CHICAGO – NOVEMBER 05: Partial view of the Chicago skyline, photographed from outside the Adler … [+]
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When it comes to real estate investing, taking a long-term approach has key benefits. The most successful investors I’ve dealt with in my career have built their portfolios over time. While there could be challenges to acquiring and refinancing assets in today’s market, there are still opportunities to be had. If you’re an investor who has already closed on transactions, you could leverage your existing portfolio. If you’re new to the game, you might opt to focus on the first deal, after which you’ll gain some credibility and can begin to build your track record.
Once you’ve held a piece of property for some time, there could be several options to pursue, depending on your business model and pool of investors. You might decide to hold the place, refinance it, or sell. As you make transactions, you’ll want to let others know. Spreading the word about your real estate investment activity can lead to more connections.
Building a Portfolio
Most likely when you acquire a property, you’ll have a plan in place which will dictate the long-term objectives. Your partner and other investors may be interested in holding the property, or they might be looking to move on after several years. If others take their return and shift funds elsewhere, you’ll have to decide whether you can maintain the place on your own and still get the return you want.
Refinancing could be brought into the discussion, although in today’s market, this step may not enable investors to get the same return on equity that they could take out in the past. In the past, refinancing could have brought a lower interest rate and enabled investors to take cash out from the equity. However, as debt service coverage ratios have become more conservative, along with the proceeds, in some cases a refinance to take out cash may not be possible. It could be a time to think about selling to get a return on equity.
If holding the property or refinancing won’t provide your desired return, you might consider selling the place. If you do, you’ll want to work with a knowledgeable investment sales broker. Look for someone with a laid-out marketing strategy who will share your opportunity with a broad audience. Check that the broker has a strong track record and a reasonable timeline in place based on the market conditions.
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As you think about selling, you’ll want to talk to your accountant about the tax implications. They can help you understand what your potential capital gains could be. They’ll also look at taxes from a federal and local level. Knowing what your after-tax scenario will be may make it easier to determine what you want to do with the asset.
Section 1031 of the IRS tax code allows you to exchange one property for another of like-kind without having to pay capital gains tax. Often called a 1031 exchange, there are rules you’ll have to follow for this process, including acquiring another property (or properties) as an investment and using a qualified intermediary to hold your funds in escrow. You’ll typically have 45 days after closing on the first property to identify the next acquisition (or acquisitions), and you’ll need to close on them within 180 days of closing on the first place.
Spread the Word
As you acquire real estate assets, you’ll want to let others know of your activity. Some real estate professionals who have been guests on my podcast “The Insider’s Edge to Real Estate Investing” do an incredible job of promoting the properties they are closing. These include Steve Kachanian from Klosed, and Jeffrey Znaty and George Giannopoulos from Kings Capital.
Spreading the word about your track record brings several benefits. Primarily, this strategy can help you stay top of mind for investment sales brokers. These professionals are often very busy with listings that they’re trying to sell. If you’re demonstrating that you’re active, brokers will be more in tune with what type of asset you’re interested in. The adage that “deals lead to more deals” is certainly true.
Certainly, acquiring an initial property takes time and effort. After crossing that hurdle, you can think about building your real estate portfolio. As you move forward, you’ll want to develop a strategy around cultivating your brand and reaching your target audience. Let others know what you’re doing and what you’re interested in, and you’ll likely find an increasing number of opportunities for your next investments.