How Ultra wealthy purchase real estate

I was recently asked how do wealthy people purchase or set up their real estate transactions? Here is my input. 

There are many ways the “ultra-wealthy” purchase real estate, these points serve as great fundamentals on how many successful professionals structure their deals.

Financing:

Ability to purchase additional property, while not having to come up with 100% of the purchase price

1. For many, including savvy wealthy investors, buying an investment property with debt (mortgage) is much easier than paying fully in cash. The reason for this, is most times, capital is already stored in other assets and not liquidated in the bank. By leveraging a loan from a bank, an income property is slowly paid for in several years, interest included. Many times, in commercial real estate the balance is paid off by a balloon payment

Mortgage Interest is Deductible

2. When financing, your mortgage interest is deductible, so that would be an additional write off on top of your depreciation. A 30-year fixed rate principle and interest loan is “amortized” over 30 years, with the majority of the interest being paid up front and the majority of the principle being paid later.

Increase Your Cash-on-Cash Return (if you buy and borrow right)

3. Cash flow is your passive stream of income generated by the property (gross rent minus all your expenses associated with the property) that is distributed to investors quarterly.

When you obtain a mortgage, your total monthly expenses go up because you now have a payment to make, and your total net monthly cash flow goes down because you used some of your gross rental income to pay your mortgage.

HOWEVER, since you put so much less money down out of your pocket (20%) then your “cash on cash return”— the return on the actual money you invested out of pocket— increases substantially.

Entity:

4. LLC: LLCs limit personal vulnerability to potential lawsuits that may occur through the property. If you have multiple property it is best to have each asset under a different LLC and not in one grouping. Forming your business as an LLC helps protect you against lawsuits, significantly cuts down on paperwork compared to other business types, prevents your business from being taxed twice, and presents your business as more credible.

5. S-Corp: There are many benefits of forming an S-corp when it comes to real estate, mainly relating to tax purposes.Owners report their share of profit and loss on their individual tax returns known as pass through taxation. Income is not taxed twice – corporate income and dividend income – eliminating double taxation. The company can attract investors through the sale of shares of stock creating additional investment opportunities, and the business continues to exist even if the owner leaves or dies. S-Corps also require only once-a-year tax filing requirement as oppose to C-Corps, which must file quarterly.

Demographics/Economic conditions:

6. When making a large acquisition, you are not only buying a building, or even the tenant that occupies the building. You are buying the demographics that make up that region. Successful real estate professionals will vet deals based upon the geographic location looking at key metrics; employment rates, job growth, education levels, household income, population statistics, etc. There are many factors that will draw an investor to purchase property in an area, I recommend reading offering memorandums by large firms such as CBRE and Marcus Millichap to understand the marketing material, and what goes into selling/purchasing a large investment in the real estate world.