When it comes to planning for your future, leveraging your multi-family portfolio is important. In this episode, René Nelson Pacwest Commercial Real Estate Investment talks with Bob Nelson of Pacwest Real Estate Investments about how to make decisions regarding selling with a 1031 exchange or simply making adjustments to management or financing.
Listen or Read
I’m René Nelson with Pacwest Commercial Real Estate. I’m a CCIM and a Counselor of Real Estate.
I’m Bob Nelson, Real Estate Investment Broker with Pacwest Real Estate Investments. Same companies, names? No, not quite. Pacwest, yes. You’re Pacwest Commercial Real Estate. I’m Pacwest Real Estate Investments. Each of us bring a little different specialty to real estate investments, income property investments.
René Nelson: Yeah. My niche that I really prefer to work on is multi-family or apartment complexes, and also helping people buy passive real estate using single tenant, triple net opportunities.
Bob Nelson: And I do… mine is more of a specialty focus to the transaction itself, the 1031 exchange. I’m known nationally as the 1031 guru, maybe self-proclaimed, but so far nobody’s knocked me off the perch. So, with that expertise, I’ve been doing this for 50 years and been through five recessions, and it is that that allows me to bring to the table some pretty valuable insight on what might happen in the future, because a lot of our thinking is now defensive thinking. It has been great, we’ve had a long run, but things might change a little bit. How do we prepare ourselves for that change?
What a Client Should Bring to the Conversation of Leveraging Multifamily Portfolio
Bob Nelson: What would you suggest a potential client do in preparation for talking to us and preparation for talking about potentially changing their portfolio?
René Nelson: For a lot of investors, they feel like things are moving along smoothly. We’re in a healthy, robust economy. Employment is still showing favorable, but I think for a lot of people, they’re wondering, is there still an opportunity for me to leverage my portfolio into more units? Should I pay off debt? And really, what we like to do is sit down, and strategize, and look, and analyze that with you, as far as, what’s your cashflow? What’s your ultimate objective? Are you trying to quit your day job and just live off of your real estate portfolio? And if that’s the situation, what kind of an income stream do you need to replace?
Candidly, you’re probably not going to get there if you only own duplex or a fourplex. You’re going to need to continue to probably work your day job and continue to acquire more real estate. But how do you get there? How do you get that, for what Bob calls your string of ponies together, in order to have that passive income stream for the rest of your life? One thing that you need to do is go in and get pre-approved with a good commercial lender, so that you know what you’re going to be approved for and have purchasing capacity to enable to pull off. But part of that is also going to start with, what’s your financial statement look like?
The Importance of Current Financial Information in Determining Your Current Position
Bob Nelson: And please, update your financial statement. We can’t ask you enough to make sure that you’re absolutely current, understand your current position.
Understanding your current position may startle you. You most likely have a larger net worth than what you’d anticipated. You may also, though, have a reasonably poor balance, as far as the financial statement is concerned. You might be top heavy in cash, you might be top heavy in debt, but it’s good to get a picture of that.
René has a mortgage background, has the capacity to look at a financial statement and create some insights that a lender, a prospective future lender, would be able to spot. So, we can put you in a position where you’re going to look as attractive as possible to that lender. So, a current financial statement that’s up-to-date.
We also would like to see a current rent roll for those properties that you do own, length of the leases, what’s the size of the leasehold income, what’s the size of the spaces? That would allow us to take a quick look at your level of rental income. Is it consistent with the market or are you substantially behind, or are you pretty much cutting edge? If you’re professionally managed, you’re probably not too far from cutting edge. That’s not necessarily totally true, but it would be good to look at that because that’s exactly what a lender is going to look to.
We also would like to see three years of your history, your operating history on that property. That means three years, if you’re an individual, you filed what’s known as a Schedule E on your federal tax return for each of the properties that you own. We’d like to see three years of Schedule Es for the properties that you would have us take a look at.
If you’re not an individual filing individually… you would be, for instance, a limited liability company, an LLC, we’re not after a Schedule E. Instead, the same would be a form 8825.
If we can see those three years… I’m more concerned with the pattern of expenses than I am potentially with the income. The income I can figure out on my own. The past operating history of the property, not so much so, so if we can see the three years of operating history…
It’s also very helpful from our standpoint, if it’s professionally managed, to see the three December operating statements for those same three years. Your property manager will break down an expense into maybe 20 categories, your Schedule E or 8825 breaks it into 14 categories, and we can take a quick look at what’s there.
In some instances, we have to cycle out capital expenditures that do not recur year in and year out, because if that’s the case, we need to pull that away in order to get a more accurate view of net operating income. If we have that, we’ve got a pretty good idea how this property performs, what could be done to make it perform better, and in some instances it’s not to sell the property at all, it’s to adjust the management, it’s to adjust the financing, it’s to make subtle adjustments, and sometimes they’re particularly subtle, that would be helpful.
But, again, if we can see this information, and hopefully several months before you’ve decided that you would sell the property you would like to get rid of, it allows us to structure and posture for a 1031, the highest level of success that we could with a 1031 tax-deferred exchange.
To a number of individuals, the capital gains of a property they’ve held for, let’s say, the past eight to 10 years, is roughly one-third of the value of that property, which… I’m going to say one-third to 40% of your equity position, depends on your depreciation recaptures and so forth, but it’s important to know that, and with that, we’ve got a good chance of creating a substantial investment strategy that would significantly improve your position.
René Nelson: Absolutely. In the next video, Bob, let’s talk about the benefits of 1031 exchanges and how that could benefit a multi-family owner or a commercial property owner.
Bob Nelson: You know, I’d really like to get David Moore to join us and add his expertise also.
René Nelson: Yeah, I think that’d be great.
René Nelson Pacwest Commercial Real Estate Investment is an expert when it comes to leveraging your multi-family portfolio. Your future is important, so call her today for all the answers you need! 541-912-6583.