Archives for March 2017

Investors renting out property on sites such as Airbnb could generate more income by getting into the world of special-events leases. But there are a number of hurdles to clear in order to make this a winning investment strategy.

Real estate professionals have found their place in the short-term rental trend, helping investors purchase properties they can then rent out by the night to travelers using sites such as Airbnb and VRBO. But there might be another way your clients could make money off STRs—if they have the right space. It’s an interesting twist that’s just beginning to emerge: leasing a residence for special events.
It might look like this: A quaint farmhouse with a picturesque barn could be the perfect venue for a country chic wedding; a historic mansion or contemporary penthouse could serve as space for corporate meetings or parties. Few have tried this investment strategy, so it can’t be called a trend. But some practitioners say they expect interest in such an investment model to build. One agent has even tried it himself.
Brian Copeland, CRS, GRI, a team leader at Village Real Estate Services in Nashville, Tenn., and his partner, Greg Bullard, turned their 5,200-square-foot home, which they built in 2007, into a short-term rental property when they moved to the countryside after adopting a son several years ago. Copeland discovered that the home’s features—including antique whiskey barrel floors, 20-foot coffered ceilings, and a dramatic skyline view—appealed not only to travelers but also individuals and businesses seeking a unique event space. So he began renting the property to groups of up to 150 people for events such as weddings and corporate retreats.
Copeland typically charged between $1,000 and $1,500 a day for special events, while his average nightly rate for individual visitors was $400. But certain issues prompted him to stop leasing for special events. Large groups are harder on a home than individual overnight guests, Copeland says, and corporate clients can be demanding about specific furniture arrangements. “We have hardwood floors, a dining room table that seats 18, and a grand piano,” he says. “They always want to move the furniture, so we have to bring in a crew to move everything and reset it when they leave. They tape things to the walls. We were constantly repainting the walls and refinishing the floors.”
Because doorknobs and toilet handles kept breaking from heavy use, Copeland installed commercial-grade replacements. “Commercial grade is ugly, but they [can take a beating],” he says. The hassles and upkeep became too much, and now, he and Bullard lease their home exclusively as a short-term vacation rental with a three-night minimum stay. “We said, ‘We can’t do this anymore.’ Even a three-month renter can’t do as much damage as a corporate retreat.”
Still, he says, special events can be a good income generator for investors who are looking for creative ways to build wealth. “For someone who has the right temperament and the right property, it can be a good deal,” he says. Help your clients explore their options with the following caveats.
Understand local zoning regulations. You and your client may already know that many municipalities are cracking down on short-term rentals, but there’s more to be aware of when marketing space for special events. In addition to making sure your local ordinances don’t make STRs impermissible, your client must also contend with zoning restrictions, stricter building codes governing commercial property, and local business ordinances, says Michael Schaffer, broker-associate at LIV Sotheby’s International Realty in Greenwood Village, Colo. Business licenses and expensive retrofits, such as adding a sprinkler system, might also be required, he adds.
Be prepared for financing delays. Investors who plan on financing the purchase of an investment property to rent out for special events may have to jump through extra hoops to get lender approval. Bruce Ailion, CRB, CRS, a broker at RE/MAX Town & Country in Woodstock, Ga., helped buyers who had trouble securing financing to buy a foreclosed clubhouse in 2011 that they wanted to use as a wedding and special-events venue. “We looked around at probably 20 lenders,” recalls Ailion, who is also a real estate attorney. Though it wasn’t an STR, the lender wanted to survey the property to better understand how it would be used. An “oddball project” sometimes falls under more lender scrutiny, Ailion notes. His buyers ended up paying nearly double the average interest rate because of the unusual nature of the project, he says.
Know what kind of property works best. A big house with many rooms may work as a meeting space where the agenda calls for small-group sessions. But large, open spaces that can accommodate a crowd are more appropriate for festive dinner parties, galas, or corporate gatherings. “We built our home for social reasons,” Copeland says. “We could clear out the living and dining rooms and seat 80 people comfortably at round tables for dinner.” Ideally, the property will provide multiple scenic views, as well as fountains, arbors, fireplaces, or grand staircases where people can take pictures. Copeland also recommends locations near an airport to ease accessibility for out-of-town guests. His rental property is five miles from Nashville International Airport.
Keep parking in mind. Rural and suburban properties are likely to have the acreage necessary for multiple cars and delivery trucks. In the city, you may have to be more creative or limit the size of groups you’re hosting. “Maybe you can make some kind of partnership with a valet and a nearby church or synagogue that would like to make some extra money,” Copeland says. But be aware of any requirements your municipality might have for commercial properties to provide their own parking.
Make sure insurance is sufficient. Traditional homeowners insurance won’t cover all the damage and accidents that can occur when you use personal property for commercial purposes. The insurance policy you’ll need depends on the nature of your property use. Protect yourself as well, advises Dawn Thomas, CRS, broker-associate at Golden Gate Sotheby’s International Realty in Palo Alto, Calif., who also owns a two-bedroom rental home. She advises setting up an LLC so there won’t be liability attached to your personal assets and consulting an attorney to draft lease agreements.
Neighborhood pushback can derail the deal. If nearby residents are opposed to residential property being used for commercial purposes in their communities, their collective voices could put an end to an investor’s plans. Unfortunately, in that situation, there’s not much your client can do. “The larger the groups and higher the traffic that will be generated, the more difficult it will be to make a noncommercial property legally usable for commercial purposes,” Schaffer says. “You’re fighting an uphill battle when 500 neighbors show up at a city council meeting.” Investors should have alternate income streams, he adds, so their livelihood doesn’t rest on making a STR work if it doesn’t.
By: Pamela Dittmer McKuen (REALTORMag)
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Learn what people are planning at various stages of their real estate careers.

You know how you go the extra mile for your clients—running a quick vacuum before a showing, bringing in flowers or even your own furniture to create that wow factor, wearing out your tire treads to find someone the perfect home. That’s because you’re taking your clients’ dreams seriously.
But even as you help your clients with their plans, are you thinking about yours? What about that ultimate plan-ahead task, your own retirement? Without an employer-based 401(k) or pension set up for you, your long-term financial wellness is fully on your shoulders—and it can be a daunting responsibility.
Financial planner Tad Cook, who specializes in serving real estate clients at @Financial in Chicago, says that a quick rule of thumb is to set aside 25 to 35 percent of your gross income for taxes; save 10 percent for retirement; and then base your working budget on the remaining 65 percent.
But this is a key point to remember: Retirement plans are not a one-size-fits-all proposition. “It really all depends on the volume of business you have and how aggressively you want to pursue a program,” Cook says. “We have to look at the whole financial picture—and age comes into it.”
Here are stories of three individuals at different ages and stages of their careers. What you learn about their situations and solutions may help you come up with your own set of strategies.

What plans are best for real estate professionals? Take a look at four retirement options for independent contractors.

How to face down inflation

Alison Parker, 36, a newly licensed practitioner with Keller Williams in Glen Ellyn, Ill., recently had her first closing. She loves real estate, is a mother of two toddlers, and is excited about how she can blend her budding career with the rigors of motherhood. Her husband, who works in IT, has a pension and 401(k) through his company. She does not. Parker knows she should save for retirement, but at the moment, she’s concentrating more on building her business and setting up college money for the kids.
The plan for the kids, in fact, is pretty well developed: Alison’s young family recently moved from Chicago to the suburbs, but instead of selling their condo when they bought their single-family home, they decided to refinance the condo on a 15-year note and turn it into a rental. It will be paid off when the kids are ready for college. The plan is to sell it at that time to generate funds for the children’s college. At least that’s the thinking so far.
Cook strongly endorses the Parker family’s decision to hold on to their first property, but instead of tapping it for college funding, that second property makes more sense as a retirement vehicle. “Income is so much the key to retirement,” says Cook, “and inflation is an issue.” Because the cost of living is always rising, you can expect living expenses to increase during your retirement. If all your assets are in a fund, you would need to take more money out to meet rising costs. “But with a rental,” Cook says, “you can raise the rent every year and fight inflation.” Cook says real estate agents who have investments in two or three homes have the easiest retirement planning, so there’s no time like the present to get something in place. And even while many practitioners are advising clients about investment opportunities in real estate, a majority haven’t heeded that wisdom themselves. Only about 30 percent of REALTORS® currently own investment property, according to the latest Member Profile by the National Association of REALTORS®.
If you’re looking to set aside money for college, Cook says investments in a 529 college savings plan are recommended since they grow tax-free, at an average of 6 percent, which may be more favorable than real estate values, which tend to increase at an average rate of 3 percent a year. Of course, as a caveat, he adds that performance of any asset can vary. Another cautionary note from Cook: Don’t pay for your kids’ education out of your retirement fund. “That doesn’t work well for anyone,” he says. Think about it: Most kids would rather pay off their student loans than support you in your old age. And, if for some reason you do have to take funds out of a 401(k), Cook advises that you replace it as soon as possible.

How to sock it away

Dave Mattes, 52, has been a real estate agent for most of the last 20 years, not including a five-year excursion into mortgage lending before returning to his passion. Now a sales associate at RE/MAX of Reading in Wyomissing, Pa., he and his wife Melanie, who is also an agent, are aggressively putting money into two Roth IRAs and a SEP IRA . “I’ve been slow to the party, like most people, unfortunately,” Mattes confesses. “It is truly ‘do as I say, not as I’ve done.’ You need to be socking money away starting at age 25 and never, ever, ever stop.”
The Matteses may have been late starters, but they made other investments along the way, now owning eight properties, most of them in the Reading area. “It’s perfect for self-employed agents to acquire properties with 10 percent down,” he says. Mattes purchased his properties with conventional 30-year mortgages, then gradually converted to 15- or 20-year notes. The properties will be paid off as the couple moves into their 60s. “Now I’ll have an asset sitting there that I could cash in, or will have rental income that should provide a decent quality of life.”
Mattes acknowledges that the advice to put money away for retirement was always out there, at the fringes of his awareness. “You know the whole time you need to do it,” he says. His brokerage even encouraged people to make retirement planning a priority by providing contacts and programs for agents and staff. “Our office is very proactive about making tools available to us. They bring people in from outside—accounting firms, financial advisers. They make it easy for us to put a percentage of our income into various accounts.”
Mattes himself now relies on his accountant and financial planner to guide him with his savings program. “They were referred to me by someone I trust,” he says.
But real estate pros should be sure they understand whose best interest their financial counselor is committed to. The Trump administration in February sought to delay the Obama-era “fiduciary rule” that was slated to take effect in April and would require investment advisers to disclose whether they had a commission-based payment structure that favored their own financial gain over their clients’ interests. Cook from @Financial says it’s important to inquire about how investment advisers are paid for their work with you. “First and foremost, ask about fees, which can involve commission, startup costs, ratios, percentages, or other management expenses,” he says. If you’re getting advice from stockbrokers paid on commission, their greater loyalty may be to their brokerage and its products rather than you. Independent financial planners are paid directly by clients, so their interests are not aligned with any particular investment product or brand.
The important point, Cook says, is that the earlier you start saving, the more you earn over the long term. In fact, when you start saving matters more than how much you save, because of the power of compound interest. Mattes finds he must now put away three times as much each month as he would have if he had started years ago. “So I’m taking the complete opposite approach with my son, who’s 26,” he says. Mattes is strongly encouraging his son to start putting money away in a retirement fund—and he is matching those contributions for him.

How to be a serial investor

Wayne Reuter, 62, and his wife, Teresa, 58, retired in 2016 and 2014 respectively, after lengthy careers. Wayne originally worked for the Union Oil Company of California, then 20 years ago joined Teresa’s real estate business RE/MAX Excels in Geneva, Ill., and they continued to build their practice together.
For decades, Wayne has been a religious tracker of the family’s income and expenses. He could tell you what he made and spent in any given year, going back to the 1990s. “In ninth grade, a Ouija board said I was going to live to 86,” he says wryly, “so that’s what I’m planning for.”
He and Teresa made many real estate investments, over the years. The first house they bought was in Boca Raton, Fla., in 1978. They paid $37,500 for it, and when they moved, instead of selling it, they decided to make it a rental. They finally sold the house for $185,000 in 2016—but more important than the appreciation was that in the interval, it generated more than $300,000 in income for them.
Over the years the Reuters bought and sold about 30 other properties in Illinois, owning usually about five at a time. They bought them, rented them, managed them, paid them off, then sold them.
“If you’re in real estate,” Wayne says, “you know what a good deal is.” His advice: “Get one investment property and see if you like being a landlord.” Some people find it a headache, but not the Reuters. “Managing a property and being a landlord is similar to managing people,” he says. They communicated carefully with their tenants, striving for flexibility and honesty. “And the good thing about being a landlord is that you can delegate tasks (for a fee).”
But real estate was not the Reuters’ only investment. They always saved. “You can start with saving 1 percent of each commission in year one and increase that amount in each subsequent year, but get in the habit of saving and every year putting money into your retirement accounts.”
Not everyone has this kind of discipline, and according to Cook, age 50 seems to be the magic number that kicks people into gear. “If a real estate professional has not done a lot of savings in their 20s, 30s, or 40s,” he says, “then in their 50s, that’s when people wake up to fact they need to be saving aggressively for retirement. At this point, the Solo 401(k) is often the vehicle that we use.” That’s because the higher contribution limits can help you do your best to make up for lost time. Or you can split your contributions between types of accounts, deductible and nondeductible. Find a certified public accountant or financial planner you trust who can advise you. The best retirement advice is to practice smart money management—the rules you’ve always heard about. Says Reuter, “Spend less than you make, pay off your credit card balance each month, try to keep three to six months of cash on hand for emergencies and the months you don’t make enough, plan your taxes ahead, and make your quarterly payments. And put away 10 percent every year.”
And own real estate. “Once you get your short-term expenses under control, you should have a property. There’s nothing like having someone else to pay the mortgage.”
Reuter makes it sound easy, and of course it isn’t for everyone. So if you feel overwhelmed at the prospect, it might help to remember that adage about how to get a big tree in your yard:
The best day to plant a tree is 20 years ago. But the second-best day is today.

Once you have your expenses under control, start investing in real estate, says long-time real estate investor Wayne Reuter. Learn more about real estate investment strategies through NAR’s course at rebac.net/investing.

 
By: Beth Franken (REALTORMag)
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Embracing a New Era

Last year in the annual Expectations & Market Realities in Real Estate 2016 report, Navigating Through The Crosscurrents, we predicted:

• Economic growth at a slow, but steady, pace.
• Employment growth, low gas prices, and increased consumer spending would lead the Federal Reserve to raise the federal funds rate.
• Major geopolitical events would rattle the investment environment.
• Commercial real estate would remain on solid footing.
As 2016 came to a close, these predictions proved accurate. Although commercial real estate transactions and returns were lower than the historically high levels set in 2015, growth remained strong, with YOY returns of 9.22% as of third quarter 2016, according to the National Council of Real Estate Investment Fiduciaries Property Index (NPI), and rents were stable or increased across all property types.

Using this as a backdrop to our 2017 report, let us dive into what lies ahead over the coming year.

By: Expectations & Market Realities in Real Estate 2017 – National Association of REALTORS® New Mexico
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