurtured.  You can come into an area and start from scratch, but it takes time.

It’s one of the reasons in our coaching program that we introduce students to the people they will need to work with.  So, no matter where you are, find someone that can introduce you to the people that you will need.  A reference is 100 times better than cold-calling – on both sides of the equation.

The other thing about real estate being “local” are all the small nuances that you learn when you live and work in an area – the state of the real estate market, local customs, character of neighborhoods, building inspection processes and, of course, where to get the best coffee and tacos.

Where people looking at real estate investing have a disconnect is in knowing what this profession is all about.  True, there’s lots of moving parts and technical aspects related to, say, rehabbing a house.  But we can (and do) teach that over a period of 8 weeks, 3 hours a week.  It’s all the other stuff that matters.

One of my favorite analogies is to liken real estate investors to surgeons.  Not that this stuff is brain surgery by any stretch, but both the surgeon and the real estate investor are practitioners.  The best way to see what I mean is to get on Netflix and watch Grey’s Anatomy from the beginning.

Grey’s interns come out of 4+ years of intensive book-learning in pre-med and full med programs at a university, and they still don’t cut anyone open until they’ve had a LOT of time in the O.R. with an attending surgeon that shows them the nuances to put their book knowledge into practice.

So, don’t focus entirely on the book knowledge – for sure, get some good schoolin’ – but focus more on finding your “attending investor” and let his or her knowledge and experience guide you and help navigate you around the mistakes and pitfalls; some of which can be costly (or cratering).

These things all contribute to the notion that real estate investing is local.  It’s not the houses, it’s not the state of those houses, it’s not the distressed state of owners.  It’s about resources, understanding, developed skills, and the support around you.  If you don’t have that support yet, go find
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Property Tour #3 Is Only a Few Weeks Away...

by  Randy King  on  Monday, August 07, 2017

One of the favorite features of the Madison REIA Blueprint Series is the property tour.  For those enrolled in the program, we do 4 live property tours in and around Madison every year.  Why do you suppose these venues are so well-attended and loved?

Well, let’s see – the first thing that comes to mind is the “HGTV Effect” as we like to call it.  This is where people really love to see a distressed property that’s essentially been left for dead, abused, and misused for many years, inhabited by raccoons and their relations and generally just trashed.

Yes, we’ve got plenty of those on the tour (good thing we provide masks).  Also inside the HGTV Effect is the re-building phase, where people get to see how our rehabbers have chosen to bring a property back to life, what updates they’re doing, and how they are proceeding with the process.

During all this, of course, we stress the educational part of the process – it’s what the REI Blueprint is all about.  So we have participants use their Rehab Estimate Worksheets to arrive at a rehab cost, and we analyze that work right on site of the properties where we do this.

Property Tour #3 is coming up on Saturday, August 26, 2017, so if you’re a bit of a real estate geek and this sounds like a fun thing to do all day Saturday, you’ll want to check out the REI Blueprint Series on our website.  CLICK HERE for more details on this event and the REI Blueprint.

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Pay What?

by  Randy King  on  Saturday, August 05, 2017
We’re often asked how to figure out what to offer for a property, and it’s one of the earliest things that
we teach in our Blueprint Series and are constantly reinforcing in our coaching program. Many people
think that the approach real estate investors use is just to “low-ball” the price and see what happens.
Besides being deceptive and an unfair business practice, “low-balling” rarely works, and it creates a poor
reputation for ethical and honest real estate investors. Let’s take the high road and show you exactly
how to arrive at a fair offer price, then stand behind that price and how you calculated it.
The very first thing to do is to determine what the house would be worth completely fixed up and in a
move-in- ready state. The most accurate way to do this is to use the Multiple Listing Service (MLS) to
look at what similar houses have sold for nearby and recently.
The catch there is that only real estate licensees like a REALTOR or a real estate broker is granted access
to the MLS, and only through a real estate brokerage. So, if you’re not a licensee, your best bet is to
hook up with one who is willing to work with you and perhaps be paid by selling your finished property.
The process of finding these comparable properties is often called “getting comps”, and it is part science
and a lot of art. The art is in having a good working knowledge of neighborhoods and having a sense of
where the market is heading. In other words, being good at reading tarot cards might be a useful skill.
Let’s say that you arrived at good comps of $225,000 for a property. We call this the “After Repair
Value” or ARV for short. The seller needs to get out, and the house is in rough condition; no REALTOR
would list the house as it is; it may not be financeable by a bank for many reasons (that’s another post).
You visit the house with your handy-dandy Rehab Repair Estimate Worksheet (oh, you need one of
those? Then CLICK HERE) and you get to work. Yes, using this worksheet is also part science and some
art as well, but with a little practice, you get good at it.
When you run through the worksheet, we’ll say that you came up with $53,000 in repairs. Not an
unusual number for a house in rough shape; this stuff adds up fast. Now the (simple) magic begins. To
figure out what to offer, you multiply the ARV by 70% and subtract the repair costs. Done.
In this case, 70% of $225,000 is $157,500, less repairs of $53,000 yields $104,500. That’s what we call
your Maximum Allowable Offer, or MAO. We use 70% because the difference, 30%, is what we need for
things like holding costs (utilities, insurance, etc.), closing costs, and your profit. It’s a solid number.
There are other schools of thought that have you doing extremely elaborate calculations, including
things like the actual cost of utilities and insurance, closing costs, etc., but in the end, they all tend to
average out to 30%. You could say that’s one weird little trick, but we won’t. It just works.
It’s important to stress the VALUE of your service to the seller. They can be DONE with this problem in
as quickly as a week, and they will pay no commissions, have no repair or even clean-up costs, and walk
away with a check. Fixing it up and using a REALTOR can be costly both in time and money.
So the key to being an effective, ethical real estate investor is to have a process and a plan for
calculating your offer prices, stick to that plan, and show your seller what he is up against and why you
are a great solution to his problem in the long run.
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Are you a Real Estate Professional?

by  Scott Vance  on  Friday, August 04, 2017

Are you a “Real Estate” professional in the eyes of the IRS?

It does not matter if you are a bookkeeper, Enrolled Agent, CPA, Attorney or an employee of the IRS the tax code is daunting and easy to misinterpret.  Even if you understand it the application of the regulation presents a further complication.  An area in my tax practice where I see mistakes routinely made is in the application of the title “Real Estate Professional”, section 469 of the IRS code deals with this topic specifically. 

Recently I was contacted by a potential client.  The IRS had sent him a notice that they were going to audit him.  He retained me for representation during the audit.  Being defined as a real estate professional is very advantageous to the tax payer.  The biggest advantage is that the passive activity loss limitations no longer apply.  Also real estate professionals are able to exclude rental income from the additional 3.8% tax on net investment income.  This client, named Jed had 3 rental properties and ran a business doing construction/home repairs and improvements.  He self-prepared his taxes by hand.  Between him and his wife they had a joint MAGI income which was in excess of $150,000.  He had claimed on his return that he was in fact a “Real Estate” professional.  But in speaking with Jed he wasn’t sure what the definition of one was for sure.  I explained a real estate profession in the eyes of the IRS has two main requirements and they are;

  1. More than one-half of the taxpayer’s personal services must be performed in real property trades or businesses in which he materially participates; and
  2. The taxpayer must perform more than 750 hours of service in real property trades or the businesses in which he materially participates.

If both tests are met the taxpayer is allowed to deduct all of the loss for the rentals in which he materially participates.  Material participation is defined by Treasury Regulation

Section 1.469-5T;

  1. You participate in the activity for more than 500 hours during the year,
  2. Your participation in the activity constitutes substantially all of the participation by all individuals (including non-owners) in the activity for the year,
  3. Your participation is more than 100 hours during the year, and no other individual (including non-owners) participates more hours than you,
  4. The activity is a significant participation activity in which you participate for more than 100 hours during the year and your annual participation in all significant participation activities is more than 500 hours.
  5. You materially participated in the activity for any five tax years (whether or not consecutive) during the 10 immediately preceding tax years,
  6. For a personal service activity, you materially participated for any three tax years (whether or not consecutive) preceding the current tax year, or
  7. A generic facts and circumstances test.

Most people who invest in rental property are not able to meet these stringent requirements.  In general passive income losses, which is what rental income is considered, are only allowed to offset passive gains.  The IRS gives a special allowance under section 469(i) allowing up to $25,000 of passive loss to be offset by earned income subject to income limitations and the requirement that the individual “Materially Participate”.  Should a taxpayer have more passive activity losses than they are able to offset in a given year those losses can be carried forward to future years.  In Jed's case he exceeded the allowable Modified Adjusted Gross Income amount of $150,000 disqualifying him from the $25,000 allowance provided by the IRS and was forced to use the “Real Estate” professional or carry forward the loss to a year where he might qualify to use it.

Luckily for Joe he met the two-part test required by the IRS to be considered a real estate professional.  In his primary profession of being a contractor he more than met the minimum time requirement.  Because he met the time requirement as a contractor this qualification extended over to his activities as a land lord.  Because he met the IRS requirements of the definition of a real estate professional he was then allowed to deduct the loss of his rental properties.  In Joe's case, he only had about an $8,000 loss for the year.  This loss ultimately saved him about $1,600 in the taxes he paid in 2016, as you can see the ability to meet the real estate professional definition of the IRS can be lucrative.

I represented Joe in front of the IRS for his audit.  The IRS auditor didn’t blink an eye when it came to Joe being considered a “Real Estate” professional.  I had Joe provide some simple documentation as to his hours, his activities and the auditor was satisfied with respect to the real estate professional definition. 

Scott Vance is a fee-only planner and Enrolled Agent at Taxvanta serving the Raleigh, N.C. area. He recently retired from the Army. His background allows him to uniquely understand issues faced by military personnel, but he works with all clients. He is currently a candidate for CFP® certification and seeks to provide objective, commission free advice to clients. Vance was born and raised in Pennsylvania. He is married to Amy. They have a son, Brandon. They enjoy skiing and kayaking. He can be reached by email at

Article Disclaimer: This article was written by a valued blog contributor but Triangle Real Estate Investors Association does not give legal, tax, economic, or investment advice. TREIA disclaims all liability for the action or inaction taken or not taken as a result of communications from or to its members, officers, directors, employees and contractors. Each person should consult their own counsel, accountant and other advisors as to legal, tax, economic, investment, and related matters concerning Real Estate and other investments.

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Back in the day, which was a Wednesday, investing in real estate pretty much meant that you bought a property and rented it out.  Sometimes it was a duplex, sometimes a single-family house, sometimes a 4-unit, and up from there.  The goal became to have as many “doors” as you could get to increase your income.  This worked swimmingly for quite a long time, and then something new appeared – on TV.

Bob Vila and the gang came along with “This Old House” and started the rehabbing revolution.  At the time that he was doing it, the owner of the house was right there playing the game with him.  Then someone else came along and discovered that you could buy so-called “distressed” properties, fix them up, then re-sell them on the open market.  A new practice was born; they called it “fix-and-flip”.

Early on, “distressed” meant houses that were in pretty bad shape that the bank had foreclosed on and taken back into their “Real Estate Owned” (REO) inventory.  The interesting thing was that REO inventory was toxic to a bank – the rules used to be that the bank had to set aside seven (7) times its “non-performing asset” value in liquidity (cash) that it could no longer use for loans.  Consequently, if the bank had, say, $500,000 worth of REO inventory, it had to keep $3.5 million liquid that it could not lend to customers.

This could quickly crater a bank; whose lifeblood is the ability to make loans.  So, it was with little surprise that it was relatively easy to acquire these properties from the bank at severe discounts.  They were grateful to have them gone.  Now, this explanation is a bit trivial and used for illustration purposes only; it does not go into new liquidity coverage requirements (LCR) and all the changes that have occurred since the 2008 crash and the introduction of Dodd-Frank.  And we’re only talking about portfolio loans; those that are held by a bank.

But back then, foreclosure was not common and REO inventories were exceptionally small.  It’s only when banks relaxed lending requirements (some say to the level of the ability to fog a mirror), that loan defaults became rampant.  The resulting explosion of REO inventory was astounding.

Fast-forward to today and this is no longer a good way to acquire property for a real estate investor.  All the banking changes have these non-performing assets (REO inventories) exerting less impact on bank operations, and with the high demand for housing, banks can afford to sit back, put lipstick on a pig, and get retail prices for properties held in REO.  This does not work for real estate investors that need to acquire at a discount.  And banks are also selling off low-performing and non-performing loans to note brokers, getting them off their books without foreclosure at all.

That last piece has the effect of reducing the appearance of housing foreclosures because, while the note may be sold at a loss, the bank skips the whole foreclosure process.  Some say that this may have been engineered to give the appearance of a rebounding economy in the housing market.  And it seems to have worked.

So, where are we today with all this?  Well, a real estate investor that is looking to acquire properties is working directly with the distressed owner to solve his problem on the front-end long before the property ends up as an REO.  And in many cases, “distress” simply means not wanting to list a property with a REALTOR and endure that whole process.  As a result, the marketing practices of a real estate investor have shifted dramatically away from dealing with banks and empty, distressed properties to working directly with distressed owners and active properties.

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A discussion with Greg Kesterman from Hamilton County Public Health on health issues concerning property and tenants.

This course covers several topics on health issues one might face as a landlord including hoarding, meth clean up and interacting with the health department.

Incudes 1/2 an Hour in PHP Credits in Federal Regulations

Click Here to Take Online Class

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A discussion with Greg Kesterman from Hamilton County Public Health on health issues concerning property and tenants.

This course covers several topics on health issues one might face as a landlord including hoarding, meth clean up and interacting with the health department.

Incudes 1/2 an Hour in PHP Credits in Federal Regulations

Click Here to Take Online Class

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Is it time to sell that rental?

by  Vena Jones-Cox  on  Tuesday, July 25, 2017
According to a news article by WOSU Radio (and the experience of most of our community), property values in Central Ohio are at a record high. Does that mean it's time to sell?

As with all great real estate questions, the answer is, "It depends".

If you have rentals you'd rather not own, selling soon might get you the highest price on a property you don't want anyway. If you're good at finding distressed and low priced deals, it might be an opportunity to do a 1031 exchange into a rental you'll like better in the long run.

But if you bought your rental for long-term income and wealth building, believing that the market might be topping out (we don't believe that, but we don't have a crystal ball, either) is no reason to sell. The increased value is adding to your wealth in a non-taxable manner, and even if prices drop drastically, your income probably won't.

Getting rid of properties that have turned out to be too far, too management-intensive, or too unprofitable is always a good thing, and although we might not be at the top of the market just yet, now is a good time to divest yourself of those losers. But keep the keepers: jumping in and out of the market is NOT a good way to build wealth in real estate!
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Flipper and Other Mutations

by  Randy King  on  Friday, July 21, 2017
If you're a sci-fi geek and you just stumbled on this tome, I'm sorry to disappoint.  I'm not talking about people walking around with a third arm protruding from their chest or additional eyes on the back of their head, although in some instances, I would personally welcome such appendages.  If you've ever worked on a residential construction/rehab project or have children, you know exactly what I mean.

Instead, let’s look at how the media has mutated the public discourse on the perception of Real Estate Investing and Real Estate Investors.  I don’t just mean TV and print media here – there’s plenty of accountability to be passed around to social media and so-called “real estate gurus” as well.

There was a point in time not too many years ago when the term “Real Estate Investing” referred to the purchase of properties for rental, creating income.  The person who did this was a Real Estate Investor. 
President Dwight Eisenhower kicked off the whole real estate investing thing in this country with the 1960 enactment of the Federal Real Estate Investment Trust Act (REIT).  But Real Estate Investing as we know it today got its launch in 1980 with PBS Television’s This Old House from WGBH in Boston.

By the ratings explosion, it was clear that the creator, Russell Morash (who also introduced Julia Child to the world), had stepped into a surprising phenomenon.  People loved this stuff.  They loved doing it, but they really loved watching it on TV.
Fast-forward to today and cable networks such as HGTV, TLC, and DIY and countless web sites owe their existence to this phenomenon.  Here’s just a couple of ways that they have contributed to the mutation:

For those of a certain age, “Flipper” referred to a lovable bottlenose dolphin whose antics and social message aired weekly on NBC.  Today, a “Flipper” is anyone who rehabs houses.  But, technically, a “house flip” is a wholesale deal – where you control a property with an accepted offer, then “flip” it to someone else to fix up.

How the term rehabbing became flipping is T.V. shenanigans.  The term is really “doing a fix-and-flip”, which is where a rehabber purchases a property taking title to it, repairs and renovates it, then sells it on the retail market to someone who’s going to live there.

But the word “flip” is catchy in T.V. show titles and commercials, so flipper, flip, and flipping became shorthand.  Flipper is turning over and over and over in her watery grave, no doubt.

The term “Investor” conjures up notions of using one’s own money to do a deal, but that is rarely the case.  No, today an investor is someone that invests, time, money, or other resources into a real estate project.  Most of the time, that’s time, resources and OPM - Other People’s Money.

And because of the proliferation of so-called “real estate gurus” that fly into town, sell people the dream and completely focus on making money at any cost, investors are frequently portrayed as “low-balling scum” – the kind that offer a ridiculously low price and strong-arm little old ladies into selling.  Sigh.

And it’s no coincidence that the groups flying into town are the ones buying time on the networks to air their flipping shows.  Oh - you thought that the network was just featuring them?  Nope, those shows are paid for with money that’s being taken from people who want to be just like them.

So, the message, grasshopper, is to do your due diligence, learn exactly what this industry is all about, get the terms right, and learn how to contribute to the betterment of the community with your very visible work.  Stop in at the Madison REIA and they’ll show you how.  Tell ‘em Flipper sent you.
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Multiple Offers Strategies

by  Mike Jacka  on  Monday, June 12, 2017

When it comes to making offers, most investors only know how to make one offer at a time.  They usually make an all cash offer, also known as the MAO (Maximum Allowable Offer) or they get a loan from a bank, hard money lender or a private investor.  This strategy has worked fine for investors and if you are only making offers on bank REOs on through the MLS, then a cash/MAO offer is really all you will be able to make.

The average number offers to get one accepted with this approach is 20-40 offers to get one accepted in today’s market for most of the country.  Some more experienced investors have been able to reduce that number down to about 5-10 offers to one acceptance by being very selective on what properties to make offers on.  In other words, they know from experience that certain properties from certain banks or listing agents simply will not accept their offers so they don’t even make the offers. 

The secret to success in the real estate business is making offers.  The problem is that most investors use the same offer process when dealing with sellers directly and they are missing some huge opportunities if they just knew how to create alternative offers that don’t require cashing out the seller.

Ask yourself these two questions:

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