There is safety in numbers. This is true in battle and in multifamily real estate. When investing in an apartment building or a condo complex, it may be a wise decision to minimize individual risk by investing with a group.
Real estate investing groups are somewhat like mutual funds for property ownership. They enable those who do not have the capital to invest in large properties alone to get a piece of the return. In turn, they minimize risk to each individual investor in the group.
When seeking a real estate investing group, it’s important to differentiate the legitimate investing entities – a group of like-minded individuals who actively invest in multifamily real estate – from the thinly veiled sales pitches for books and seminars that promise riches for little work. Multifamily real estate investing groups are constantly seeking new opportunities to invest in real estate that matches the focus of the organization. Those groups rely on their members for leads and networking opportunities and are constantly seeking new investors to join the group.
The more investors, the larger the multifamily real estate acquisition can be. And, with a larger group, the less each individual member will take a financial hit if the property is not as profitable as projected. This is particularly significant when purchasing, repositioning, and managing multifamily real estate.
Say you bought an apartment building by yourself. You renovate it and start renting the units. You manage the building as the landlord. But some units are vacant. You are not receiving the monthly income that you budgeted for when you sunk your money into the property and the rehabilitations. Investing with a group doesn’t eliminate this situation, but it can make its ill effects less palpable. Even if the individual unit that you own through your group is unoccupied, pooling income from the properties makes it more of a collective loss than one that specifically targets one investor. The loss would still be there, but just not as detrimental.
For the investing neophyte, groups may be a wise way to get into multifamily real estate investing. You can learn from other members who bring their diverse backgrounds to real estate investing. However, it is extremely important to choose the right group. Know your real estate investment goals before you join or start a group. At Jason Cohen Pittsburgh, we are just as careful about the people we invest with as we are the properties in which we invest. Our network of investors share our interests in multifamily real estate acquisition and repositioning, enabling us to have successful investments in a cohesive manner.
Sure, there is safety in numbers. Just make sure you’re analyzing those numbers as thoroughly as you are the acquisition itself.
As a solo real estate investor at Jason Cohen Pittsburgh and as part of a real estate investing group, I’ve been taking advantage of the 1031 Exchange. It’s not for everyone. It’s not for the casual investor who supplements a full-time career with income from a rental property. Indeed, the beneficiaries of the 1031 Exchange are investors who intend to take the profit from one property and sink it right back into another.
Also known as a “like-kind exchange,” this tax deferral program offers a tax break to investors who use the sale of one property to generate capital used to invest in another similar property. At Jason Cohen Pittsburgh, we use this strategy because we constantly acquire multifamily investment properties in Pittsburgh. We renovate, rehabilitate, and reposition these properties for resale as high-end rentals. Then we use the money from the sale to acquire a new property to repeat the process. The benefit of the 1031 Exchange is the deferral of taxes, saving us money in the property exchange.
When performing a typical real estate transaction, the owner pays taxes on gains from the sale. Section 1031 of the Internal Revenue Code provides an exception to this rule for property sellers who take this gain and reinvest it into another like-kind property. Not only is this stipulation for like-kind property, but also includes cash and liabilities. The theory is that the profit hasn’t been realized yet because the recipient of the sale hasn’t actually acquired cash from the transaction. Instead, the seller has used the money to put directly into another similar investment.
The swapped properties must have the same use. You can’t defer taxes while selling your multifamily investment property to buy a home to live in. That’s why the 1031 Exchange is such a boon for companies like Jason Cohen Pittsburgh.
There are five types of exchanges under this program:
- Simultaneous exchange: The selling and buying takes place at the same time
- Delayed exchange: There is a time gap between the sale of the relinquished property and purchase of the replacement property. There is a limit to the amount of time between these two actions, as dictated by Treasury regulations.
- Improvement exchange: The investor can renovate or rehabilitate the replacement property using the proceeds from the sale.
- Reverse exchange: The purchase of the replacement property occurs prior to the sale of the relinquished property.
- Personal property exchange: Other personal assets are traded along with the real estate, as long as the personal property is like-kind.
In order to qualify for the tax-deferred exchange, the properties must be:
- Like-kind: The relinquished and replacement properties must be the same type, i.e., both must be real estate. A 1031 Exchange cannot be used to trade stocks for real estate, even if they are of an equal value.
- Proper use: The properties must have a similar use as an investment. Qualifying properties cannot be flipped or be the owner’s personal residence.
The properties must be exchanged for one another, not a total cash sale. Purchasers have a 45-day window in which to locate a suitable replacement property in order to have the tax deferral and the exchange must be completed within 180 days of the sale.
At Jason Cohen Pittsburgh, we specialize in acquiring multifamily properties. The 1031 Exchange is a valuable tool that allows us to defer taxes while we acquire a number of properties.
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