Commercial Real Estate Investing From A-Z

Today we are continuing our conversation around commercial financing, we will learn how you can get a commercial real estate loan, ways to partner up with seasoned operators, how to find lenders that can make creative financing available to you, and a few other valuable things. We are interviewing John Pascal, Managing Director of Paramount Capital Advisors (PCA). You can read this interview here: https://montecarlorei.com/8-things-you-should-know-about-real-estate-financing/ Let's start with the basics: is a job needed for first time investors, does the credit score matter, what is the minimum down payment for that type of investor? From a lender standpoint it’s very important that the borrower has experience executing the business plan that they’re proposing. It’s a little bit difficult to get financing for first time investors or developers. Generally, who I deal with are more experienced real estate groups because it’s just very difficult to finance the deal otherwise. But I would encourage anybody who is looking at getting into the business to maybe partner with, or work with a group that has done it once what they’re proposing to do. And it’s also important that the borrower has a good balance sheet. Typically a lender would like to see net worth equal to or above the loan amount, and liquidity, meaning cash or marketable securities equal to at least 10% of the loan amount.  What are typical deal killers when trying to get a loan? The lack of financial capability, i.e. net worth and liquidity. The parameters for that are more stringent with a traditional bank than they are with a private equity lender. The other hurdle is the experience of the borrower. The more experience, the easier it’ll be to find financing because the lender will have comfort that the borrower can execute on their business plan. The strategy itself is also important. If a borrower says “I can sell this property in a 4% cap rate and that’s my way of paying the loan back”. It has to be realistic, and proven in the market. Are 4% cap rates prevalent in the market, and can that be proven out to the lender? Those three things are really critical for getting the loan approved. I heard that you are very creative on getting financing, I would love to hear some examples of your creativity. It all boils down to having a good understanding of the capital markets, and which capital sources are doing what. I spend a lot of my time understanding what different lenders with different equity sources are interested in doing. One example was that there was a developer of a hotel in the Atlanta area whose lenders were looking to foreclose on the asset, and the property was in a good location. It just was at the time completed and about a year or so prior to me getting involved, and it was just ramping up, basically it was under water. The vultures were circling, and the borrower came to me to try to figure out a solution. It was a situation where a traditional lender probably wouldn’t have looked at this deal because the deal was underwater, but I brought in a private equity firm to recognize that there was going to be some value in the deal. There were probably 15 or 16 lenders on the deal, and we negotiated with each of the lenders to take them out. It was like herding cats. The bottom line was that I found a private equity firm who would do the deal. They certainly charged a lot of money to do it, but today the property is doing great. John Pascal www.paramountcapitaladvisors.com john@paramountcapitaladvisors.com (312) 767-3320 --- Support this podcast: https://podcasters.spotify.com/pod/show/best-commercial-retail-real-estate-investing-advice-ever/support

Today we're discussing commercial loans: how are they different from residential loans, how to find the best lenders, how to apply to these loans and present them to the lender, and what are some of the terms that we get to choose on these loans. Read the full interview here: https://montecarlorei.com/how-to-apply-for-a-commercial-loan-how-to-find-the-best-lenders/ How should a new investor present a deal to a lender in order to get approved? Run your credit report up front, accumulate the last three years of your tax returns, put together a personal financial statement, and basically be candid with the lender. If you have anything that you think is going to look badly, like a past bankruptcy or past foreclosure, just explain it upfront. What are some different loan terms that we as investors would be able to choose from and decide on for commercial properties? Basically you can choose how much leverage you want. It depends on what the lender's going to offer, but you can get leverage anywhere from 60 to 75 or 80%, we even do 85% of some stuff. Where you have the most flexibility, as a borrower, it's the prepayment. The longer you do your prepayment out, typically the lower your rate is going to be. So whether you do a three year, five year, or ten year prepay, that's really where you have the most flexibility when you're speaking to the lender. Can these loans be transferred to a new buyer if we decide to sell the property before that three, five or 10 year prepay? With most lenders, yes. with some lenders no. In today's market, most lenders would transfer, and there's usually a small transfer fee. How do you recommend people going about finding really good lenders? I see a lot of people posting hard money loans and they really sound like a scam because their rates are so low. How can people make sure that they are really dealing with a legit lender and also a very good one? There's a lot of scammers in this business, so I'm just being very careful. I would say to talk to other investors, see are they used for lenders and or bonkers and I would really do it that way. I wouldn't just, you, you know, if you're a new investor, just going in on your own, talk to other investors and network, you know, go to the networking groups. It pays to network with other investors. You know, I mean this is an information business or whatever one's one. A lot of people say that you need to find a local lender where the property is based out of. Is that true?  No, that’s false, I don’t buy that for a minute. For example, the deal that I shared with you previously that I did in Ohio, it was a retail deal in Cleveland and we got great deal for them, 4.35%, 10 year term. 75% loan to value, with a California lender 2000 miles away. I think there might be a few times where a local lender makes sense, but off of the top of my head, I can’t think of a circumstance. Were you there back in 2008 doing loans? Do you want to share a little bit about what was going on and how we should be prepared for a potential recession coming up? Yes, I was. What was going on? Not a great deal. Nothing really. I was actually working at Marcus and Millichap back then and not much was trading. How do you prepare for that? That’s a good point. A lot of people believe, particularly in some of the biggest cities, particularly in multifamily, they think it’s a little frothy right now. The cap rates are sub five. I think looking at tertiary markets, secondary markets, and value add is kind of a protection for that. Paul Castagna (561) 306-6852 bedfordlending.com --- Support this podcast: https://podcasters.spotify.com/pod/show/best-commercial-retail-real-estate-investing-advice-ever/support

One of the most asked for podcasts has been on the financing side of real estate investing: do we need to be employed in order to get a commercial real estate loan? Does our credit score matter? How long are these loans for? Are the interest rates the same as residential loan rates? What does the downpayment look like? What are the risks, loan options, etc? We will have a series of interviews coming up with commercial lenders to discuss the financing side of things in order to clarify some of these questions for you. Before that, I thought it would be appropriate to discuss personal finances first, in order to make sure we are all starting this journey together on the right foot. You can read this podcast and get all the links we discussed here: https://montecarlorei.com/8-tips-to-improve-your-personal-finances/ Top 8 Tips for Improving Your Personal Finances If you have credit card debt, and you have an interest rate that is anything higher than 0%, fear not, you are not alone as we just found out! Call your credit card company and ask for a 0% interest rate. They will likely say no, and then you just open a credit card with Citi Double Cash, and transfer this debt to that new card, you will get 0% interest for 1.5 yrs, that will give you enough time to pay off your existing debt without it growing every month. On that same note, if you have, let’s say $5,000 in credit card debt, and you are paying 20% interest in that debt, and you have $10,000 in your savings account, you should pay off that debt with your savings, so your credit card balance stops increasing by $1,000 per year. After you pay off your credit card debt, another benefit of this “Citi Double Cash” card is that you get 2% cash back on all of your purchases. If you have a student loan, make sure you are getting the lowest interest rate as possible. If you have multiple loans, make sure to consolidate all of them into one very low interest rate loan: https://studentloanhero.com/featured/5-banks-to-refinance-your-student-loans/ If you have a checking account that is paying you 1 penny per month, you can open an account with Wealthfront, they are a company that is paying the highest rat that I could find, 2.32% today and they offer up to $1M in FDIC insurance (unlike the other banks that offer a maximum of 250k FDIC insurance).  I know someone that works there and they told me that they’re able to give $1M FDIC insurance because they break the balance down with different institutions, for example, they’ll put $250k with Bank of America, $250k with Wells Fargo, etc. Watch out your expenses! If you buy Starbucks everyday, you might want to buy a coffee machine and do it at home, I never understood why people pay $3-5 for coffee every day when they can make coffee at home. It was only after I had a really good job after my 30’s, that I started buying myself lattes, and on the weekends only! You can get in touch with me here: https://montecarlorei.com/contact-us/ --- Support this podcast: https://podcasters.spotify.com/pod/show/best-commercial-retail-real-estate-investing-advice-ever/support

Today we are reviewing where is retail going, how should a retail investor think and approach their investments in today's world, what are tenants looking for in a retail center, and what are major items that national tenants and landlords want to see in their lease. Read the full interview here: https://montecarlorei.com/where-is-retail-going-lease-negotiation-national-tenants/ Where do you think retail is going based on your experience? I'm sure a lot of folks that have come on your podcast talked about the retail evolution, the apocalypse, and that retail is dying. And when you look at the history of retail, it has always evolved based on consumer demands and convenience. From a macro view, we are seeing a slowing in the development pipeline, slightly higher cap rates compared to other sectors, and I'd argue we're a little overbuilt in the United States when it comes to retail. However, there is a tremendous amount of product that is obsolete, a lot of C lass C malls and Class C shopping centers across the US need to be repurposed and rezoned. We're starting to see this happening now, I go back to this idea that Sears completely disrupted retail back when they came out with their catalog, and then, the next flavor of the month was "It's more convenient to go to the mall." And then in the 90's power centers just ballooned, you had these huge giant anchors, and they were fulfillment stores. Now you have online shopping, and we're seeing all of these things shift out. How should a retail investor think and approach their investments in today's world? I think that regardless of the asset, you have to take a longterm vision on real estate based on strong fundamentals. We can't control what the Fed is going to do tomorrow, we can't control what cap rates are, and where they're going to trend, so I don't want to spend a lot of time worrying about those things. Commercial real estate is so cyclical, and it's always in either one of four phases. At the end of the day you want to find well located assets with really strong demographics, one, three and five mile radius, understand how many households, what's the average household income, what's the population, how's it growing, how's the job market? Just going back to the basics. And then we want to look for attractive opportunities. When you're in a rising cap rate market, you have to find ways to grow your NOI. The only way to do that is to really dig into the market dynamics and understand where the value is. There’s an art to underwriting shopping centers, it’s not the broker's job because they will say that you can just lease up this vacancy in three to six months, and this is the market rate they’re going to pay. There are so many more nuances to getting leases done, you have to find ways to lease and attract the right tenants. As you work with a lot of tenants, what are they looking for in a retail center nowadays? It has always been about market share, finding sales, and finding the desirable tenant mix. Retailers are getting so sophisticated when it comes to understanding what the market analytics, trends, and where they need to be in the marketplace. Demographics play a huge role in this: understanding traffic counts, traffic patterns, visibility, the amount of parking that they will need, and they want to partner with well-respected landlords that are going to take care of the asset. Jason Ricks www.concordiarealty.com jason@concordiarealty.com Blog post: http://www.concordiarealty.com/resources/crc020-online-sales-vs-brick-and-mortar-retail/ --- Support this podcast: https://podcasters.spotify.com/pod/show/best-commercial-retail-real-estate-investing-advice-ever/support

Today we are covering what is the difference between Cash on Cash and IRR, what are REIT's, and what are the pros and cons from an investor's perspective. Read this interview here: http://montecarlorei.com/episode-23-what-is-cash-on-cash-irr-and-reits/ We're interviewing Jason Ricks, a professional real estate investor focusing on acquisitions, leasing, construction, and development. He has a background in retail leasing and asset management working on premier properties worth hundreds of millions across the country. He also oversaw a 2.2 million square foot value add retail portfolio throughout Texas and Oklahoma, and most recently he was featured in the number one Amazon best selling book Desire, Discipline and Determination. What is the difference between cash on cash and IRR? These are both really common metrics that a lot of investors use when evaluating real estate. One of the beauties of commercial real estate, or income producing real estate, is the cashflow. Cash on cash is a snapshot of the percentage return of your cash invested. Imagine that you invested $100,000 into a shopping center. In year one you got a cash flow check of $10,000, so what type of return is that on your investment? That's going to be a 10% cash on cash return and this is usually quoted on a before tax basis. What that does is that it gives you a nice snapshot of the initial return that you're going to get on your investment, which a lot of investors are curious about, especially when you evaluate this against, for example, a stock dividend or a coupon. That's one of the exciting things about commercial real estate - that cash on cash income producing, and cash on cash gives you a nice snapshot of the IRR. Internal rate of return gives you the full picture, the comprehensive picture. And the way that's done is if you own, let's say a shopping center over a period of five years, you're going to have very different cash flows. And whenever you decide to sell the building, you're going to have a big chunk of sales proceeds. How do you evaluate a return on your investment over a five year period, taking into account the time value of money? That's what the IRR does. It gives you a nice picture of your yield. A lot of times investors will look at IRR before making an investment, and it's primarily a proforma. So it will say, here's my crystal ball and here's where I think cash flows are going to be, here's where I think we're going to end up going on an exit cap, and this is going to be the sales proceeds. And what's nice about it is that it gives you an opportunity to evaluate it against other investment vehicles. What are REIT's and what are the pros and cons of investing in a REIT from an investor's perspective? REIT's came about in the 60's and at that point only accredited investors were really engaged in commercial real estate, REIT's then allowed non-accredited investors to invest in commercial real estate. This can be done in either debt or equity REIT's, and these can either be private or public. To qualify for a REIT there are a lot of requirements, and a ton of reporting. 90% of its taxable income has to be in the form of shareholder dividends, and you have to invest 75% of your assets in real estate cash or US Treasuries. As an individual investor that's unaccredited, what's fantastic about REIT's is that gives you broad based diversification and exposure to commercial real estate, plus just like any other publicly traded stock, it's liquid, meaning that you can get in and get out very quickly. Unfortunately, REIT’s don’t offer much in the form of capital appreciation. They’re very dividend heavy focused. And those dividend checks that you do get from REIT’s are going to be taxed as regular income. Jason Ricks jason@concordiarealty.com --- Support this podcast: https://podcasters.spotify.com/pod/show/best-commercial-retail-real-estate-investing-advice-ever/support

In this episode we will learn what are some of the top 5 mistakes to avoid when investing in CRE. You can read this episode here: http://montecarlorei.com/episode-22-top-5-mistakes-to-avoid-when-investing-in-commercial-real-estate/ 1. Looking at Pro Forma Numbers One of the things that you will start to see as you're searching for properties is that there are two sources of income in the financial statement. Number one is the actual revenue / actual net operating income of the property. Number two is the pro forma income / pro forma net operating income. And these numbers are different because one is the current number and existing financials and the other one is an imaginary number. It's an imaginary number based on what the real estate agent thinks the property could make after you buy it. Commercial real estate brokers don't have the same obligations around disclosures or telling the truth as residential real estate agents do, you have to be careful and take everything that they give you with a grain of salt on the pro forma numbers.  2. Always take a look at who your tenants are Is this the right mix of tenants? If it's a retail building - when are their leases expiring? If the majority of the tenants have lease expiration dates coming up all around the same time in the next three years, that's not a good sign. Why? Because what if something happens to the economy or what if something happens to the local market and these tenants all decided to leave at the same time? Not only are you looking at the tenant mix and when their leases expire, you are also looking at how much these leases are currently at, are the leases above market price? Are the leases currently below market price?Is this the right mix of tenants? If it's a retail building - when are their leases expiring? If the majority of the tenants have lease expiration dates coming up all around the same time in the next three years, that's not a good sign. Why? Because what if something happens to the economy and these tenants all decided to leave at the same time? 3. Survey the property for environmental issues as well as the laws within that city There are a lot of very difficult cities to do business with, San Francisco is a prime example. For example, if you want to convert an office to a Starbucks, you're going to have to go through a lot of approvals with the city. If you want to convert something to a residential building, it might take literally years to get that approved. A lot of people in the neighborhood will make a big deal out of it and they will make it very difficult for you to get approvals in a short period of time, so you really want to check what you can do with that property without having a lot of issues. 4. Get all reports and surveys done Get a structural engineer to make sure that the building is solid and has no problems. Get a roof inspector to make sure that your property has a solid roof, and depending on the type of property, you might want to have a few other surveys done such as taking a look at the foundation, the windows, and HVAC units, if applicable. 5. Take a look at hidden costs and contracts that will have to be honored by you after the sale Some properties may have contracts that are two, three years long for online advertising and those were part of the costs that you were planning on cutting after you took over the property. However, the contract doesn't end for at least another couple of years. You also may have to pay local taxes that the seller was responsible for paying, and there may also be some insurances that you may not need that the seller purchased and now you're responsible for paying. --- Support this podcast: https://podcasters.spotify.com/pod/show/best-commercial-retail-real-estate-investing-advice-ever/support

Today we are reviewing how to make investments with a possible recession coming up, and how do you underwrite deals with that in mind. We are interviewing Hunter Thompson, the founder and managing principal of Asym Capital. You can read this full interview here: http://montecarlorei.com/how-do-you-prepare-for-a-possible-recession-how-to-underwrite-real-estate-deals-resistant/ I am personally very excited about this topic, from my observation living in Silicon Valley, I think that the signs on an upcoming recession are everywhere: 1. One of the companies that I used to work for is currently losing $130 million per year, and they’re valued at almost $10 billion in the stock market. 2. I dabbed into angel investing, and so much money being thrown at startups that don’t have any customers 3. There’s a lot of money being thrown in real estate. Cap rates are very low, interest rates are at an all time low, and the government is not raising rates for some strange reason. These signs all happened right before 2000 and right before 2008, and now is a great opportunity for us to jump into why we should be looking at session resistant properties and how to underwrite these deals. How do you prepare for a potential downturn and how do you underwrite real estate deals with this in mind? My thesis is that all types of real estate are going to perform if the capital markets are booming and the economy is really heating up. If you can raise rents aggressively, you can fill occupancy, you can complete capital expenditure and expect to be able to raise rents, etc. But only some types of real estate do well when the economy is contracting, so even if you have a portion of your portfolio that’s focused on the types of real estate that do well when the economies are contracting, it really significantly increases the overall risk profile of your portfolio and increases the favorability of the risk profile. A significant portion of our business is focused exclusively on things that cater to people that are making $35,000 – $55,000 a year, somewhere in that range. The mobile home park business, for example, is probably the most clear example of a recession resistant asset because the worst the economy does, the more demand there is for the product. Think about it like this: if everyone that’s making $100,000 moves down to making $60,000, and everyone that’s making $60,000 moves down to $40,000 and everyone that’s making $40,000 moves down to $30,000, there’s always demand for that bottom product. Now that doesn’t paint the whole picture, which is something we can get into from a big picture perspective, though the mobile home park business is very compelling because the demand is stable. A similar case can be made for something like self storage where people use the product when they’re going through some kind of life change. Let’s think about things like downsizing, which is very common during recessions, people change jobs, people have to move in order to stay employed, things like that are all very common during recessions, and also you have people moving home from college unexpectedly, but all of them spur demand for the product of self storage. From a downside protection standpoint, it’s very compelling. And also looking at the historical data, this isn’t something that just sounds reasonable. It’s very compelling and not just something that makes sense from a big picture. Hunter Thompson Email: info@asymcapital.com Website: https://asymcapital.com --- Support this podcast: https://podcasters.spotify.com/pod/show/best-commercial-retail-real-estate-investing-advice-ever/support

In this episode, we will review what is due diligence, what types of questions you should be asking during the due diligence period, and what documents you should be getting from the seller. I won't go over the entire due diligence checklist because that is a very long checklist. This is just a very brief overview of some of the items that you will need as you're going through the due diligence report.   You can read this podcast here: https://montecarlorei.com/what-is-due-diligence-what-are-some-items-you-should-cover-when-purchasing-a-property/ What is Due Diligence? It’s a term that you will learn when you are buying your first commercial property, it happens after your offer was accepted and that means that you have a specific number of days to review all the documents that the seller has on the property, schedule all types of inspections and reports, compare rental rates that are ongoing in the market, as well as sales comps to make sure that you are paying the right price for the property. If you Google what is due diligence, Google says that due diligence is the “reasonable steps taken by a person in order to satisfy a legal document, especially in buying or selling something”. It’s a comprehensive appraisal of a business undertaken by you (the prospective buyer) to make sure that the assets and the liabilities are correct, and make sure that this is an actual good deal for you to purchase or not. You typically have, depending on the market, 15 days at the very, very minimum to do all of your due diligence, all the way to 30 days, 60 days, sometimes 90 days. If the deal is really, really complex, it can take six months, nine months, or even one year. If you get in contract to purchase a property and you get 30 days to do your due diligence, and then you realize that you need more time because you were not given all of the paperwork on time, you can always ask for an extension, which is what we did on my first offer. What are some example items that you need to cover during the due diligence process? - Who is going to escort everyone to the property? You will have contractors coming over to do inspections and some reports, so you need to know who will be helping these people get in the property. - The seller’s agent should provide you with a contact sheet for who is the escrow agent, who is the escrow officer, their phone numbers in case you need to get in contact with any one them. - You are going to be asking for referrals for structural engineers, architects, roof inspectors and this could be from your own real estate agent because they are familiar with that city and they can refer you to the right people that they have used in the past. - Sales comps for the area from your real estate agent, and this is for you to understand if you are paying a fair price for the property. How you determined that is by looking at the price per square feet. Prices can vary greatly based on location, so you need to take that into consideration as well. For instance, one of the sales comps can be three blocks away from your property. - You'll need a copy of all of the leases that have been signed for this property. If you're buying an office building or a retail building, you really want to make sure that your read every single lease and all of the red lines. If you have two national tenants there for example, let's say you have a Starbucks and you have a Chick-Filet, they will likely require the owner of the property to use their own leases, so Chick-Filet and Starbucks will give their own lease to the owner of the property and they will negotiate from that. - A breakdown of every single expense that the property has, and for most of these expenses you will want a two year history of all of the bills. --- Support this podcast: https://podcasters.spotify.com/pod/show/best-commercial-retail-real-estate-investing-advice-ever/support

Today we’re going to do a very basic analysis around the question: should you buy your own place, or should you invest in a commercial property? I’ll also going to update you on what I have been up to for the last couple of months, and how are my projects going. Read this entire episode here: https://montecarlorei.com/should-you-buy-a-home-or-invest-in-commercial-real-estate-my-project-updates-and-lessons-learned/ Should you buy your own home, or rent and put the down payment in an investment property? I am not providing any financial advice, this is my personal opinion based on the things that I have learned, you should always do your own homework and ask a professional for advice. Here’s my personal opinion on the question around buying a home to live in, or not buying it and putting that money towards an investment property. If I were to buy a one bedroom apartment in San Francisco, I would be paying around $1.2M and I would have to put 20% down, so I would be putting $240,000 as a down payment and my mortgage would be $960,000, the interest rate could be around 4% in today’s market, that’s $960,000 at 4%. My monthly payment would be $4,500 per month plus property taxes of $1,000 per month (1% of the property value in California), and we have another $1,000/month in HOA fees (Home Owners Association). My total payment would be $6,500 per month if I were to own my one bedroom condo. On the other hand, I can be a tenant and rent that one bedroom apartment in today’s market for $4,500 per month. That’s a $2,000 difference – $4,500 if I am renting from someone vs $6,500 if I am the owner of that apartment. On top of that, if I am the owner, I just put $240,000 as a down payment, so I’m not making any money on that $240,000. Now, let’s say you’d take that $240,000 to invest in a commercial property, and we are going to round this up to make things very simple: let’s say that you are making a 10% return every single year on that $240,000, which is very acceptable for real estate investing. At $240,000 that you were putting as a down payment, you’re instead getting a basic return of 10% every single year. That’s $24,000 that you’re making every year, plus, as a renter, I am saving $2,000 from the $6,500 that I would be paying if I was a homeowner or a condo owner in this case. That’s another $24,000 that I am saving by being a renter every single year, and another 10% on my $240,000 which is another $24,000 that I’m making every year in my commercial real estate investment. That’s a total of $48,000 every single year, that’s almost half a million dollars over ten years. How much should you save to buy a home, and to buy a commercial property? If you are going to own your own house, you typically should put a 20% down payment, there are all kinds of loans that you can get to nowadays, you could probably only have a 10% down payment, and sometimes even less depending on the type of loan that you find. For commercial properties you should have around 30% down payment. This number can also change depending on the property income and the type of loan that you get. This is a very standard number: 20% down for your own home, 30% down for a commercial investment, or you can join a syndication where you are investing with quite a few people and you buy a small part of that property. Typically the minimum amount to invest in a syndication is around $25,000 (it could also be much higher than that), and in a syndication you would own a percentage of that property. Linkedin:  https://www.linkedin.com/in/steffbold/ --- Support this podcast: https://podcasters.spotify.com/pod/show/best-commercial-retail-real-estate-investing-advice-ever/support

In this episode you will learn a tip for tax deduction when you buy a property, it’s useful even if you have already bought some properties: cost segregation. What types of properties can benefit from cost segregation, we’ll go over an example of how much you’ll be able to deduct on your taxes, why it’s important to have cash on hand today versus in five years, what is bonus depreciation and how much a cost segregation study would typically cost. We're interviewing Yonah Weiss, a Business Director at Madison SPECS, a national Cost Segregation leader. You can read the interview here: https://montecarlorei.com/what-is-cost-segregation-what-types-of-properties-can-benefit-from-it-whats-bonus-depreciation-and-how-much-would-a-cost-segregation-study-cost/ What is cost segregation? It’s a tax benefit for real estate investors and it has to do with depreciation. When you own a property, you get a tax deduction called depreciation. Where cost segregation comes into play is the fact that the IRS determined that things in the property have different useful lives, anything that is not part of the structure of the building depreciates over five years. Then you have another category of things called land improvements and this can be anything like pavement, asphalt, parking lot, landscaping, fencing, anything outside the building actually depreciates over 15 years instead of 39 years. You break out the components of the property into their cost, and depreciate them at a faster rate. What type of properties qualify for this? Any type of property, as long as it’s not your personal residence, it can be commercial, residential and multifamily, office, assisted living, hotels, hospitality, self storage, industrial, shopping malls, golf courses, mobile home parks, etc. What is the main benefit of doing cost segregation? The cashflow. When you have more deductions than you have income, you don’t write a check. We’re not talking about getting free money, what we’re talking about is keeping the money that you made and paying less taxes, or no taxes. In many cases, the main benefit is the cashflow, you’re able to use that money to invest. The second thing is the time value of money because you can take huge deductions early on and make sure that you’re using that money to invest. The time value of money means money today is worth more than it is five years from now. If I were to offer you $50,000 today or $10,000 a year or five years, what would you take? What is bonus depreciation? It used to be a rule that when you developed a new property, you could take 50% of the depreciation of that property in the first year of that new construction. The law changed in that it’s now for any property that you buy, not just new developments. All the depreciation that is less than 20 years (in the example that we gave, the five-year personal property and 15 year land improvements) all of that cost segregation is eligible for bonus depreciation, you can actually take 100% of that depreciation in the first year of ownership, instead of spreading it over five years. You have a choice of 100% or 50%, which really gives you a much added benefit to take, to knock off your entire income tax liability in the first year. How much would it cost to do a cost segregation study in our example property, 30,000 square feet office that was purchased for $3 million? At our firm and for that property, it could cost around $5,000-$6,000. Yonah Weiss https://www.linkedin.com/in/cost-segregation-yonah-weiss/ yweiss@madisonspecs.com (732) 298-9002 --- Support this podcast: https://podcasters.spotify.com/pod/show/best-commercial-retail-real-estate-investing-advice-ever/support