You're talking about a 721 exchange, aka an UPREIT. Two major drawbacks. First, UPREITs are one time deal. If you do a 721 you can defer taxes one time. At the end of the REIT investment you have to pay the taxes. Versus a 1031, which you can do over and over to infinity, then die and pass on the assets to heirs at an adjusted basis.

Second, there are no publicly traded UPREITs. So you want to get real comfortable with the GP that will be handling your money and their business plan because they will have all the control. If you want to learn diligencing GPs there's an excellent book by Rob Beardsley available on Amazon.

A Delware Statutory Trust was also mentioned. A DST is a weird, super complex entity structure where you 1) have to raise all the capital up front, and 2) can't get your money out, and 3) the entity can't raise more capital *or debt* after the DST is put in place. It's a very very very restricted structure, and requires folks with an uber level of expertise. There's a company on the East Coast called Capital Square that has a long history of putting together DST > UPREIT deals, and I personally know some very heavy hitters that trust and respect these guys. I don't invest in REITS, so I can't vouch for them either way. But my understanding is they raise capital for a value add asset in a DST, improve the property, then sell the property to their own UPREIT to allow for refinance and return of capital.

Another option would be to invest the capital gains into an Opportunity Zone Fund. This will defer your cap gains until 2026 tax year, but if you hold the fund investment for at least 10 years you get all the cap gains earned by the fund tax free.

Another option is to do a traditional 1031 exchange, as you know, which actually affords quite a bit of flexibility. Or you can just pay the cap gains on your gain.

Thanks for the explanation. Really appreciate it. I was reading up on the different options and the Opportunity Zone Fund seems super interesting, especially the part about after 10 years not having to pay taxes on capital gains accrued while in the Fund. Do you have a feel for how much an investment into a OZF would typically appreciate after 10 years, or is it too super variable to estimate?

My understanding is if I invested $500k of capital gains into an OZF, after 10 years I would only need to pay capital gain taxes on $425K, no matter how much the investment appreciated to. I just dont have a feel for how much one would expect the investment to appreciate in that time span (on average, understanding there is variance, risk and no guarantees).

Totally dependent on the deal(s). But an OZF doesn't have to be used for real estate either, it's any business in an Opportunity Zone. But for RE other than raw land, you have to spend as much on improvement as you did on acquisition. So there's some hoops to jump through that make it a bit more difficult because you are *required* to do a value add deal, buy/invest in a business, or buy raw land. Still a good program, but it's not an appreciation play, most of your value is going to come from the value add portion of the investment. So...OZF lends itself well to a strategy where you buy/rehab with 100% equity, refinance, repeat. It has to be actively managed.

There's other restirctions as well. The invested capital has to be allocated in 180 days and deployed in 12 months. Any capital gains realized or refinance proceeds within the fund has the same restriction. Any income generated is taxed at the normal income rate (less the normal real estate tax deductions).

If you invest a $500k capital gain in an OZF, 1) you have to pay the tax (~$100k) for 2026 tax year, and 2) any gains made by the OZF end up tax free if held at least 10 years. Example:

Invest $500k in OZF 2023
2027 you pay $100k taxes, but not out of the OZF
2033 you sell all the OZF investments for $1.5M
You pay no tax on the $1M gain.

Income generated by the fund is just passed through to investors. Capital gains can stay in the fund and be redeployed.

Is having a real estate agent who shows you rental properties before they are listed when buying lots of properties very very common or are they're people who have 100 properties from they're own due diligence without inside info?

Why would a real estate investor invest in single family homes when in certain areas of the country multifamily homes are in giant abundance at around the same price point of $100k? I feel like for a 2br apartment $1000 is the norm and you could charge twice that for two family homes. Am I wrong about anything or anything more to know?

Thanks

Multi Families have better returns than single families but there's more work, higher depreciation, higher turnover,etc. Keep in mind long term appreciation as well - for example where I am the mutli families in the ghetto have the best cash flow with the worst long term appreciation, where as the homes in nice areas don't really cash flow but will appreciate better long term. Personally I'd try to find a balance between the two, although cash flow will take precedent over appreciation for me.

Sorry if stupid question but the homes still go up in value each year just at a lower rate? If yes I am pretty sure the avg growth is around 3.5% what would you say the avg growth for these homes are??

Thanks

Also, when you say find a balance between the two... Does this mean have some single family homes and multi family homes in your portfolio? Or would it mean buying maybe more expensive multi family in better areas?

�� Thanks

I think buying in slightly better areas where appreciation is higher. Either way though its all about finding the right deal - not like you can cherry pick these deals anymore at least where I live.

Hey all:

An odd thing happened to me the other day.

An associate of mine told me that he wished I could rent him some commercial space. His lease is just about up where he currently is at, and he is having problems with his landlord.

This guy is a GREAT tenant and businessman. His business is well established, profitable and WELL CAPITALIZED. He is an ideal tenant.

He is currently paying market rates, but the landlord wants to raise the rent almost 50%! That would be an above market rate!

So I looked at Loopnet, checked my neighborhood, and called a couple of commercial brokers. There are PLENTY of properties available that might be suitable.

The problem is that all of them are priced so high, that their cap rates are mid to high single digits (7-8-9%). If you borrow any money on a mortgage (commercial rates are about 8%), there is a good chance the property does not cash flow, OR it is a minimal amount.

So who is buying these properties? I can buy REIT's, and if I am careful, I can get an 8% dividend yield, or even higher. With a REIT, I also have minimal work, certainly MUCH less than owning a commercial property directly.

If mortgage rates are 8%, I want to be able to net about 12% MINIMUM on a property. If a "normalized" commercial property can't cash flow with leverage, why even bother?

I've got to think that the sellers can only hold for so long. At some point, property prices are going to have to come down to allow investors to make a decent return.

Got a question about condos/coops.

One of my properties is a New York City condo in a fairly small building (12 residential units and 3 medical offices). The way condo shares and initial maintenance charges are calculated in New York State is that the builder sets approximate market values for each unit and then the shares are prorated based on those values (regardless of how much the units actually sell for).

Well, two of the doctors were developers behind the entire project and set artificially small market values and associated maintenance values for the 3 medical offices as well as the penthouse that one of the doctors initially sold to his buddy. To give you an example my ~1600 square foot 3-bdrm was valued in the low 600k's in the offering plan (sale price was in low 500k's, true value in the mid 500k's), while a 3,000+ square foot medical office was valued at 400k (true value at that time was likely around $1M). Even beyond the valuation concerns, medical offices clearly use significantly higher amounts of resources (more water, patients using the elevator in large numbers, doctors and other specialists coming and going and lifting and lowering the garage gate, etc...).

Now we finally managed to get control of the Condo board as well as the majority of unit owner votes. What is our best way to adjust the maintenance? Can we just vote and create different maintenance levels based on the use (i.e. charge higher maintenance for business use vs. residential)? Or can we recalculate the shares based on square footage or current valuation (of each unit/office, which would require an assessor right?) and then adjust the maintenance accordingly?

Too variable to estimate. For RE, there are only two ways to do an OZF. One is to buy land and just hold it. With that you're hoping for appreciation. But the problem is carrying costs (taxes, etc) during the hold period and also the fact that the OZs aren't the high appreciation plays. Two is to value add. You could spread the money over a bunch of SFHs or do any sort of RE development in any category. But there's a steep learning curve to this, and a lot of risk. A good value add deal can generate IRRs of 20%+ easy, but it all depends on execution.



Not exactly. If you have a gain of $500k and invest it into a OZF, you have to pay the tax on the $500k gain in 2027 (for the 2026 tax year). If you hold the $500k investment for 10 years, you can get any gains made on that amount tax free.

I don't understand the question sorry

Real estate doesn't go up in value every year. It goes either up or down in value in any particular year. Doesn't matter if you're talking about single family or multifamily property.

If your cap rate is lower than your interest rate you automatically have negative cash flow. If your cap rate is above your interest rate, you automatically have positive cash flow.

Put another way, unless you are doing value add, real estate is mostly an attempt at interest rate arbitrage.

Likely nobody, or if they are it's a cash buyer looking for a very specific assets.

As to REITS, it's not that simple. Look at office reits right now. Vornado is down 73% over 5 years. Boston Properties is down 52%. Commercial real estate is mortgaged on 5 or 10 years loans. What do you suppose happens to reits that borrowed, say, $2B 3 years ago at 3% and have an adjustment coming in two years? What do you suppose happens when a REIT can't fill it's properties?

There is a problem with a lot of REIT's, like you illustrate....but not all REIT's. There are other income vehicles besides REIT's. Some of the BDC's are yielding bigly, some energy related stocks are also doing so. There are also a few retailers that have quite nice dividends. Like all other investments, you've got to pick & choose.

One potential problem with the big REIT's is that if they can't refinance and start giving properties back to the banks, what are the banks going to do with the foreclosed properties? I would guess that they will take a loss on 95%+ of those properties. That could start a wave of defaults & problems. REIT's collapse, that harms the banks. The bank's problems constricts credit more broadly, hurting the general economy. On and on it goes, a vicious circle.

when would you consider to be overleveraged?
I assume most real estate people were in "debt" when they first started out and whatnot unless they had huge funds to begin with

Agree. I'm not saying there is no value to be found. REITs generally are very conservative on LTV. I think they will be find longer term, and depending on what you think will happen with the properties they own, there could be exceptional value in many companies that can weather the storm and come out the other side. But that's pretty unclear right now for many major reits.

I think that greater than 70% LTV on an income property is over leveraged. In the past I would have said 80%. Now I believe it is 70%.

I have also come to believe that unless you are doing value add deals in RE, you are essentially just gambling on interest rates.

It's somewhat interesting that given the changes in the real estate market, this thread has been inactive for months.

In addition to speculating on interest rates (which I think very few "investors" are even aware of...) you can also be speculating on a neighborhood/district getting better. It can better with lower occupancy rates. Once occupancy starts to significantly improve, you will then (hopefully) see the quality of tenants start to go up.

This has been my experience in a Detroit suburb in which I own some commercial properties. 5 years ago, when I bought, the vacancy rate in the area was probably 30%+? A lot of stores were simply family operations or "two dudes" trying to run a barbershop or simple retail operation.

Fast forward to today, vacancy rates are below 10%. MOST of the tenants are family type operations...BUT they now have some capital behind their operation. The hair salons used to be pretty sparse...now they have actually spent money SIGNIFICANTLY improving the interior. They are spending money on the facade of the building. They are spending money on signage. While still relatively modest, it is a SIGNIFICANT improvement over what was there previously.

So the end result is that even as interest rates have gone up, the quality of the neighborhood has gone UP. With that improvement in quality, the value of property has gone up quite a bit in the last 5 years.

Great point. Have you seen corresponding rent increases over that period of time?

I know that they have indeed gone up. However, how much exactly is hard to say. I am so wrapped up in other things, I don't pay a whole of attention to it.

One other thing I've noticed, is that there is TREMENDOUS variability even within 1/4 of a mile. There is also TREMENDOUS differences for "secondary" locations in this area. For example, 2nd & 3rd floor office/commercial space is still empty (or is less than half of more desirable locations). 1st floor rent & availability? Very tight.

I would like to get some more properties in this area. I have a thesis that the Detroit area (and other MidWest locations) have been in the tank for so long, they are due for a comeback. That people & business will start to relocate to this area. For example, I got a couple of decent buildings for LESS than the rent in a tier 1 city. I have put an e-commerce business in one of them. It is working out, but taking more time energy than I initially thought.

Residential housing here can also be a "silly" deal, if you know where to look. I showed a guy from Seattle what he could buy in this market if he sold his house. He has a nice house in the Seattle area. Here in the Detroit area, he will be looking at houses with pools, tennis courts, detached multi-car garages with offices, slate roofs & such. His money goes just so much further here, it is crazy.

always nice to see this thread still here and spex contributing

i will likely be dipping my toe within a year and BRRRRing out of town. anyone have experience doing that?

i have a few target markets in mind (leaning indianapolis and huntsville at the moment) but i think i'd need to study another few 100 hours on neighborhoods, supply/demand, etc etc. if anyone has any good resources down this rabbit hole i'd appreciate it

lower volumes but surprisingly not many horror stories. there was a good tweet yesterday about a guy who LP'd to a guy that jammed too much into a 3 cap on an ARM in 2021. whoops.

something i've read about and don't totally understand:

say you have a 5m capital base and BRRRR with an average ARV of 500k.

how do you think about your port when the sum of your property ARV's becomes north of your capital base? you're obviously still cash flowing (w whatever slippages from vacancy and maintenance are priced in) but when you're north of 5m ARV is that starting to feel like leverage? or no

i'm still at the drawing board phase and i know it would take years to even scale to that degree, but it's been on my mind. for example, even if i found amazing discounts in FL after hurricane insurance adjustments... my port would still be exposed entirely to a hurricane. so i'm just staying the hell away from FL. same with AZ. if it's too hot in 10 years the vacancies could kill me.

will be re-reading this thread in the meantime