If you’re currently an owner of an investment property, a 1031 exchange might be the ideal real estate transaction for you if you want to purchase another property while selling off your current one. A 1031 exchange is a tax-deferred exchange that allows you to defer capital gains taxes as long as you are purchasing another “like-kind” property. This exchange mechanism is used by some of the most successful real estate investors and can be beneficial in a variety of situations. The following is a general guide to a 1031 exchange in California. It includes details about what the 1031 exchange is, how to perform the exchange, and why the exchange could be beneficial for you. Understanding the intricate details of a 1031 exchange should be accomplished using a “Qualified Intermediary” which is a professional third-party company that accommodates the exchange process and helps you avoid making any critical mistakes that could jeopardize your tax-advantaged sale.

What Is a 1031 Exchange?

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A 1031 exchange is an exchange that occurs when you sell one investment property in order to purchase another. When swapping your current investment property for another, you would typically be required to pay a significant amount of capital gain taxes. However, if this transaction qualifies as a 1031 exchange, you can defer these taxes indefinitely. This allows investors the opportunity to move into a different class of real estate and/or shift their focus into a new area without getting hit with a large tax burden.

The main requirements for a 1031 exchange are: (1) must purchase another “like-kind” investment property; (2) replacement property must be of equal or greater value; (3) must invest all of the proceeds from the sale (cannot receive any “boot”); (4) must be the same title holder and taxpayer; (5) must identify new property within 45 days; and (6) must purchase new property within 180 days.

To understand how beneficial a 1031 exchange can be, you should know what the capital gains tax is. In most real estate transactions where you own investment property for more than one year, you will be required to pay a capital gains tax. This directly levies a tax on the difference between the adjusted purchase price (initial price plus improvement costs, other related costs, and factoring out depreciation) and the sales price of the property. The percentage that’s taxed on your capital gains depends on the tax bracket that you’re in. The 1031 exchange is defined under section 1031 of the IRS code, which is where it gets its name.

4 Types of Real Estate Exchanges

There are four types of real estate exchanges that you can consider when you wish to participate in a 1031 exchange, which includes:

  • Simultaneous exchange
  • Delayed exchange
  • Reverse exchange
  • Construction or improvement exchange

1. Simultaneous Exchange

One type of 1031 exchange is a simultaneous exchange, which takes place when the property that you’re selling and the property that you’re acquiring close the same day as one another. Keep in mind that this exchange must be simultaneous in order for you to receive the benefits. If the closing of either property is delayed for a short period of time, the exchange could be disqualified, which means that you would need to pay full capital gains taxes.

A simultaneous exchange can occur in three separate ways. The first type of simultaneous exchange is one where you swap deeds with the owner of the other investment property. The second type is a three-party exchange where the transaction between you and the owner of the other investment property is facilitated by a third party called a Qualified Intermediary. Qualified Intermediaries will structure the entire transaction and have training and experience in handling such transactions. Without the help of a Qualified Intermediary, you run the risk of nullifying the 1031 exchange and incurring a large tax burden.

2. Delayed Exchange

A delayed exchange is easily the most common 1031 exchange that you can make. When you conduct a delayed exchange, you will be able to relinquish or sell your investment property before you purchase another investment property. This allows you to use the funds from one sale to acquire another property. This type of exchange can’t occur until you’ve marketed your property, secured a buyer, and have executed the sale and final purchase agreement. A Qualified Intermediary will then need to be engaged to retain the proceeds of the sale until a like-kind property is acquired by the seller.

You will have 45 days to identify a new property and 180 days to close. During this period, the profits from the sale of your previous investment property will be held in a binding trust. Again, while the sale of your new property must be completed in 180 days, you will only have 45 days to find the investment property that you wish to buy. This time-frame gives you some leeway when compared to a simultaneous exchange.

3. Reverse Exchange

A reverse exchange is unique in that you find and purchase an investment property before selling your current investment property. Your current property will then be traded away. By purchasing a new property beforehand, you can wait to sell your current property until the market value of the property increases.

The main issue with this type of exchange is that the transaction typically occurs with 100 percent cash. It’s also important to understand that the majority of banks don’t provide reverse exchange loans. Keep in mind that the purchase of another property with this exchange means that you will have 45 days to determine which one of your current investment properties are going to be relinquished. You will then have another 135 days to complete the sale.

4. Construction or Improvement Exchange

A construction or improvement exchange is a type of exchange that allows you to make improvements to the property before the actual exchange takes place. The property will be placed with a qualified intermediary for 180 days, during which you can use the exchange equity to make the necessary improvements. However, there are three separate requirements that you must meet if you want all gains to be free from taxes.

First, all exchange equity will need to be spent as a down payment or by making improvements to the property within 180 days. The taxpayer will need to receive the same property that was identified on the 45th day, which means that it can’t change significantly. Once the property is given back to the taxpayer, it will need to be at an equal or greater value. These improvements need to be made within 180 days.

Basic 1031 Exchange Definitions

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1. What is Like-Kind Property?

The property that you obtain must be a “like-kind property” in order for the transaction to be considered a 1031 exchange. However, this is a broad term, which means that the property you obtain doesn’t need to be exactly the same as the one that you relinquished. Almost any type of real estate can qualify for this exchange. For instance, you could exchange a duplex for an apartment building. Both properties will need to be in the U.S.

2. What qualifies as Investment Property?

The property must be a business or investment property, which means that it can’t be personal property. Your home won’t qualify for a 1031 exchange. However, a single-family rental property that you own could be exchanged for commercial rental property.

3. How do you determine Equal or Greater Value in an exchange?

The equity and market value of the investment property that you purchase will need to be equal to or greater than what you sold your current property for. If your property has a $300,000 mortgage on a $1 million home, the property that you want to purchase must be worth at least $1 million and you must have the same ratio (or higher) debt on the property.

4. What is “Boot”?

The term “boot” refers to non-like-kind property received in an exchange. Typically boot is in the form of cash, mortgage debt or personal property received in an exchange. If you want your exchange to be wholly tax-free, you can’t receive boot on the sale of the property. Any boot that you do receive will be taxed.

5. What does the same Title Holder / Tax Payer mean?

The name and tax return that appears on the property title for the property that you sell will need to be the same as the name and tax return that you provide when purchasing a new property. An exception is allowed if you’re the sole member of a limited-liability company wherein the property is passed from your company to you.

6. The 45-Day Identification Window

No matter which type of 1031 exchange you take part in, you will have 45 days from the close of the sale to find as many as three like-kind properties. If you identify two or three properties, their total value must equal or surpass the value of the property that’s being sold.

7. The 180-Day Purchase Window

Once you sell your current property, you will have 180 days to purchase a replacement investment property and complete the 1031 exchange.

Getting Started With a Section 1031 Transaction

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If you feel like a 1031 exchange is right for you, it’s essential that you know what you’re doing and follow all of the rules. The first step is always to contact a Qualified Intermediary to help handle your exchange. Whether you’re conducting a simultaneous exchange or a delayed exchange, the investment property that you choose to buy must be similar to the property that you’re relinquishing. It’s also important that you don’t attempt to use any personal property in this exchange. Keep in mind that you will have 45 days to find a property and 180 days to complete the exchange. Any delay on these time limits could cause you to pay capital gains taxes.

As an investor, these exchanges can be useful in a variety of ways. If you want to diversify your assets with a different property or would like to purchase a property that has better-estimated returns, a 1031 exchange is a great tool. It could also be helpful if you currently manage the investment property that you own but would rather purchase one that’s already managed. While you should now understand how to get started with a section 1031 transaction, this is an incredibly complicated process that comes with many obstacles that need to be navigated. Please contact AB Capital for our list of trusted Qualified Intermediaries.

*Disclaimer: The statements and opinions expressed in this article are solely those of AB Capital. AB Capital makes no representations, warranties or guaranties as to the accuracy or completeness of any information contained in this article. AB Capital is licensed by the Financial Division of the California Department of Business Oversight as a California finance lender and broker (DBO Lic. No. 60DBO-69427). AB Capital makes money from providing bridge loans. Nothing stated in this article should be interpreted, construed or used as legal, financial, investment or tax planning advice, or a substitute for thorough due diligence and the exercise of sound independent judgment. If you are considering obtaining a bridge loan, it is recommended that you consult with persons that you trust including but not limited to real estate brokers, attorneys, accountants or financial advisors.

A real estate debt fund allows borrowers to obtain short-term capital for a variety of different commercial real estate projects, which means that the borrowers are almost always developers or experienced real estate investors. The types of real estate projects that are able to be invested in through a real estate debt fund include construction loans, multi-family buildings and industrial buildings to name a few.

A standard real estate debt fund is comprised of equity-backed capital that can be lent to real estate asset owners as well as potential buyers of real estate. Anyone who invests in this type of fund will generally receive periodic payments from the interest charged against the capital as well as security that’s charged against assets of a property. Each debt fund is usually centered around a specific investment strategy. For instance, some funds will focus on financing certain asset types. Before you get started with this type of investing, it’s important that you’re aware of what real estate debt funds entail.

How to Generate Income Through Real Estate Debt Funds

person holding 100 dollar bills

If you decide to invest your money into a real estate debt fund, you will be able to generate most of your income from interest that’s gathered on borrowed capital, which means that a higher interest rate will allow you to garner more income from the investment. Some of the income that you generate can occur in the event of a default, which will allow the fund to obtain the title to the collateral that was used as the basis for the loan. If your investment allowed a developer to construct a commercial building, this property would be available to the fund if the borrower defaulted on their monthly payments.

These funds typically charge interest rates of at least nine percent, which can differ depending on the current state of the market. These rates are usually fixed with a requirement that monthly payments are made on them. The borrower of this loan must also pay some additional fees, which can include:

  • Exit fees
  • Servicing fees
  • Origination fees
  • Extension fees
  • Modification fees

While it depends somewhat on the exact type of real estate debt fund you invest in, there are times when investors are given some or all of the fees that the borrower is required to pay. .

If you want to start investing in real estate debt funds, your first goal should be to find a debt fund, of which there are many to select from. Unless you want to become a manager of a debt fund, someone else will manage all of the investments that are placed in the fund, which gives you the ability to sit back and collect your payments.

This form of investment is useful if you’re looking to have a balanced investment portfolio. Investing in a real estate debt fund is a relatively low-risk investment, which gives you an opportunity to lower the risk of your investment portfolio and provide yourself with consistent income while you wait for your riskier investments to pan out. If you invest solely in risky investments, your losses could be substantial. Investing in a real estate debt fund can be a way to hedge these losses.

How Debt Differs From Equity

Before you go forward with investing in a real estate debt fund, you should first know how debt differs from equity. If you have a greater appetite for risk, investing in equity is likely a good option for you. When you make this kind of investment, you will have either full or partial ownership of the property in question. While individuals who invest in equity will be paid last in the event of the project failing, the potential for high returns is better when compared to someone who invests in debt on a property.

The focus of investing in debt is to minimize risk whenever possible. In most cases, debt investors will minimize risk while increasing the possibility of obtaining a fixed rate of return. Even though the potential for high returns is greater with equity investors, debt investors generally benefit from receiving consistent payments. A debt investor also holds the collateral for the loan, which they can claim in the event that the borrower defaults.

Who Invests in Real Estate Debt Funds?

two people reviewing real estate documents

Debt funds are able to provide commercial real estate borrowers with loans and terms that they can’t receive from traditional lenders. The problem with borrowing from traditional lenders is that they usually have very strict requirements that a borrower must meet if they want to borrow any amount of money. If a borrower is unable to qualify for a loan from a traditional lender, or they seek speed in closing, they can seek investments from debt funds instead.

If a borrower has a somewhat complicated financial situation or lower credit than is usual, they can look towards real estate debt funds for their project. The common loan types that are available through real estate debt funds include bridge loans, construction loans, and rehab loans.

How are Bridge Loans related to Real Estate Debt Investing?

A bridge loan is a type of loan that borrowers can seek if they require short-term financing until they are able to secure more permanent financing. For instance, borrowers who are in the process of selling their current property can purchase another property with a bridge loan.

Once the current property has finally sold, the money that you receive from the sale can be used to repay the bridge loan or to convert it into a standard mortgage. As an investor, your money can be used to invest in a bridge loan through a real estate debt fund. Construction loans and rehab loans are two additional loan types that debt funds may invest in.

Almost any type of investor can choose to invest in a real estate debt fund. Since these funds collect contributions from a large number of investors, your contribution can be any amount that you would like it to be, which can correlate with the amount of risk that you would like to take on with your investment portfolio. If you’re thinking about putting some of your money towards this type of investment, you should know about the pros and cons associated with doing so.

Benefits of Investing In a Real Estate Debt Fund

There are many reasons why you might want to invest in a real estate debt fund, the primary of which is that these investments typically provide stable returns and consistent payments. Whether you’re attempting to balance a high-risk investment or are currently sticking with low-risk ones, a real estate debt fund makes for a good investment opportunity as long as you partner with the right fund management firm. Keep in mind that the payments you receive are usually provided on a monthly or quarterly basis.

Investing in a real estate debt fund also provides you with security within the capital stack. This is a form of senior debt, which means that your investment will have first priority when compared to all other types of investment for the property in question. This is a useful way to diversify your portfolio and helps to minimize risk. Debt funds invest capital into many different projects at a time, which is another avenue for diversification. Since your money is spread around to numerous projects, the failure of one project shouldn’t cause you to lose a substantial sum of money.

Downsides to Consider When Investing in Real Estate Debt Funds

Even though real estate debt funds generally come with lower risk and are able to provide consistent returns, there are some downsides to using your money for this type of investment. Although your risk is mitigated, there is still some risk of investing in a real estate debt fund. For instance, there’s always a possibility that a borrower defaults on one of the properties that you invest in. While the debt fund manager will be able to take control of this property, it may be difficult to recoup the money you’ve invested in if the commercial real estate market in the surrounding area is performing poorly.

When investing in a real estate debt fund, it’s also important that you pair with the right debt fund managers. Make sure that you read up on the history of debt funds before you invest in one. While there are some downsides to investing in a real estate debt fund, the relatively low amount of risk vs possible rewards makes this a good option.

Real Estate Debt Funds: Minimized Risk with High Returns

Investing in a real estate debt fund gives you the ability to maintain a balanced portfolio. These debt funds are backed up by collateral, which means that in most cases you’ll be able to get back some of your investment if the borrower defaults. While equity investments may give you the possibility of a higher return, investing in a debt fund allows you to receive monthly or quarterly payments for a consistent generation of income. If you want to invest in many different types of real estate without needing to actively manage the property that you invest in, a real estate debt fund may be a good option for you and your portfolio.

Before you get started with investing in a real estate debt fund, you should first look at all of your options when it comes to real estate investing. Unlike many investment types, real estate investments can be very exciting because of the variety and potential returns that they provide. Whether you want to maintain a high-risk or low-risk investment portfolio, both of these investment strategies are possible with commercial real estate investing.

*Disclaimer: The statements and opinions expressed in this article are solely those of AB Capital. AB Capital makes no representations, warranties or guaranties as to the accuracy or completeness of any information contained in this article. AB Capital is licensed by the Financial Division of the California Department of Business Oversight as a California finance lender and broker (DBO Lic. No. 60DBO-69427). AB Capital makes money from providing bridge loans. Nothing stated in this article should be interpreted, construed or used as legal, financial, investment or tax planning advice, or a substitute for thorough due diligence and the exercise of sound independent judgment. If you are considering obtaining a bridge loan, it is recommended that you consult with persons that you trust including but not limited to real estate brokers, attorneys, accountants or financial advisors.

Asset preservation is a method of using certain legal strategies to protect all of your assets so that they can be used by yourself, your family, and your spouse.

There are several different asset preservation strategies that an individual or business can use. These methods extend from establishing a limited partnership to obtaining a prenuptial agreement. While anyone can make use of asset preservation, these strategies are typically employed by high net worth individuals as well as a range of different types of businesses.

Protecting and preserving your assets can provide you with long-term stability and peace of mind. However, it’s important that you use the asset preservation strategies that best apply to your specific situation. When you implement these strategies correctly, you should be able to protect yourself against the possibility of serious financial setbacks. The following article goes into detail about the top three asset preservation strategies that you or your business can use to protect the money you have.

#1 Establish Limited Partnerships and Limited Liability Companies

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One strategy for asset preservation involves establishing limited partnerships and limited liability companies when possible. A limited partnership is any kind of partnership that’s made with at least two partners. A key difference between general partners and limited partners is that the general partner will have an unlimited amount of liability pertaining to the debt in the business. On the other hand, limited partners will have limited liability in accordance with the amount that they’ve invested in the company.

There are many notable positives of creating a limited partnership, the primary of which is that it will allow you to limit the personal liability for business debts as mentioned previously. You cannot be held responsible for any company debts aside from the money that you’ve invested. This will protect you from incurring too many losses in the event that the business fails. If you’ve been searching for ways to build a company but are wary of the risks that come with investing your money, a limited partnership is a great way to lessen the amount of money that you could lose. Since your investment is protected, you don’t have nearly as much to lose as the general partner. However, this also means that you will have little control over the business operations.

A limited liability company is very similar to that of a limited partnership with the primary difference being that none of the owners of the LLC are responsible for the debts and liabilities associated with the company. If you create an LLC and eventually file for bankruptcy, the members of your company won’t have to use personal funds to pay off company debts, which is a great way to preserve your assets while still creating a business.

How to Start an LLC

If you believe that that the best method for creating a company is to start an LLC, doing so is relatively straightforward as long as you know what steps to take. In the majority of states, starting an LLC begins with filing Articles of Organization with the Secretary of State in whichever state you live in. The basic types of information that will need to be provided when filling out the Articles of Organization include:

  • The full name of the company that you’re looking to create
  • A detailed description of your company
  • Your company’s mailing address, which can be a post office box if necessary
  • The address and name of the registered agent, which is the individual or company that you’ve assigned to receive any legal papers on your behalf
  • Basic information about the company’s managers and owners

When you file the Articles of Organization, you will also be tasked with paying a filing fee, which can vary by state. Expect to pay anywhere from $100-$250 in most states. Among the most notable aspects of this process is that you don’t necessarily need to obtain assistance from a lawyer to start an LLC, which should allow you to complete the process in a short period of time. The majority of states will allow you to file these documents by mail or online, which is another way that the process is streamlined. However, a few states have a requirement where businesses need to publish their intent to create an LLC in a local newspaper.

When you’re creating a limited liability company, it’s also highly recommended that you look into an LLC Operating Agreement. This type of agreement provides you with the ability to structure how your business will operate, which extends to everything from how each member will divide the profits to how the company will handle the arrival of new members. With this agreement in hand, your business can operate by the rules that you set as opposed to the rules put forth by the state.

#2 Create Asset Protection Trusts

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Another strategy for asset preservation is creating asset protection trusts. An asset protection trust is a financial protection tool that you can use against judgments, creditors, and lawsuits. The assets that you place in this trust are shielded from creditors, which gives you the ability to avoid litigation and settle the debts on terms that are favorable to you.

When you’re creating an estate plan, asset protection trusts are among the top ways to protect the assets you currently have. This is considered to be a self-settled spendthrift trust, which means that you are the beneficiary and the settlor with a significant amount of control over how your assets are used. Many types of assets can be placed into an asset protection trust, which includes investment accounts, bonds, stocks, personal property, automobiles, and real estate. If you’re looking into establishing an asset protection trust, it’s important to understand that there are two basic types of trusts available to you, which include a domestic irrevocable trust and a foreign offshore trust.

Domestic Irrevocable Trust Vs. a Foreign Offshore

While a foreign offshore trust is considered to be the top option for asset preservation, a domestic irrevocable trust can also be highly beneficial. When selecting the type of trust that you should use with your assets, you’re basically choosing the legal jurisdiction that the assets are protected by. With a domestic irrevocable trust, the account will fall under U.S. legal jurisdiction. On the other hand, an offshore trust is subject to the laws of the country that the trust is placed in.

When you place your money into a domestic irrevocable trust, your assets will continue to be under court order, which means that certain U.S. state laws and federal bankruptcy laws could still apply to this trust. However, this trust is less expensive than its offshore counterpart. There are also many U.S. states that have created asset protection trust laws, which are flexible.

If you want to create an offshore trust, this type of trust is the kind of legal vehicle that isn’t subject to standard U.S. laws, which means that it will be very difficult for anyone to get to your assets. In order for someone to pursue the assets that you hold within an offshore trust, they will be required to use the foreign jurisdiction system with foreign legal counsel, which makes for a very time-consuming legal hurdle.

#3 Prenuptial Agreements

Image of couple sitting on a bench overlooking a lake

A prenuptial agreement is a kind of written contract that a couple can make before they get married. This contract will usually list every piece of property that each individual owns as well as any kind of debts that they’ve accrued over the years. The contract will be used to specify what the property rights are for each individual in the event that the marriage ends in the future. While a prenuptial agreement typically applies to divorce, it can also be used in the event of a death or separation.

Without a prenuptial agreement, all property and assets between the divorcing couple will be subject to the state divorce laws, which are typically centered around equitable distribution. This means that all property and assets would essentially need to be split regardless of who purchased the property to begin with. A prenuptial agreement allows separate pieces of property to remain separate.

Reasons to Create a Prenuptial Agreement

There are many reasons why a couple may want to create a prenuptial agreement, the primary of which is that they want to avoid a lengthy divorce process by specifying at the beginning how the property will be divided in the event of a divorce. When a prenuptial agreement has been signed, you won’t need to go through countless arguments pertaining to how property and assets are going to be divided, which can make the divorce process more straightforward. Some of the additional reasons to create a prenuptial agreement include:

  • Passing separate property to children from previous marriages
  • Getting protection from debts that were incurred by one spouse
  • Clarifying any financial rights that each spouse has

If you want to protect the assets that you expect to make over the course of your marriage, creating and signing a prenuptial agreement is a great way to do so. Keep in mind that courts will look very thoroughly at the agreement, which means that it must be written in a legally sound manner.

*Disclaimer: The statements and opinions expressed in this article are solely those of AB Capital. AB Capital makes no representations, warranties or guaranties as to the accuracy or completeness of any information contained in this article. AB Capital is licensed by the Financial Division of the California Department of Business Oversight as a California finance lender and broker (DBO Lic. No. 60DBO-69427). AB Capital makes money from providing bridge loans. Nothing stated in this article should be interpreted, construed or used as legal, financial, investment or tax planning advice, or a substitute for thorough due diligence and the exercise of sound independent judgment. If you are considering obtaining a bridge loan, it is recommended that you consult with persons that you trust including but not limited to real estate brokers, attorneys, accountants or financial advisors.

If you’ve been thinking about investing in real estate, among the most important considerations of buying an investment property is having a real estate attorney by your side who can help you navigate this process. A real estate attorney is a professional who can use their skills to help you navigate through any legal hurdles that can occur when purchasing an investment property. If there’s a lien on the property that needs to be taken care of or a dispute regarding the borders of the property, a real estate attorney should be able to make sure that these issues don’t stall your purchase of the property indefinitely.

A real estate attorney can provide their legal services before an investment property is sold, during the sale process, or after the purchase has gone through. The many situations where their expertise may be necessary include everything from providing recommendations of home inspection services to providing counsel if a problem happens to develop during the closing process. Issues can occur during the purchase of an investment property in the same way that they can develop when buying a home for your family.

residential property on grass

While the purchase of an investment property may go through without issue, a top reason to consider hiring a real estate attorney is that they can review any purchase agreements, title documents, transfer documents, and mortgage documents. Even a small problem with this paperwork and documentation can put a delay in your purchase, which only serves to increase uncertainty. The real estate attorney that you hire should represent your interests completely throughout the entire transaction. The following is an in-depth look at what residential real estate attorneys do and why you should consider using one to purchase a home as an investment.

What Are Real Estate Attorneys and What Do They Do?

legal documents and woman

When you’re getting ready to buy an investment property, a real estate attorney can help you with any legal problems and hurdles that might develop during the process. Their assistance is similar to the assistance provided by a standard real estate agent in that they will work on your behalf to make sure the purchase process goes smoothly and that any issues are quickly ironed out. Even after you’ve made the initial purchase, it’s possible that legal issues will occur. If ever they do, a real estate attorney can help determine what legal steps you should take. The attorney you hire should always represent your interests, which means that you can be confident in the counsel they provide.

Real estate attorneys benefit investors because they can effectively handle almost every facet of the process, which gives the investor time to focus on how they’ll be able to get a return on the investment. While you’ll still need to sign any paperwork and gather any of the necessary documentation for buying an investment property, a residential real estate attorney can make sure that the actions you take throughout the purchase process are the right ones. As an investor, a real estate attorney is a great way to lessen the risk of your investment.

Using a Residential Real Estate Attorney Prior, During, and Post Sale

When you hire a residential real estate attorney to assist you during the purchase of an investment property, you’ll find that they can help you before, during, and after the sale. With an attorney by your side through all three phases of purchasing an investment home, the process should be a relatively straightforward one. If you run into a problem before or during the sale of an investment property, a residential real estate attorney should be able to provide you with the representation you need to continue with the sale.

Prior to the Sale of a Home

paperwork woman's hand

Likely the most beneficial service that a real estate attorney can provide before the sale of a home is reading the entirety of your real estate contract to make sure that it’s worded perfectly and doesn’t include any language that goes against your interests. If there are any liens that are currently on the home, a real estate attorney should be able to handle the legal issues surrounding the lien, which would allow you to go forward with the purchase.

Before you purchase your investment property of choice, a real estate attorney can also help you by checking the property title for any issues and by providing informed recommendations of home inspection services that you can use. If you want to be certain of the value of your investment property, a home inspection is essential to make sure that there are no underlying problems with the quality or structure of the home. Having a real estate attorney help you during the selection process should allow you to make the right purchase decision.

During the Sale of a Home

residential home on land

Once you’ve made an offer on an investment property, a real estate attorney can guide you through the closing process, which can last anywhere from 15-60 days. For instance, a real estate attorney may be able to attend the closing of the property with you, which will allow them to handle any issues that might arise during this process. While the closing process should go smoothly once you’ve made an offer on the investment home, there’s always a possibility that a legal issue could develop. In this situation, the issue should be resolved much quicker if you already have a real estate attorney at your side.

Another benefit of hiring a real estate attorney for the closing process on your investment home is that they can check any closing documents for errors that have been made. In the event that an issue occurs during the closing period, your real estate attorney can provide you with counsel on whether the closing should continue. They might recommend that you back out of the deal, which could help you avoid making a bad investment. Once the sale goes through, they will also make sure that the deed is recorded correctly.

After the Sale of a Home

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There are many things that a residential real estate attorney may be able to assist you with following the sale of the home. One of the more common issues that develops after buying a home is finding out that there’s a problem with the property that the previous owner didn’t inform you about. If the seller had a duty to properly expose these defects, a real estate attorney can handle any kind of litigation that occurs. The types of defects that might result in litigation include ones that relate to the driveways, grounds, and property.

If your investment property is being rented out, a real estate attorney may be able to help you by drafting lease agreements. If a dispute arises pertaining to the borders of your property, you can also retain the assistance of a real estate attorney to help you in this matter. In the event that a foreclosure is necessary, a real estate attorney can assist you in exploring all of your legal options, which can include everything from a mortgage modification to a short sale.

Why You Need a Real Estate Attorney as Part of Your Real Estate Investment Strategy

man in suit lawyer

Real estate investment is already difficult when you’re just trying to find the right homes to invest in that will provide you with a significant return. This process can be made much more complicated if you’re left to handle the entire purchase of the home by yourself. As mentioned previously, there are many areas where a real estate attorney can act as a guide that will help you avoid making a costly mistake.

Among the more beneficial aspects of hiring a real estate attorney is that their services can be provided before, during, and after the purchase of an investment property. If a real estate attorney doesn’t help you by reading the initial sale contract, you could overlook poor terms that would make the purchase a bad investment. During the purchase of a home, an attorney can provide you with counsel on what to do when a problem develops within the closing process.

When you’re purchasing a property as an investment or to expand your investment portfolio, you’ll be better off with a real estate attorney because they can effectively guide you through every step of the process. This guidance should help you navigate any hurdles that arise and keep you from making mistakes that could cause you to later regret your purchase. Without a real estate attorney, the process of buying an investment property can be much more chaotic and may even last longer. However, it’s not enough to just decide to hire a real estate attorney. It’s also important that you find an attorney who will provide you with premium representation and has experience in handling legal matters pertaining to investment property.

Finding The Right Residential Real Estate Attorney

property houses residential

Now that you know how important it is to have a real estate attorney by your side when buying an investment property, it’s time to look at how to find an attorney who you can be confident will provide you with quality representation. It’s highly recommended that you begin searching for a real estate attorney at the same time that you start looking at potential investment homes to buy. If you have any friends, family members, or coworkers who have engaged in real estate investment in the past, ask for a referral.

It’s also easy to perform some online research before narrowing your list of potential attorneys down to 3-5 options. When you type an attorney’s name into a search engine like Google or Bing, you should be able to find reviews and online referrals pertaining to the attorney in question. This is also a great opportunity to identify any red flags that may push you towards choosing one attorney over another.

After you have narrowed your search, it’s time to conduct in-person interviews with the small list of real estate attorneys that you’ve created. During the interview, you might want to inquire about their fee schedule, the amount of experience they have, the number of real estate transactions that they’ve closed, and any possible conflicts of interest. You should also think about asking for a list of references that you can check before making your final decision.

*Disclaimer: The statements and opinions expressed in this article are solely those of AB Capital. AB Capital makes no representations, warranties or guaranties as to the accuracy or completeness of any information contained in this article. AB Capital is licensed by the Financial Division of the California Department of Business Oversight as a California finance lender and broker (DBO Lic. No. 60DBO-69427). AB Capital makes money from providing bridge loans. Nothing stated in this article should be interpreted, construed or used as legal, financial, investment or tax planning advice, or a substitute for thorough due diligence and the exercise of sound independent judgment. If you are considering obtaining a bridge loan, it is recommended that you consult with persons that you trust including but not limited to real estate brokers, attorneys, accountants or financial advisors.

An IRA is any kind of individual retirement account that you can use if you want to contribute some of your pre-taxed income to various investments that are tax-deferred, which means that you can delay paying taxes on these investments until a future date. A notable benefit of investing your money in an IRA is that the IRS doesn’t assess dividend income or capital gains taxes until you withdraw funds. The contributions that you make to a standard IRA can be tax deductible depending on your tax-filing status, income level, and other factors.

If you want to invest some of your money into real estate through an IRA, you should investigate a self-directed IRA. This is a type of IRA is very similar to a traditional IRA with the main difference being that self-directed IRAs allow individuals to contribute to several different types of investments that aren’t allowed with standard IRAs. These alternative investments include:

  • Tax lien certificates
  • Precious metals
  • Limited partnerships
  • Private placements
  • Commodities
  • Real estate

The IRA account that you create is held by a third party, such as a trustee or custodian. However, you will still be able to directly manage the account. If you’ve been thinking about making investments in real estate, you could use a self-directed IRA to do so.

The Main Benefits of Using Your IRA to Invest in Real Estate

real estate

There are many benefits that come with using your IRA to invest in real estate aside from the obvious tax break advantages. Real estate investments are notable for typically providing investors with stable returns over a lengthy period of time. If you would like to balance your investment portfolio, these investments allow for a relatively safe approach to investing that can pair well with some riskier investments. Real estate typically has a very low correlation with other types of asset classes, which means that adding real estate to your portfolio can help you decrease portfolio volatility while providing a higher return for each unit of risk.

There are a few examples of benefits that are specific to using an IRA to invest in real estate. For one, real estate will typically appreciate over time and has historically done so, which is good for your IRA account since an IRA is a long-term investment. Real estate investing is also able to offset the overall volatility of your portfolio, which can be beneficial for you if your portfolio is otherwise filled with risky investments. You may want a relatively stable investment in your portfolio that can provide you with steady returns while you wait to see if your riskier investments pan out.

Real estate investments can also provide you with a consistent income stream that’s taken from renting the building out to tenants or investing in trust deed backed notes. Any of the income that you collect will be able to grow tax-free in your IRA. It’s also important to understand that returns generated from alternative investments are able to be contributed to your IRA and can grow tax-free.

Important Things to Keep in Mind

person holding key in hand

Before you get started with real estate investing, keep in mind that the real estate property can only be used by you for investment purposes, which means that you’ll be unable to use the property as a place for your children to live, as a vacation home, as an office that’s used for your business, or as a second home. You won’t be able to directly benefit from your investment other than using the returns from the investments to contribute to the IRA that you’ve set up.

Any of the income that you collect also goes back to your IRA, which may not always be ideal. There are numerous people in your life who won’t be able to benefit from the purchase that you’ve made, which means that certain people will be unable to live in the property that you purchase or sell you the property. The people who are disqualified from benefiting from your investment include all of your family members, which extends to spouses, children, parents, grandparents, and in-laws. You should also understand that the trustee or custodian who manages your IRA will be unable to benefit as well. The same is true of any entities that own over 50 percent of the property that you’ve invested in.

One concern that you should keep in mind before you invest in real estate with an individual retirement account is that getting a mortgage for your IRA can be very difficult. You will likely be required to use some of the cash that’s currently in your IRA in order to invest in and purchase the property. If you decide to use some of the cash in your IRA to purchase the property, you won’t be able to benefit from the property tax deductions, depreciation, or deductible mortgage interest payments.

While there are a few downsides to investing in real estate with an IRA, one additional benefit is that all of the maintenance and repair costs for the property in question won’t come directly from your pocket. Instead, the funds that you’ve placed in your IRA can be used to cover the costs.

Selling Real Estate Property Purchased With Your IRA

Two people shaking hands in front of house

When it comes time to sell the property that you’ve invested in, it’s possible to initiate the sale of the property in the exact same way that you would with property that wasn’t purchased with an IRA. To begin this process, you will need to find some other party who is interested in buying the property, which can take some time depending on the market and the value of the property that you’re selling. Once you’ve found the right buyer, you will be tasked with coming to an agreement on the selling price. On this front, it’s highly recommended that you partner with a real estate agent to make sure that you avoid making any mistakes and that you don’t sell the property for less than you had intended.

After you have come to an agreement, you should immediately contact your trustee or custodian to sell the property on the behalf of the IRA. What happens after the property has been sold depends on the exact type of IRA that you have. While all of the money that you make from the sale of the property will go back into the IRA that you have, this money can either be tax-free or tax-deferred. Selling a property that was purchased with an IRA should be a simple and straightforward process as long as you follow these guidelines.

Do You Want to Get Started Using Your IRA to Invest in Real Estate?

house for sale

If you want to get started with using your IRA to invest in real estate, there are five basic steps that you should adhere to. First of all, you’ll want to identify a possible investment, after which you should complete the necessary due diligence.

Once you’ve found the right property and have made sure that it provides you with a worthy investment opportunity, you should request funds from your IRA so that you can direct your investment. This requires the completion of a Direction of Investment form for the IRA. When you’ve notified the IRA that you intend to use funds from the account to invest in real estate, the next step involves waiting for the investment to be fully processed, which should be handled by the trustee or custodian of your IRA.

Even though your IRA will essentially own the title for the property that you’ve invested in, you will be able to manage the investment once the purchase has gone through. While any profits that you make from the property must be immediately sent to the IRA, you should be able to obtain a tax deferment on the money. The final step of investing in real estate with an IRA involves the creation of an exit strategy.

The amount of time that you hold the property all depends on your preference. If you feel that the local real estate market may soon start to falter, you could begin to look for a buyer to purchase the property from you. If you put an effective exit strategy in place, you’ll likely be prepared for any situation that arises. With these tips in mind, you should have a good idea about purchasing real estate with an IRA and the benefits that it can provide for you and your investment portfolio.

*Disclaimer: The statements and opinions expressed in this article are solely those of AB Capital. AB Capital makes no representations, warranties or guaranties as to the accuracy or completeness of any information contained in this article. AB Capital is licensed by the Financial Division of the California Department of Business Oversight as a California finance lender and broker (DBO Lic. No. 60DBO-69427). AB Capital makes money from providing bridge loans. Nothing stated in this article should be interpreted, construed or used as legal, financial, investment or tax planning advice, or a substitute for thorough due diligence and the exercise of sound independent judgment. If you are considering obtaining a bridge loan, it is recommended that you consult with persons that you trust including but not limited to real estate brokers, attorneys, accountants or financial advisors.

An accredited investor is someone who qualifies to invest, deal, and trade in financial securities and has a special status under financial regulation laws. The SEC has determined that there are two main criteria that can be used by an individual to become an accredited investor.

First, someone who has earned income of more than $200,000 or a joint income with a spouse of more than $300,000 over the past two years can qualify as an accredited investor. However, this qualification can only be provided if the individual expects to earn a similar income over the next year. Individuals can also be accredited investors if their individual net worth or their joint net worth is over $1 million when the investment takes place.

Avenues to Verification

Additional methods of verifying that you’re an accredited investor are also available if you don’t qualify for the net worth or high-income methods. When you are deemed to be an accredited investor, you can invest your money into non-registered investments that are provided by venture capital firms, private equity funds, and hedge funds. If you want to invest in the previously mentioned funds, the following article provides a guide on how to become a verified accredited investor.

Are You An Insider?

Man in suit sitting at desk with laptop and

An individual can be an accredited investor if they are a director, general partner, or executive officer of the issuer of the securities that are being sold or offered. While the majority of accredited investors receive this designation because of their income level or net worth, people who are directly tied to the unregistered security can also receive this designation. An unregistered security is any kind of stock, bond, or note that has yet to be registered with the SEC to be sold to the public. Being an accredited investor means that you can purchase these securities before they have been made available to the public.

Evidence Required to Prove Insider Standing

When you attempt to purchase an unregistered security from a hedge fund or private equity fund as an insider, you will be required to provide evidence that you are a director, general partner, or executive officer of the security in question. This evidence can be in the form of resolutions, incumbency, governing documents, or similar certificates. Anything that can prove that you are in an insider position may be accepted as evidence to prove insider standing.

There are times when this evidence could be publicly available via research reports, securities filings, or other kinds of information that are available through third-party sources. While only a small selection of individuals will qualify to be accredited investors through this method, it’s considered to be the easiest way to get verified.

Obtain a Professional Letter

Two people discussing documents

You can also become an accredited investor by providing a professional letter as proof, which must be provided to you only by qualified individuals. These individuals include:

  • A registered broker-dealer
  • A licensed attorney who is currently in good standing
  • An investment adviser who is registered with the SEC
  • A certified public accountant who is currently registered and is in good standing

What Does This Professional Letter Have to Say?

The professional letter that’s provided to you should state that logical steps were taken to determine that you are an accredited investor within the previous three months and that you were found to be an accredited investor. If you have a lawyer or accountant by your side who is able to provide this statement, you would be able to go through the verification process without needing to spend a significant sum of money. However, you may need to pay a small fee to obtain a professional letter.

It is also possible that the lawyer or accountant you work with won’t feel comfortable with providing this letter. One reason may be that these individuals have qualms about issuing a professional letter due to liability concerns. If this is the case, you may need to focus on becoming a verified accredited investor by showing evidence of high income or high net worth.

Does Your Yearly Income Qualify?

Likely the most common way to become a verified accredited investor is by having a certain income level. You can be deemed an accredited investor if you have earned income that exceeds $200,000 for both of the last two years.

Woman walking in front of bank

The same is true if you have earned joint income with your spouse which is more than $300,000 for the past two years. However, the income level verification can sometimes be difficult to obtain because you will be required to prove that you have a reasonable expectation of earning the same level of income in the current year. If you are unsure of the security of your employment in the future, it might be better to attempt to become a verified accredited investor via your total net worth.

It’s important to note that your income will need to be obtained in the same way for both years. You won’t be verified if you earn more than $200,000 as an individual for one year but make over $300,000 as joint income for the next year. Let’s say that you make $250,000 for the first year while your spouse makes next to nothing. This indicates that you would eventually become an accredited investor by displaying over $200,000 with individual income. If the second year has you making $150,000 while your spouse makes $200,000, you wouldn’t qualify as an individual but would instead only be above the joint income threshold of $300,000.

Even though you make more than $200,000 in both years, the money needs to be earned the same way both years in order for you to become verified. An exception to this rule is allowed if you get married or divorced during the two-year period but still meet the $200,000 or $300,000 threshold.

Evidence Required for Proof of Income

The easiest way to provide evidence that’s required for proof of income is to provide official or government records that display your income, which could be your regular pay stubs or your yearly tax filings. If you are unable to provide this documentation, it’s also possible to obtain a letter from your employer or accountant who confirms that your wages or annual income are higher than $200,000 or $300,000 with a joint income. If you need to request this letter, make sure that your employer or accountant also provides evidence that you will be able to maintain this income for the current year. Along with this letter, you must make a statement that you believe your income level will be above the threshold for the current year.

Are You Considered a High Net Worth Individual?

Man reading newspaper

You can become an accredited investor by proving that you have a high net worth, which means that your individual net worth or joint net worth with your spouse will need to be above $1 million. The main issue with making this calculation is that the positive value for your main residence isn’t directly counted when your total assets are being calculated. While the value of your home isn’t counted, any debt that was incurred over the past 60 days with your main residence will be subtracted from the value of your total assets. This method can be very simple to calculate if you happen to have zero liabilities and practically all of your assets within a single bank account. Otherwise, you’ll want to weigh the pros and cons of each option.

Evidence Required to Prove High Net Worth

While it might seem like proving high net worth would be the easiest verification method for becoming an accredited investor, it’s important to understand that you will be required to disclose both your assets and your liabilities so that the net worth can be calculated. It’s not enough to have more than $1 million in assets. It’s also important that the number of liabilities you currently have don’t lower your total worth to below $1 million.

There are three separate factors that are used when verifying that you have a net worth of more than $1 million. The first factor involves the credit report for yourself and your spouse, the latter of which is only necessary if you’re attempting to qualify for the high net worth verification through joint net worth with your spouse. If a U.S. credit report can be accessed, it should be provided. If you don’t have a credit report tied to your name, you will be required to explain why there isn’t a credit report, which can make verification difficult.

Person holding one hundred dollar bills

The next step in proving your net worth is disclosing all of your liabilities. If you have any liabilities, they will be deducted from your net worth. If you believe that there aren’t any liabilities tied to your name, you must make an affirmative statement that you don’t have liabilities. The final step involves disclosing all of your assets. When you disclose your assets, you will need to support them with documentation that shows you are the rightful owner of the asset. The asset’s value should also be calculated.

Different assets have different guidelines when you’re attempting to calculate your net worth. For instance, any insurance policies or annuities that you have could have a cash value to them, which means that they could be used as assets. For any bank accounts or certificates of deposit, you should provide your latest statement that displays the value of the account. If you gather the right documentation, you should be able to use nearly all of your assets as proof that you are a high net worth individual.

Diversifying Your Investment Portfolio As an Accredited Investor

Are you an accredited investor looking to diversify your portfolio? If so, consider investing in commercial real estate with AB Capital. With more than 75 years of combined experience, our professional staff has the experience and knowledge that are needed to assist customers with their investment needs. The main types of investment opportunities that we facilitate are secured investment opportunities for real estate.

There are multiple investment options that you can select from if you wish to diversify your portfolio. For instance, you could choose to invest in residential real estate or commercial real estate depending on your preference and the type of return you’re expecting. Our team can help you determine which investment strategy is right for your portfolio. Contact AB Capital today to get started!

*Disclaimer: The statements and opinions expressed in this article are solely those of AB Capital. AB Capital makes no representations, warranties or guaranties as to the accuracy or completeness of any information contained in this article. AB Capital is licensed by the Financial Division of the California Department of Business Oversight as a California finance lender and broker (DBO Lic. No. 60DBO-69427). AB Capital makes money from providing bridge loans. Nothing stated in this article should be interpreted, construed or used as legal, financial, investment or tax planning advice, or a substitute for thorough due diligence and the exercise of sound independent judgment. If you are considering obtaining a bridge loan, it is recommended that you consult with persons that you trust including but not limited to real estate brokers, attorneys, accountants or financial advisors.

Real estate investing is a highly varied investment strategy that involves the purchase or sale of real estate in order to gain profit. Once real estate is invested in, it’s also possible to own, manage, or rent the property depending on the exact strategy you would like to use. There are many different ways that an investor can place money into real estate, which includes everything from real estate trading to real estate investment trusts.

One notable type of real estate investing is debt investing with real estate, which involves providing borrowers with loans that they can use to purchase or develop real estate. You could also choose to invest in mortgage-backed securities as a form of real estate debt investing. When you invest in real estate debt, your investment is backed by the real estate asset serving as collateral. One notable form of debt investing involves placing money into a real estate debt fund, which is a popular type of investment pool that can net you a stable return.

You could also choose to make equity investments, which involve purchasing an asset that will provide you with a profit that’s dependent on the performance of the asset. One notable aspect of investing in equity is that you will be entitled to a specific share of the capital that’s gained by the asset. While there are a wide variety of different kinds of equity investments, one notable example is purchasing and managing a rental property where you gather income from the monthly payments that each renter must make.

One main difference between these investment types is that equity investors continue making money off of the asset as long as it performs well, which isn’t the case with a debt investment. If you’re currently interested in investing in real estate but are unsure if equity investments or debt investments would be better for your portfolio, the following article will go into detail about the pros and cons of each.

Pros and Cons of Debt Investments

two people reviewing real estate documents

Debt investments are an option for investors who want to better balance the overall risk of their investment portfolios. When you invest in debt investments for real estate, you will be acting as the lender to the property owner or the sponsor of the deal. While there’s always a chance that the borrower will not deliver the results that you expect from them, the loan is directly secured by the actual property, which means that you will be able to take control of the property if the borrower defaults on the loan.

When investing in debt, you will receive a fixed rate of return that’s determined by the interest rate on the loan and by how much money you have invested. Even though the fixed rate of return that you receive depends mostly on the interest rate that is set for the loan, it can be beneficial to know that you’ll obtain the same payments each month.

There are a wide variety of positives that come with investing in debt, the most notable of which is that these investments are considered by many to be safer than equity investing. The loan that you make will be secured by the property that the borrower wishes to purchase, which allows the property to be used as a kind of insurance policy for repayment of the loan. If the sponsor or property owner happens to default on the property, you can recoup the losses of your investment by foreclosing on it.

These loans generally have a much shorter hold period. Debt investments are usually associated with actual development projects, which means that the loan should be paid back in full at the completion of the project or soon thereafter. The holding period attributed to most debt investments is anywhere from six months to a couple of years. If you want to maintain a high amount of liquidity in your portfolio, this is a good form of investment. Another benefit of investing in debt is that it provides you with a steady income that’s predictable. Whether you are paid monthly or quarterly, you will know the frequency of the payouts you receive as well as the amount that you will receive since it’s based on the interest rate that has been set for the loan.

While there are numerous positives to investing in debt, there are also a few problems that you should keep in mind. Unlike equity investments, the debt investments that you make have a capped return. The returns you obtain are limited by the set interest rate, which means that equity investments have the potential of providing higher returns. There are also significant fees that come with participating in debt investment crowdfunding. The platform will take a small percentage of the money that’s earned through crowdfunding.

Pros and Cons of Equity Investments

An equity investment is a form of investing where the investor acts as a shareholder in the property that they’re investing in. The stake that they have in the property directly correlates with the amount that they’ve invested. The most notable aspect of investing in equity is that returns are obtained in the form of a certain share of the income that the property is able to generate from the rental payments. The amount that you receive is reduced slightly depending on the exact platform that you use to make the equity investment. Investors can also receive payments from the share that they have in the event that the property is eventually sold. These payments come directly from any amount of appreciation on the property.

There are many positives that come from investing in real estate equity. For one, these investments have the ability to generate high returns. These returns could be as high as 20 percent or greater. If the property is successful, its value could increase, which would lead to you receiving even more profit than you had anticipated. It’s also important to note that there is no cap on returns, which theoretically gives you the ability to make a large profit in comparison to your initial investment. If the asset happens to perform exceptionally well, you will be able to reap the benefits.

While equity investing is great if you want to maximize your returns, the main issue with investing in equity is that it often requires a lengthy hold period, which refers to the time between your purchase of the asset and your eventual sale of the asset. Holding onto an equity investment for a lengthy period of time may not be advisable if you’re interested in maintaining a high amount of liquidity in your portfolio.

Another negative aspect of investing in equity is that this type of investment comes with a high amount of risk. The property that you invest in could do poorly or fail altogether. When this occurs, the debt investors will receive payment before you, which reduces the possibility that you will get back the money that you’ve invested. Additionally, if you expect to receive monthly rental payments but find that your renters aren’t making their payments on time or that the property itself is considered to be undesirable for renters, you may not be able to obtain the kind of returns you’re looking for.

While both equity and debt investments have their pros and cons, the investments that you make largely depend on what would be best for your portfolio. When investing in equity for a real estate project, it’s possible that you will receive high returns in the event that the property performs well. As the owner of the property, you will also have direct control over many aspects of how the property performs, which means that it’s possible you could turn around a failing property. If you would rather invest in debt, these are many investments that yield stable returns and can help to diversify your portfolio.

*Disclaimer: The statements and opinions expressed in this article are solely those of AB Capital. AB Capital makes no representations, warranties or guaranties as to the accuracy or completeness of any information contained in this article. AB Capital is licensed by the Financial Division of the California Department of Business Oversight as a California finance lender and broker (DBO Lic. No. 60DBO-69427). AB Capital makes money from providing bridge loans. Nothing stated in this article should be interpreted, construed or used as legal, financial, investment or tax planning advice, or a substitute for thorough due diligence and the exercise of sound independent judgment. If you are considering obtaining a bridge loan, it is recommended that you consult with persons that you trust including but not limited to real estate brokers, attorneys, accountants or financial advisors.

If you are currently investing in real estate or would like to do so in the near future, you might wonder if it’s necessary to obtain a real estate license to assist with your investments. A real estate license can help you save more on commissions while also increasing your income. But do you require a real estate license in order to make investments in real estate? The answer to this question is no, but this does not infer that it would be a bad idea to obtain a real estate license.

Even though it’s not required that you obtain a real estate license before making investments in real estate, doing so can provide you with a range of notable benefits. This article focuses on the many advantages that come with a real estate license, which should help you determine if getting a license is right for you.

Benefits of Obtaining a Real Estate License

model house with coins in background

There are multiple benefits that you can obtain by applying for a real estate license. Some of these benefits include:

  • You’ll gain access to many more deals
  • Your contact network will grow and expand
  • You can earn additional income via commissions
  • You will be able to have more control when investing in real estate

Multiple Listing Services

The most notable benefit of obtaining a real estate license is that you will have access to multiple listing services (MLS), which is a comprehensive database created by various real estate brokers to provide each other with extensive data about properties that are listed on the market. The goal of this service is to make sure that brokers can easily connect buyers with sellers. The MLS also helps to facilitate broader networking among real estate brokers in the industry.

table with piggy bank, magnifying glass and toy house

The real estate brokers and agents who pay membership fees are able to access an MLS. In return for the fee, real estate agents can obtain information on the properties that can be found in a specific area. This information includes complete listings, numerous photos, and details like property amenities and square footage. Keep in mind that only licensed brokers and agents are able to access an MLS, which is why it’s recommended that you obtain a real estate license before investing in real estate. While each specific MLS has its own procedures, they usually follow the rules and guidelines that have been set by the National Association of Realtors.

The rules that have been created by this association dictate that each listing will need to display the amount of commission that was earned for the seller. This commission is shared with the other broker or realtor who set up the introduction with the buyer. Multiple listing services are beneficial to both the buyer and seller. For the seller, the MLS provides them with more exposure for the property they are attempting to sell. On the other hand, buyers have many more options at their disposal and should be able to more readily find the right home. These services also help to even out the playing field by making sure that smaller brokerages are able to compete with larger ones.

You Earn Commission

The commission that a real estate agent gets refers to the fees that the agent is owed when the property is sold. The agent earns a commission when a buyer purchases the property as long as they represent the buyer. The agent for the buyer can submit offers for the property and negotiate with the listing agent. They also deal directly with the home appraisers, inspectors, closing attorneys, lenders, and any other party that takes part in the closing of the transaction. You will also be in charge of marketing, sales, and showing properties to prospective buyers.

planted money in garden

If you decide to obtain a real estate license, you will be able to forego using a real estate agent when investing in a property, which means that the standard commission fees they receive won’t come out of your pocket. Instead, you will act as the agent, which means that you can make money by facilitating the transaction. The commission fees that you should expect to receive typically amount to 2-3 percent of the property value. However, you’ll likely need to negotiate the commission split when you sign on with your brokerage.

The majority of brokerages have a base commission split that’s offered to newer agents. Eventually, you will have a significant amount of experience as a real estate agent, which may come with an increase in the commission split that you receive. High amounts of production may also lead to an increase in your commission split. In any regard, having a real estate license allows you to make a commission that would otherwise be unavailable to you when investing in a property.

You Are in Control of Your Real Estate Investments

man with thumbs up

Likely the best aspect of getting your real estate license is that you will be in control of your real estate investments. When you invest as a real estate agent, all aspects of the transaction go directly through you. Without this license, you would likely need to work with a real estate agent to negotiate and submit offers, which also means that you wouldn’t obtain a commission from the property being sold. When a deal has been reached and the property is being closed on, you can also be directly involved with every element of this process, which means that you would speak directly with home inspectors, closing attorneys, appraisers, and lenders. Before you obtain a real estate license, it’s important that you understand what the process involves when working with a buyer or seller.

When you work with sellers, you will be tasked with meeting with the seller and understanding their needs. Throughout the transaction, it’s up to you to display your knowledge of the market, your negotiation skills, and your marketing abilities. Among the most important tasks for a real estate agent is to set the right listing price, which will involve studying the local real estate market and comparing the main property with other properties in the area. Once the right price has been reached, it’s time to list the property with any relevant listing service. In order to provide a comprehensive listing, numerous photos will need to be taken of the exterior and interior of the property. Finally, it’s important to stage the home correctly so that prospective buyers find it appealing.

Working with a buyer is an entirely different process and typically involves meeting with and understanding the needs that the buyer has when searching for a home. The information that you obtain from the buyer can then be used on the MLS to identify properties that match these specifications. Once the right property has been identified, you will need to plan a showing of the property while working around the buyer’s schedule. When showing a property to the buyer, make sure that you communicate every feature that they might be interested in. While touring the property, you will also have an opportunity to talk with other agents, which might allow you to obtain useful information. If the buyer is interested in the property, all that’s left to do is to make a purchase offer, which will likely lead to negotiations with the seller’s agent. During these negotiations, you will need to negotiate on behalf of the buyer’s interests.

Want to Diversify Your Real Estate Investment Portfolio?

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Obtaining a real estate license can be highly beneficial when you want to build a strong and steady investment portfolio. With this license in hand, you should have a much easier time identifying properties that would make a good investment since you will have access to multiple listing services. You will also have direct control over the entire selling or buying process, which should make it easier for you to negotiate the kind of deals that you want. By acting as the real estate agent, you should make a sizable commission by connecting a buyer to the seller, which would otherwise be impossible. Even though it’s not exactly necessary to have a real estate license before you invest in real estate, it can potentially be more rewarding for you and your investment portfolio.

*Disclaimer: The statements and opinions expressed in this article are solely those of AB Capital. AB Capital makes no representations, warranties or guaranties as to the accuracy or completeness of any information contained in this article. AB Capital is licensed by the Financial Division of the California Department of Business Oversight as a California finance lender and broker (DBO Lic. No. 60DBO-69427). AB Capital makes money from providing bridge loans. Nothing stated in this article should be interpreted, construed or used as legal, financial, investment or tax planning advice, or a substitute for thorough due diligence and the exercise of sound independent judgment. If you are considering obtaining a bridge loan, it is recommended that you consult with persons that you trust including but not limited to real estate brokers, attorneys, accountants or financial advisors.

Passive investing, generally, is a type of investment where you can generate income from your investments without significant active participation. Index investing is one of the more common forms of passive investing that allows investors to purchase an index fund comprised of stocks that closely track the underlying index without the need for active trading by the investor. In the equity markets, index funds are now widely accepted to provide equal or better returns than an actively managed portfolio, and at a lower cost to the investor.

For those looking to diversify their portfolios to include real estate without doing a lot of the heavy lifting, there are several passive investment options. Some of the more common passive real estate investment strategies that are available include crowdfunding, REITs, remote ownership, and trust deed investing, all of which have the potential to generate high returns if you make smart investments. If you want to invest in real estate but don’t want to take on too much risk with your investment portfolio, passive real estate investment may be ideal for you. Below is a general primer on these four passive investment strategies.

Crowdfunding

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One method of passive real estate investing that has become increasingly popular in recent years is crowdfunding. Crowdfunding occurs when numerous smaller investors pool their resources to make a single investment. In real estate, crowdfunding is often used to provide debt or equity to real estate professional operators to invest in varying types of real estate including commercial properties, single-family homes, and apartment complex portfolios. These types of investments typically require investment minimums that can range from $500-$100,000, depending on the investment. Over the years, online crowdfunding platforms have specific to real estate have increased in popularity and sophistication.

There are a variety of questions that you should ask yourself before you get involved with investing through crowdfunding. As just one example, some platforms require that anyone wishing to join the platform be an accredited investor, which usually means that you need to have a high net worth or annual income. If you aren’t accredited, you may need to consider an alternative passive real estate investment option. You should also consider the reputation and legitimacy of the crowdfunding platform you select. They come in all different shapes and sizes, especially with their recent proliferation.

Regarding the investment itself, you will want to make sure you understand and carefully evaluate the investment and its terms. Crowdfunding platforms are typically just a “platform” or “marketplace” where third parties can post investments. Other than satisfying general criteria, the quality of the each investment has likely not been evaluated by the crowdfunding platform. Factors that you will want to evaluate include, among others, the quality and experience of the sponsor, the value of the underlying property or properties securing the investment, the terms of that investment, and whether you would rather invest in equity or debt. As to the latter consideration, certain crowdfunding platforms offer both investment options.

Online Platforms for Real Estate Crowdfunding for Passive Investments

While there are many online platforms that you can use for real estate crowdfunding investments, three of the more popular platforms include:

While AB Capital does not endorse any of them, each of these three platforms are considered to be among the more widely used for crowdfunding real estate investments. Before you make a decision on which platform you would like to invest with, it’s highly recommended that you take a brief look at all of them to compare the features that they provide and the types of investments that they offer.

REITs (Real Estate Investment Trusts)

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A REIT is a real estate investment trust wherein a company owns, finances, or operates real estate that is typically income-producing. It is similar to a mutual fund, except that instead of investing in stocks, the REIT invests in real estate. Certain REITs will directly buy a portfolio of properties that they believe will generate an appropriate return, while other REITs will invest in real estate debt, mortgage-backed securities, and mortgages. To best understand which REIT strategy is right for you, it’s important that you know more about the process of investing in a REIT. Like mutual funds that invest solely in real estate, REITs provide passive investors with stakes in substantial real estate deals without the usual high barrier of entry. A REIT also is required to distribute at least 90% of its taxable income to shareholders each year in the form of dividends, so it may provide an attractive option for income-seeking investors.

When comparing crowdfunding with a REIT, the main difference between the two is that REIT portfolios typically include investments in many different properties and even types of properties, whereas crowdfunding investments are typically property or project-specific. In that sense, REIT investments are typically more diversified. By investing in a broad range of properties at once, the failure of one property shouldn’t significantly damage your overall investment strategy. Spreading around the risk is a great strategy if you want to take a measured approach to investing.

There are three primary types of REITs that you can invest in, which include exchange-traded options, non-traded REITs, and private REITs. If you invest wisely, it’s possible to receive multiple income streams through annual dividend income as well as long-term appreciation. REITs also provide you with a good opportunity to diversify your portfolio. Many successful real estate investors find that REITs are a wise investment option when used alongside mutual funds and stocks.

There are also a couple of issues that come with investing in an REIT. For instance, these trusts are tied directly to stock exchanges, which means that your REIT can lose some of its value if the stock exchange that it’s tied to does poorly. You also don’t have control over your investments. However, this may be ideal for you if you would rather participate in passive real estate investing.

How to Invest in REITs

If you want to invest in REITs, it’s possible to directly buy shares in the REIT that you’re interested in. This can be done just like any other type of public stock listed on a major stock exchange. You can also use a broker, financial planner, or some type of other professional advisor who can help you analyze the REITs against your financial objectives, and who may also have access to other private REITs that are not available on a publicly-traded exchange.

Remote Real Estate Ownership

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Remote ownership is another form of passive (though less passive) real estate investing that allows you to obtain complete ownership of remote property. This passive investment strategy is a favorite of many seasoned real estate investors because it allows complete ownership without requiring too a active role in managing the property. If you’re looking to invest in a remote property, you can do so by using an online platform to find, research, and purchase out-of-state rental properties that already have tenants in place as well as property management. The managers that are already tied to the property will manage the property for you while you collect rent each month.

In many cases, it’s possible to purchase remote real estate without ever visiting the property in question. The main benefit of using this specific strategy of passive investing is that if done properly you can obtain higher returns than other forms of passive real estate investing. Because you have complete ownership of a specific property, all of the appreciation for the building as well as the monthly rent payments will go directly to you. There may also be additional tax benefits available. The data that you need to analyze to make a wise investment decision is also typically readily accessible online. Indeed, many online platforms offer extensive data and information on the various homes and rental properties that you can invest in, which allows you to perform your research in a short period of time.

If you don’t have enough funds to purchase real estate nearby, this form of passive real estate investing gives you the opportunity to diversify your ownership of properties across numerous locations, which lessens the risk that a poorly performing market will substantially hurt your investment portfolio.

Like all investments, however, there are also some risks that you should consider. For one, you’ll be purchasing a home in a different location and potentially without having visited it in person. To mitigate this risk, you should do extensive research on the property you’re interested in before you invest and/or align yourself with a trusted person in the market. It can also be difficult to assess tenant reliability when you don’t have easy access to the property in question. If a tenant moves out unexpectedly or makes a late payment, following up with them may prove to be difficult. On the other hand, the managers at the property should be able to take care of these issues without much trouble on your end. In addition, property ownership comes with additional liability and costs such as insurance, vacancy, and repair costs.

Online Platforms to Buy Remote Real Estate

If you would like to invest in remote real estate, there are several highly popular online platforms that you can use to purchase remote properties, which include:

Keep in mind that each of these platforms is focused on a different location. Roofstock allows you to invest in single-family rental properties that are situated all throughout the U.S. While Lyvly gives you the ability to purchase rental properties in London. When you purchase one of these properties, weekly cleaners and an in-house maintenance team will take care of the property for you. When it comes to Property Finder, you can purchase apartment buildings, townhouses, villas, and penthouses in Dubai. AB Capital does not endorse any of these platforms.

Trust Deed Investments

Trust Deed investing provides yet another option to passively invest in real estate. With a trust deed investment, you are investing in a loan secured by a deed of trust recorded against a specific property. You will typically receive a stated interest rate of return that is paid monthly, and the return of your principal investment at maturity. In this sense, you are acting as the lender, as a bank would to someone purchasing a property.

*Disclaimer: The statements and opinions expressed in this article are solely those of AB Capital. AB Capital makes no representations, warranties or guaranties as to the accuracy or completeness of any information contained in this article. AB Capital is licensed by the Financial Division of the California Department of Business Oversight as a California finance lender and broker (DBO Lic. No. 60DBO-69427). AB Capital makes money from providing bridge loans. Nothing stated in this article should be interpreted, construed or used as legal, financial, investment or tax planning advice, or a substitute for thorough due diligence and the exercise of sound independent judgment. If you are considering obtaining a bridge loan, it is recommended that you consult with persons that you trust including but not limited to real estate brokers, attorneys, accountants or financial advisors.

A trust deed is a type of agreement securing a real estate loan that’s made between a lender and borrower to have the main property held in a trust by an independent and neutral third party until the loan is paid off. The third party, know as the trustee, that the property may be transferred to is typically an escrow company, title company, bank or loan servicer. Even though trust deeds aren’t as common as they once were, they can still be used in 20 states, one of which is California.

Investing in trust deeds means that you will be investing in loans that are secured by real estate. The majority of these investments are short-term loans, typically 5 years or less, which means that it won’t take long for you to determine if the investment was a smart decision. Trust deed investing fills a void in the real estate lending market because banks typically only provide long-term mortgages, as opposed to short-term bridge loans. As a trust deed investor, you effectively replace the bank in this void by making short term real estate secured loans.

This void has grown because banks have become less and less interested in providing short-term trust deed loans following the 2008 financial crisis, primarily due to the large volume of non-performing or bad loans on their balance sheets. If you’re interested in learning more about trust deed investing and the kind of opportunities it provides, the following offers a helpful guide.

The Differences Between Trust Deeds and Mortgages

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To understand trust deed investing, you should first know the difference between trust deeds and mortgages. There are two primary differences between a trust deed and a mortgage. The first difference is that a trust deed is comprised of three separate parties, which include the lender, the borrower, and a trustee. The trustee holds the property in trust for the benefit of the lender. In the event that the lender is paid on time and as promised, they will no longer have any claim to the property. Whereas, a mortgage is between two parties — the borrower and the lender.

The second primary difference between a trust deed and a mortgage is what happens if the borrower defaults on the loan. If a borrower defaults on a mortgage loan, the lender has to pursue the foreclosure process through the courts to try to secure the title to the property to satisfy the borrower’s debt. In contrast, if a borrower defaults on a trust deed loan, the trustee can pursue a non-judicial foreclosure process that is typically quicker and less costly, as discussed further below. With a deed of trust, the trustee who holds onto the property title will be in charge of pursuing the final foreclosure process if the loan goes into default.

One of the main reasons that banks choose to invest in mortgages as opposed to trust deeds is that mortgages are typically long-term, investments that are paid out over 15-30 years at a low, but stable, interest rate. On the other hand, trust deed investments are typically short-term investments that typically mature in 5 years or less, but pay a higher interest rate.

Advantages of Trust Deed Investing

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There are many advantages to trust deed investing that makes it an attractive investment vehicle for sophisticated high-net-worth individuals seeking to diversify their portfolios. One key advantage is that your investment is typically made at a significant discount to the actual value of the property. For example, typical trust deed loans in California are made at 70% or less of the property value. In other words, if a borrower is purchasing a property valued at $1,000,000, a trust deed loan secured by that property will typically be in the amount of $700,000 or less. That fact provides a safety cushion to account for market corrections or other expenses that may be incurred in the event of a default.

Another key advantage to trust deed investing is that your investment is secured by tangible property that you can take title to in the event the borrower defaults on its loan obligations. This is unlike a stock investment where you don’t have recourse to the assets of the company if your stock doesn’t perform well. As set forth above, and different from a mortgage, in the event the borrower doesn’t make its payments, the trustee there are certain laws in place that make it easier for the trustee to sell the property to satisfy the debt.

The lender will have the ability to begin a quick and less expensive foreclosure that’s non-judicial in nature. A non-judicial foreclosure provides the lender with the ability to bypass the court system and instead use the terms of the trust deed as well as State law. Since the courts aren’t involved, the process can typically be completed in a more timely and cost efficient manner compared to a judicial foreclosure through the courts.

In California, the non-judicial foreclosure process begins when the lender records and provides the borrower with a Notice of Default, which gives the borrower no less than 90 days to correct if possible. If the borrower does not cure the default and repay any outstanding amounts, a Notice of Trustee’s Sale will be filed, and no less than 21 days after which the property can be sold at a foreclosure sale. Because this process is typically quicker and easier than any type of judicial redress, it minimizes some of the risks that come with making a trust deed investment.

Because of the protective equity cushion, mentioned above, if the property value is relatively high in comparison to the outstanding loan amount, the investment shouldn’t lose any money if the borrower ends up defaulting on the loan. Since the lender can foreclose on the property and sell it, it’s possible to regain the money that was invested, which isn’t possible with many other investment types.

Yet another advantage of trust deed investing is that it typically provides an appealing yield with low risk relative to the returns. Because trust deed investments are generally shorter in duration and extended to borrowers who may not satisfy bank lending criteria, you should be able to earn annual returns in the high single digits to low double digits, depending on the characteristics of the loan and the assessed risk. These returns are typically paid to you at a monthly fixed rate with the principal investment amount paid in full when the loan matures. This type of investment is a great way to obtain passive income since you won’t be required to actively manage your investment. Instead, if the loan performs as expected, you can relax while bringing in income from the payments that are made by the borrower each month.

Disadvantages of Trust Deed Investing

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While trust deed investing can provide you with attractive risk-adjusted returns, there are some disadvantages that you should know about before you invest your money into a trust deed. For one, these investments aren’t liquid, which means, unlike a stock, you can’t decide to take your money back when the investment starts to show warning signs. Instead, you have to plan to commit to the investment for the full term of the trust deed investment because you typically won’t be paid off until the loan fully matures.

There’s also no capital appreciation or equity, which means that the asset won’t increase in value during the term of the loan. You will be paid a stated interest rate only. While the investment can provide you with a relatively high return relative to the risk, there won’t be any unexpected increases or significant upside in the return that you receive.

If you want to invest directly into a trust deed, you will also be required to evaluate borrowers, negotiate and assess the terms that you’re providing to the borrower, perform due diligence on the property and the borrower, and navigate the many laws and regulations that govern real estate lending. If you don’t have experience doing this, it can be a risky and time-consuming process and increase the likelihood that you agree to a bad deal or make a poor investment decision.

In addition, all documentation, which can be lengthy and complicated, must be properly perfected. Small errors in the documentation or problems with your due diligence could cause the borrower or another interested party to claim that your documentation is incorrect or that they have interest in the property that is just as valid as yours. Consequently, the borrower may ultimately be able to challenge the terms or the validity of the loan, and potentially take you to court at significant cost and expense. No matter what the claim is, not doing your due diligence or fully and properly documenting the loan exposes you to the possibility that a very safe investment is suddenly a risky one that could cause you to lose your money.

*Disclaimer: The statements and opinions expressed in this article are solely those of AB Capital. AB Capital makes no representations, warranties or guaranties as to the accuracy or completeness of any information contained in this article. AB Capital is licensed by the Financial Division of the California Department of Business Oversight as a California finance lender and broker (DBO Lic. No. 60DBO-69427). AB Capital makes money from providing bridge loans. Nothing stated in this article should be interpreted, construed or used as legal, financial, investment or tax planning advice, or a substitute for thorough due diligence and the exercise of sound independent judgment. If you are considering obtaining a bridge loan, it is recommended that you consult with persons that you trust including but not limited to real estate brokers, attorneys, accountants or financial advisors.