All Forum Posts by: Andrew Propst

We are sure you have noticed a number of changes in the real estate industry during the past 14 months of Covid. Some of these changes have benefited the 3rd party property manager and some have hurt. Here are five potential threats we see for third party property managers.

1. A white hot real estate market - As the market continues to stay hot, reluctant landlords are selling. This off-load of potential rental properties leaves the industry fewer properties for property management companies (PMC’S) to manage. Realtor.com's market data for the week ending May 1, 2021, shows that the median home price of all the listings increased by 15.4 percent over last year, notching the 38th consecutive week of double-digit price appreciation. Investors are cashing out.

2. On demand service applications - As we find ourselves more and more technology driven, and requiring an immediate response, many self managing landlords are using tools that allow them to access vendors, repair companies, lock boxes, signs, etc online. Willing participants work when they want, can perform when they want, and choose what services they offer. Advancements in the prop/tech space are not only creating different owner and renter experiences, but also reshaping the role of a property manager. The “Uberization” of property management is here to stay.

3. Consolidation - With Venture Capital and Private Equity firms committing funds to consolidate all service industries, the blitz to buy mom and pop PMC’s is on. According to mercer.com, globally, capital commitments of private market funds have been increasing consistently for several decades and reached a record level of US $3.1 trillion in February 2021. This represents a nine-fold increase over the past 20 years. The shift to institutionalize and dominate the market is forcing small property management companies to consider selling before they become extinct.

4. Finding and retaining talent - Many industries are facing a talent shortage on many levels. This is the reality for the property management industry today. Talent shortages in the U.S. have more than tripled in a decade with 69% of employers struggling to fill positions up from just 14% in 2010, according to a new ManpowerGroup survey. A shortage of employees can produce a variety of negative effects, hindering the ability to grow and expand, or even to meet existing staffing needs. The bottom line is that companies will lose their competitive advantage if they can’t hire and retain talent.

5. Tax law changes - Anxiety over potential tax law changes is why some investors are selling in unusually high numbers. Data shows that investors are putting properties up for sale to get ahead of proposed tax rate increases and possibly the elimination of capital gains protections. New tax rules are at the core of President Biden’s ambitious economic plan, “American Families Plan” that calls for $1.8 trillion in spending and tax-credits for provisions, The most prominent impact of the plan on real estate is the treatment of capital gains. The present capital gains rate of 20%, the lowest in a decade. This would rise to 39.6% for the highest earners. Biden’s plan would remove the ability to shield capital gains above $500,000 from taxes. Mr. Biden also seeks to close the death loophole by taxing capital gains on inherited assets. “From a broader market perspective, restricting 1031 exchanges could generate a short-term surge of activity as investors liquidate assets that have significant appreciation and/or deferred taxes,” according to John Chang, senior vice president and national director of research services at real estate firm Marcus & Millichap in an analysis emailed to CoStar. “These investors would try to clear the books before the new tax rules are put in place.” If capital-gains taxes are high and investors are unable to exchange in the future, we can assume that many willing investors will put their money in another asset.

From hot markets, “Uberization” of services, consolidation of the industry, workforce challenges, and tax changes, the threats are real. It may be time to consider cashing out on what you have created. If you sell your business you may choose to continue working in your same office for a great salary, move to another industry, or retire. Taking your money off the table is a smart move that could be your best move.

Many real estate investors start thinking about selling investment properties when real estate fundamentals are strong and markets are hot. And during such times, there seems to be no shortage of real estate agents and others anxious to benefit from another transaction. Unless there is a compelling need to cash out of your real estate investment, here are 6 reasons why you may want to think again about selling:

1. Real estate is a top-performing asset class. Few investments perform like real estate, doubling in value every 10 years on average in this country – and even more in bull markets. Too many investors wish they had held on to properties they previously sold because those assets would now be much more valuable and, in some cases, nearly irreplaceable.

2. You've got cash flow and growing equity. As your investment property increases in value, so does rent. And while your income is growing, tenants are paying down the mortgage, creating greater owner equity. The combination of market appreciation, increased revenue, and debt reduction consistently helps you build wealth over time.

3. There's financial power in leverage. As your property value increases and the mortgage balance decreases, you can refinance or “leverage” the property and pull equity out of the asset to purchase additional real estate. When properly done, this strategy can help you build greater wealth while increasing your leveraged return.

4. You've got tax advantages. Every year, tax write-offs for asset depreciation help shelter your income along with other expenses associated with your investment property. These are powerful tools that also help you build greater wealth.

5. 1031 exchanges can be challenging. It’s no secret that exchange properties are difficult to find in strong markets. There’s just too much competition for the same opportunities and cash will almost always win the day among competitive offers. And remember, a standard sale will result in capital gains tax and any applicable prepayment penalties.

6. Selling generates significant fees. The fees associated with selling an investment property are significant. They include brokerage fees of up to 6%, title insurance, closing fees, and many other associated fees. Investors are often surprised when their net proceeds are much less than anticipated.

7. They keep printing money but they are not printing real estate.

As the regulatory landscape has gotten more complicated during COVID-19—with a halt on evictions and late fees, as well as other local laws being passed to help keep renters in their homes—property managers and their knowledge within the market, ability to maintain profitability and tracking ever-changing legalities are even more valuable than it was a year ago.

If you've owned income property for any length of time, you know that managing a rental can be financially rewarding. At the same time, you've also likely discovered that property management requires a large commitment of time and effort. While you may think the do-it-yourself approach may save you on your management expenses, the complexity of the market, COVID regulations, maintenance costs and ensuring the profitability, DIY could in fact be more expensive in the long run.

Property Managers feel that their clients have viewed their services as more valuable during COVID-19 for many reasons. Most importantly; communication, services and insight. Rental owners need property managers’ help in maintaining these critical tasks to secure their properties’ profitability more than ever now.

What are some other areas that make good Property Management worth its weight in gold?

Setting the right rental rates: A good property management company will conduct a thorough market study in order to set a rental price for your property, ensuring that you achieve the perfect balance between maximizing monthly income and maintaining a low vacancy rate.

Collecting and depositing monthly rent payments on time: Property management companies have efficient, tried-and-true systems in place to effectively collect rent and maintain on-time payments.

Marketing and advertising your property: Through long experience, a property manager will know exactly where to market your property and how to craft compelling advertising materials.

Finding the right tenants: Experienced property managers are experts at finding good tenants, and will take care of all the details, including the securing all criminal background and security checks, running credit reports, verifying employment, and collecting previous landlord references.

Managing tenants: The property manager will handle both routine and emergency maintenance, take care of routine inspections, and manage any situations where conflict resolution is required.

Managing vendor relationships: Property management companies have relationships with maintenance workers, tradesmen, contractors, suppliers, and vendors that it's almost impossible for an independent landlord to duplicate.

Ensuring that you're in compliance with regulations and property laws: There are a multitude of applicable laws and regulations to abide by when renting and maintaining your rental property. These include local, state and federal regulations, as well as fair housing regulations (such as the ADA). A property manager can help you avoid lawsuits by keeping your property up-to-date and in compliance with these regulations.

Enabling you to invest in geographically distant properties: If you manage your own properties, you're pretty much limited to investment opportunities within a tight radius of your own home. By hiring a property manager, you can take advantage of investment deals in any location you wish.

Maximizing the profitability of your time: By having a property manager take care of the day-to-day aspects of running your income property, your free to spend your time identifying further investment opportunities or otherwise furthering your career.

In a number of markets across the US, as you know, inventory is the lowest it has ever been, driving the prices higher.  Inventory is almost impossible to find these days, but it still can be done with making the right connections.

We've been guided with common and alternate approaches to dig a little deeper to find good investment properties, approach homeowners directly, checking online classifieds, social media, FSBO…….But here are three ideas when quality time in effort has been invested has paid off big:

Contact Property Management Companies

Find them, call them, network with them, and find out if they have owners that plan to sell.

Contact Self-Directed IRA offices

In some ways, a self-directed IRA is like a traditional IRA or a Roth IRA. The account is designed to provide tax advantages, and participants must follow the same eligibility requirements and contribution limits. The difference lies in the type of investments you can hold in the account. While a traditional IRA or Roth IRA might be used to invest in CDs or mutual funds, a self-directed IRA can be invested in many other alternatives including real estate.

There are times that holders of these types of real estate will need to sell their investments and being able to connect with a custodian or trustee of these types of investments can provide a unique lead for a sale.

Contact Tax Accountants

Ask for referrals, if they have clients that are looking to off load some real estate investments.

Contacting these three service providers could be the key to finding your next off market megadeal;…….good luck, and good hunting!

There is a lot at stake in this wildly contested Presidential Election. With such serious topics as; COVID, climate, immigration, the economy and housing, partisan approaches to housing and the inclusion or exclusion of congressional support can dictate different directions we could be heading.

Certainly at the top of investor’s minds is the Biden proposed elimination of the like kind exchange provision, tax code section 1031. Repercussions of eliminating the 1031 exchange could have far-reaching effects on commercial real estate markets that already are suffering due to COVID-19. There could be a decrease in real estate investment and development. Trump supporters claim that Biden’s proposal is political and aimed towards the President and his family, who are fixtures in the real estate industry, and Biden supporters claim it provides a much-needed source of funding that would not hurt the middle class.

With a historic shortage of affordably priced rentals and homes for sale, how each candidate would approach this crisis could have lasting implications for years to come. Let's take a look at where each Presidential Candidate is focused on providing solutions for the housing crisis.

Trump

According to National Association of Home Builders CEO Jerry Howard “If President Trump is re-elected, I believe you’ll see him continue to try and deregulate all businesses in industries including housing, and that will help us build housing” “I think that our builders are more inclined to believe that President Trump will be better for them in that regard, but it really remains to be seen.”

Although unlike his challenger, President hasn’t released a housing plan, but we can look at what he has done in office or proposed budgets thus far as an indicator of what is to come;

• Eviction moratorium to prevent renters from losing their homes during the pandemic
• Scrapping a law that required suburbs to address racial discrimiation in housing.
• Deep HUD cuts
• Movement towards privatizing Fannie Mae and Freddi Mac, with potential affect for generations.
• Capped property, income and sales tax deductions at up to $10,000.
• Lowered the mortgage interest deduction.
• Opportunity Zones

Biden

Presidential Candidate former Vice President Joe Biden has outlined a plan that focuses on disparities and creating national standards. “When voters make a decision in November, the choices are largely preserving the status quo in the housing market versus expanding opportunities for minorities, low-income and lower middle-class households," says realtor.com®'s chief economist, Danielle Hale. "Biden is looking at how to increase opportunities for homeownership and affordable rentals," adds Hale. "[His plan] is targeted at the people who need the most help."

Highlights from Biden’s proposed plan face two distinct obstacles, passing through Congress and having the funds to support the plans.

• First-time home buyers with a down payment tax credit of up to $15,000
• Creating a national standard for appraising homes to make sure properties in communities of colors wouldn't be assessed at less than similar homes in comparable white neighborhoods.
• Fully fund Section 8 vouchers so that every low-income American who qualifies for the program would receive the assistance. Currently, about a quarter of households eligible for the vouchers don't receive them because there aren't enough to go around.
• Creating a public credit agency that would help raise the scores of minority home buyers by considering things like rental payment histories and utility bills paid on time

Possibly by print we will have election resolution and will know what direction the real estate and real estate investment market will go. Either way it is always good to know what those changes are and how we can prepare for them.

Sources:

https://www.marketwatch.com/story/a-longstanding-tax-break-for-real-estate-investors-could-be-coming-to-an-end-11602282199

https://www.realtor.com/news/trends/trump-vs-biden-housing-plans/

https://joebiden.com/housing/

www.withum.com

A good property management company with the ability to take payments online is more important than anything for April.  My property management company sends a statement every month proactively and that helps increase collection also.  I am also being somewhat flexible on payment timing.  I think there will be new information every day so plans can change quickly.