Opportunity Zones = Defer or Avoid Capital Gains Tax

The end of the year compels many people to think about tax planning, which in turn prompts us to highlight a feature of the new tax law that could provide significant benefit to real estate investors. It has to do with what are called “Opportunity Zones.”

These zones are economically distressed, low-income communities, and according to the Wall Street Journal the zones encompass almost 9,000 census tracts with a population of nearly 35 million. A list of the zones can be downloaded from this IRS page

In a nutshell, the benefit to investors is that they can defer the capital gains on an existing investment until the end of 2026 by rolling those gains into an Opportunity Zone project. In addition, they can avoid capital gains on the new investments in the zone if they hold them for at least 10 years

Like a number of provisions in the Tax Cut and Jobs Act, not all of the details were in place when the law was passed, but the IRS did in fact release regulations about this on October 19, 2018. Apparently there are still some loose ends and the IRS in their FAQ says they will be “…providing further details, including additional legal guidance, on this new tax benefit” over the next few months.   

Those who enjoy parsing the tax code can peruse the current version of the regulations.  You can find more readable summaries at National Real Estate Investor or here if you have an online subscription to the Wall Street Journal

A key takeaway from the Journal article is that this tax break appears to have been designed to give investors reasonable flexibility. For example, it cites that “…as long as 70% of a business’s tangible property is in a zone, the business doesn’t lose its ability to qualify for the tax break.” The regulations so far don’t seem to have a lot of hidden trap doors or “gotchas.” 

It would appear that this tax break provides an opportunity for investors to free up capital that is sitting dormant in properties they’re reluctant to sell because of what would otherwise be a capital gains tax burden. Now investors should be able to benefit from at least one if not two  tax breaks, and at the same time do something positive for their communities.

What do you think? Are you likely to pursue a project in an Opportunity Zone?

— Frank Gallinelli

View a sample lesson from my video course,
“Introduction to Real Estate Investment Analysis”

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Copyright 2018,  Frank Gallinelli and RealData® Inc. All Rights Reserved

The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of RealData® Inc. The material contained in articles that appear on realdata.com is not intended to provide legal, tax or other professional advice or to substitute for proper professional advice and/or due diligence. We urge you to consult an attorney, CPA or other appropriate professional before taking any action in regard to matters discussed in any article or posting. The posting of any article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.

If we’ve seemed a bit quiet lately…

“You never write. You never call.”

Well, not exactly, but if we’ve seemed a bit quiet lately it’s not because we’re ignoring our loyal followers and customers. Rather, our email service provider hit a bump in the road over the past few weeks, so we’ve been kind of trapped under the cone of silence.

We won’t bother you with the techy details, but they’ve got it all sorted now, so we’re back on track. But if you tried to sign up for the RealData Dispatch or our real estate investor education newsletter recently, there’s a good chance that you never saw your confirmation email and so you’re not on our list.

That would be a shame, because we send out a stream of good, informative material to our subscribers. That includes ebooks, videos, and other resources. We do that because we value our followers, we want you to do well in your real estate activities – and, of course, we want you to remember who we are. And yes, we do mix in an occasional marketing message, but not terribly often.

If you tried to subscribe recently – or even if you didn’t and would like to do so now – we encourage you to use the sign-up box in the right-hand column of this page.

Then check your email inbox for a message asking you to confirm that it was really you who subscribed.

Thanks. As always, we wish you spectacular success in your real estate investing.

— Frank Gallinelli

Macintosh Users – Important Info Regarding Excel Compatibility

We have been enthusiastic users of Macintosh computers since the early days of RealData. In fact ours were among the first business applications available on the Mac in 1984. There are plenty of die-hard Mac users in our customer ranks, but even they will be frustrated with an apparent Excel 2016 bug which now affects our products.

At this time, all RealData software for Mac will run on both Excel 2011 and Excel 2016 (aka Office 365).  However, if you have the latest Excel 2016 for Mac, then you will not be able to print any images, including graphs, to PDF reports. Thankfully this does not affect hard printing of reports.  We have not been able to come up with a workaround, so wait we must until Microsoft patches this issue.  UPDATE!  This issue has been fixed in the May 23, 2018 release of Office 2016.  Be sure to update to the latest release.

An important tip for all Mac users – be sure to update Excel to the latest release and also be sure to use the latest build release of your RealData products.  For most of our products, only the latest release of the latest version of each will run on Excel 2016.

For more info on updating Excel, see our knowledge base article: https://www.realdata.com/content/knowledgebase/excel-2011-how-to-check-version-and-how-to-update/

2018 Tax Reform and our REIA Software

A number of customers have asked if we’re updating our Real Estate Investment Analysis software because of the passage of the new tax law, effective in 2018. There’s still ambiguity about some provisions of the Tax Cuts and Jobs Act (which some might prefer to call the Law of Unintended Consequences), but we probably can parse it enough to make a few adjustments to the program. It may surprise you to know that, so far, we see the need for only a few simple changes in the software. But, of course, as technical corrections or other updates to the law occur, there could be others.

The most important is that there are new tax brackets:

Tax rate Single
10% Up to $9,525
12% $9,526 to $38,700
22% $38,701 to $82,500
24% $82,501 to $157,500
32% $157,501 to $200,000
35% $200,001 to $500,000
37% $500,001 or more
Tax rate Married filing jointly
10% Up to $19,050
12% $19,051 to $77,400
22% $77,401 to $165,000
24% $165,001 to $315,000
32% $315,001 to $400,000
35% $400,001 to $600,000
37% $600,001 or more

 

On the assumptions page, you’ll see that we now use 24% as the default entry, but you can enter whatever is appropriate for you.

Other rates and thresholds – such as capital gain and Net Investment Income Tax – appear to be unchanged in the new law.

Under the depreciation choices, we’re removing what had been called “Optional 40-Year Straight Line for Residential or Non-Residential.” That also goes by the name, “Alternative Depreciation System,” and this year is changed to be 40 years for commercial, 30 for residential. We’ve encountered very few of our customers who use that, so we felt we could take this opportunity to simplify the data entry a bit. We’ve kept the choice of “Other Straight Line,” which allows you to accomplish the same result.

These changes are free of charge as part of a “new build” update. Download this latest build by logging into your customer account at https://realdata.com and going to the “Sign In” link at the top right of any page. If you are using the Windows version, you may also click the “check for updates” button on the Welcome sheet of your REIA program. We are happy to assist you via email, so look also to the upper right for a link to email us

Finally, a side note about an interesting tax item that is not in the program:

We have never dealt with income tax issues in our partnership analysis because partnerships typically pass income through to individuals, each of whom in turn pays tax personally on their portion of that income. However, a new provision in the 2018 law may potentially provide a 20% deduction of Qualified Business Income derived from such pass-through entities.

To figure who qualifies and how much might be deducted personally is not for the faint of heart, but if you expect to be the recipient of Qualified Business Income from a real estate partnership, this Cornell law school has a flow chart might be helpful.

Finally, a note on why we don’t try to go beyond a general estimate of tax consequences in our software. Particularly with the changes in the 2013 and 2018 bills, the tax system has taken an increasing holistic approach. Your other investments and income from other sources can impact how much your overall tax liability grows when you add a new investment to the mix. Pretty much everything is connected.

Analysis of a single property cannot realistically address an investor’s entire financial life. We try to gather from you a modest and reasonable amount of information, so we can give you back what we hope will be reasonable estimate of consequences.

As the year goes on, if there are any changes or technical corrections to the law that we feel should affect the program, we’ll let you know here on our blog.

— Frank Gallinelli

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Your time and your investment capital are too valuable to risk on a do-it-yourself investment spreadsheet. For more than 30 years, RealData has provided the best and most reliable real estate investment software to help you make intelligent investment decisions and to create presentations you can confidently show to lenders, clients, and equity partners. Find out more at www.realdata.com.

 

Copyright 2018,  Frank Gallinelli and RealData® Inc. All Rights Reserved

The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of RealData® Inc. The material contained in articles that appear on realdata.com is not intended to provide legal, tax or other professional advice or to substitute for proper professional advice and/or due diligence. We urge you to consult an attorney, CPA or other appropriate professional before taking any action in regard to matters discussed in any article or posting. The posting of any article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.

What Kind of Real Estate Investment Makes Sense for YOU?

If you watch what’s happening with the stock market, you’re probably ready to reach for the Dramamine. It’s like being trapped in a really fast elevator, except the buttons don’t take you where you expect to go. Maybe somebody else is controlling the ride.

You realize that most of the people you see who have achieved genuine financial independence have done so with real estate. Your next step is to figure out how you can do the same.

But… real estate comes in a lot of flavors. There are some fundamental differences among the various types, and you need to understand those differences before you start your investing campaign. One size does not fit all. Let’s look at a few of your options.

 

REIT (Real Estate Investment Trust)

A REIT is fundamentally a stock investment, a lot like the ones you may have decided to put behind you.

If you buy stock in an oil company, you’re investing in a firm that probably owns and operates wells, refineries, and retail distribution.

If you buy stock in a REIT you’re investing in a company that owns and operates real estate, and probably deals with retail customers, aka tenants. Pretty much the same business model, different industry. The advantage here, as with other stocks, is liquidity. Buy today, sell tomorrow. But remember, it’s someone else’s company, and you’re a few layers away from actually investing in real estate.

 

Fix and Flip

This is a situation where you buy a property, fix it up, and sell it for a profit. The plan is for the ARV (After Repair Value) to be greater than the sum of the cost to buy plus the cost to repair. The single-family house is probably the most common fix-and-flip.

Sounds good, and plenty of people have made money doing this, but it’s far from the slam dunk you might see on reality TV. The first challenge is in finding a suitable property—one that you can buy on favorable terms, get financed, improve substantially at a reasonable cost, and sell quickly for a profit.

Where many flippers run off the rails is in underestimating their true costs. Besides the cost to buy and fix-up, you have to carry the property. This means loan payments, property taxes, insurance, and utilities during the fix-up period and also while you’re searching for a buyer. In addition, there may be costs of sale (commission and attorney), as well as taxes on the profit. In many circumstances, your profit might be taxed at ordinary income rates, not as capital gain.

All of these are considerations that a real estate developer might routinely take into account—and indeed, one could argue that a flip is essentially a type of development project—but the budding entrepreneur might not start out with so broad a perspective. And you might not have the infrastructure in place—e.g., access to capital and to contractors—that you need to achieve a suitable profit.

 

Single Family Houses as Rentals

Many first-time investors gravitate toward single-family houses as rental properties.

That choice may be driven more by personal comfort level than by the merits of this approach as an investment strategy. If you have been a residential tenant, then you probably know something about the roles and responsibilities of both tenant and landlord. Even if you don’t know the fine points of leasing and landlording, you understand the basic ground rules and this seems like familiar and comfortable territory.

These are benefits not to be taken lightly, but there are other considerations. Have you made a realistic projection of cash flow? Will your rent revenue be sufficient to cover all of your expenses, including financing? Do you recognize that losing one tenant equates to 100% vacancy? If that occurs, how long can you soldier on without revenue?

Perhaps the most important concept to recognize here is that there is a fundamental difference between a single-family home and a more typical income-property investment. The worth of any investment ought to be related to its ability to produce a return, but generally the value of a single-family home is based on the competitive market for similar properties – in short, comparable sales. So you might be missing out on something here.

Let’s look now at an option that offers what might be the biggest single benefit available to you when you choose real estate as an investment.

 

View a sample lesson from my online video course,
“Introduction to Real Estate Investment Analysis”

 

Income-Producing Property, Buy and Hold

In the spirit of full disclosure, my specialty is income-producing property, particularly what is often called “buy and hold.” It’s what I teach and write about, so now excuse me as I get on my soapbox.

This type of property generally includes non-residential (such as office, retail, mini-storage etc.) and apartment buildings with more than four units, though some investors will include four-unit properties as well.

These properties differ in a very important way from those whose main characteristic is to serve as a personal residence. As I mentioned above, the market value of a personal residence is almost always based on comparable sales. Buyers of single-family homes are essentially purchasing a lifestyle – a location and a physical property that offers a basket of amenities. The market value is based on those factors, so they drive what you’ll typically pay to acquire the home, and the price for which you’ll be able to sell.

The value of a true income-property, however, is based on its ability to generate income. The location and attributes of the physical property are not irrelevant, but they matter only insofar as they affect that ability to generate income. You could have two seemingly identical properties side-by-side. One is managed well and produces a strong net income. One is managed poorly, and has a weak bottom line. Physically similar, but the former will command the higher price.

Why does this matter? Unlike with stocks or with personal-residence real estate, you, the investor, have the opportunity to create value, to create equity. How? By increasing the property’s net income.

My favorite personal war story in this regard is about a property that a friend and I bought many years ago. The units were rented significantly below market, and we purchased it at a small premium over what those rents justified. As leases expired we increased rents substantially, just about doubled the bottom line, then sold the property for twice what we paid.

The key point here is that we didn’t have to rely on the sale prices of comparable properties in the neighborhood to increase in order for the value of our property to rise. We were able to create value proactively by doing a better job of managing. We created equity.

This ability to have such a degree of personal control over the success of your investment is something you find in very few investment vehicles outside of income-producing real estate.

 

The Bottom Line

So what will be your choice, what works best for you?

  • The REIT is certainly easy and liquid, but it is still a stock.
  • The fix-and-flip holds out the possibility of a very big payday, but you need a dependable and capable team that can move quickly; and as with any high upside there is also the greater risk of loss.
  • The single-family rental is an appealing way to break into real estate because of its familiarity, but it’s an investment mainly to the extent that you benefit from external market forces.
  • And then there is my favorite, the buy-and-hold income property. It’s an option that gives you the opportunity to exercise significant personal control over the success of your investment without going into the deep end of the risk pool.

My bias toward the last option notwithstanding, there is no choice that’s right for everyone. Your best decision is an informed decision, and that’s what I hope I’ve helped you reach.

—Frank Gallinelli

 

Ready to learn more about real estate investing? Visit learn.realdata.com

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Your time and your investment capital are too valuable to risk on a do-it-yourself investment spreadsheet. For more than 30 years, RealData has provided the best and most reliable real estate investment software to help you make intelligent investment decisions and to create presentations you can confidently show to lenders, clients, and equity partners. Find out more at www.realdata.com.

 

Copyright 2018,  Frank Gallinelli and RealData® Inc. All Rights Reserved

The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of RealData® Inc. The material contained in articles that appear on realdata.com is not intended to provide legal, tax or other professional advice or to substitute for proper professional advice and/or due diligence. We urge you to consult an attorney, CPA or other appropriate professional before taking any action in regard to matters discussed in any article or posting. The posting of any article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.

10 Mistakes To Avoid When You Invest in Real Estate

I’ve been involved in real estate for more than 40 years, much of it teaching about real estate investing, answering questions online, and supporting folks who use my company’s investment analysis software —so I’ve gotten to see a lot about how people think (and sometimes don’t think). From that experience, I want to share my list of “greatest hits,” mistakes that can really trip you up:

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1. Admiring the King’s New Clothes

I see a lot of first-timers get wrapped up in the aesthetics of a property. Is it an attractive, solid building? Is it in a desirable location? Would I be proud to tell people that this my property? Unfortunately, for some new investors, that’s where their critical evaluation ends. They see only what they want to see.

It’s nice to feel good about the commitment you’re going to make, but that warm feeling will quickly turn cold if the property is a money-draining albatross. Start, at the very least, by estimating its initial cash flow—all the money that will come in for the first year minus all the money that will go out. If that number isn’t comfortably positive, reconsider.

 

2. Almost Doing Your Due Diligence

Most investors will check out the physical condition of the property. Most will also check out the rent data and verify at least some of the expenses. But have you actually read the leases? Are you going to get yourself locked into a dicey deal with below-market rents for a number of years; or maybe with a tenant’s right of first refusal if you want to sell, or even a tenant bail-out option?

 

3. Almost Doing Your Due Diligence, Part 2

OK, you did a good job vetting the property, its finances and its leases. So what did you forget? Maybe you forgot about the market. This property doesn’t live in a vacuum, so you absolutely need to be looking at the ecosystem around it.

What are other landlords getting for units in similar properties? What’s your competition for tenants? What is the prevailing cap rate for properties of this type? What’s the business climate—are companies moving in, moving out—is employment strong? As the anvil salesman says in The Music Man, “You gotta know the territory.”

4. Using the Wrong Lingo

Deals frequently unravel because the parties are not speaking the same language. Real estate investing, like other business professions, has a vocabulary all its own—terms whose meaning is agreed upon by those who buy, sell, broker, or finance property on a regular basis. I’ve seen things like “net operating income after debt service.” The rest of us probably call that “cash flow.” Who knew?

If you misuse standard terms, or if you use terms that don’t exist in nature, you’re either going to…

     … experience what I call the Cool Hand Luke Syndrome (“What we’ve got here is a failure to communicate”) and never reach a meeting of the minds, or

     …  paint yourself as someone who has never done a deal before, doesn’t know what he or she is talking about, and shouldn’t be taken seriously (and maybe should be taken advantage of).

 

5. Not Looking at the Deal from the Perspective of the Other Players

Whether you’re trying to buy, sell, finance, or raise equity, you have to recognize that your point of view isn’t the only one that matters. You need to put yourself in the shoes of the other interested parties.

Try to understand what are the sticking points, the potential deal killers from their perspective. Perhaps then you can come up with a solution. Do you have a property to sell, and does your potential buyer seem concerned about some vacant space? How about guaranteeing the rent for a period of time?

 

6. Can’t See the Forest… 

I notice this one with a lot with folks who are trying to vet their first income property. You can think of this as another “perspective” mistake—in this case you need to adopt the perspective not of a potential buyer but rather of someone who has already bought this property and now is trying to run it. It was nice that the seller or broker gave you a list of operating costs, and most of them were probably accurate, but is that list complete?

Go back to it and think about costs that nobody volunteered. Who gets rid of the snow, manicures the landscaping, vacuums the hallways, hauls the trash, services the HVAC? And often you’ll see no line item for property management (“Oh, I do that myself”), but you need to figure in an allowance for management even if no cash currently changes hands. An appraiser would routinely add management as an expense, and you should, too, because it will effect the estimate of value.

 

7. Thinking About Your Rental Property the Way You Think About Your Home

I usually ask my grad students how many own their own home. After a few proudly raise their hands, I tell them they’re at a disadvantage and need to try to forget what they think they know about real estate. Bummer.

The value of a personal residence is driven by economic factors—some national, most local. That’s why an appraiser will use the “comparable sales” approach when estimating the value of a home. If all your neighbors’ houses have sold for around $300k, then yours will probably sell for something like that as well.

But income-producing property is valued on its ability to produce net income. It’s not going to rise in value just because of the passage of time. Too many novice investors think their investment properties are going to “appreciate” on their own, over time, just because. Think again.

You can create value in an income property by enhancing its cash flow. Very few investment vehicles give you this power, but you have to understand how it works if you want to take advantage of this wealth-building potential.

8. Being Nearsighted  

Current-year data is important, but I hear a lot of investors who insist that they will focus only on the current income and expenses when evaluating a potential investment property. They say that this data is concrete and verifiable, and any prediction about future performance is just an exercise in fortune telling.

Yes, an appraiser is going to look at the current revenue, expenses, and market cap rate to estimate value. But remember this: The appraiser’s job is to estimate value at a point in time. You, on the other hand, are almost certainly investing for a period that extends beyond the current moment, and should be interested in how you believe this property will perform over a number of years.

So, in addition to looking at current performance, you should be making several projections as to future performance—best case, worst case, and in-between scenarios. This is a topic for more detailed discussion, so stay tuned for that.

 

9. Missing the Obvious in Your Analysis

You’ve taken my advice to heart and done both short-term and long-term projections of cash flows. Now, get your head out of your spreadsheet and use your common sense. Ask yourself if the figures in your analysis actually make sense. Do they look reasonable?

Is that cash flow way less than you expected, is your IRR in the stratosphere, is your mortgage payment merely a pittance? If so, then chances are you’ve either messed up a formula or a cell reference, or entered data incorrectly. When I look at my students’ work, it’s not uncommon to see that some of them have entered the total monthly rent, when they really needed the annual amount. Or they’ve put too many decimal places in the mortgage rate. Don’t assume, just because you used a spreadsheet, that the results are correct. Garbage in…

 

10. Forgetting that Real Property is a Real Business

After all that hard work—property search, due diligence, financial analysis, negotiation, financing, closing—you are finally the owner/operator of an investment property. Perhaps this is the first business you have ever run. You need to treat it like a business.

The top line of your P&L—revenue—needs to be the top line of your to-do list. Is someone not paying the rent, giving you excuses? Don’t let it slide. Your chances of collecting decrease exponentially with the passage of time.

Keeping records on sticky notes? Poor record-keeping can be your undoing, especially at tax time. Invest in some bookkeeping software, such as Quickbooks, rather than relying on a DIY spreadsheet. And once you’ve got it, use it.

Keep your tenant applications, leases and other documents in an organized file. If you really want to be good, scan them and store them on a removable hard drive.

In short, if you want your real estate investment business to succeed, then treat it like a serious business.

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These are the ten real estate investor mistakes I’ve seen most often, but maybe you’ve seen (or committed!) some of your own. I invite you to share your cautionary tales and add them to our list – let’s call it Everything Else that Real Estate Investors Should Avoid.

 

—-Frank Gallinelli

 

Your time and your investment capital are too valuable to risk on a do-it-yourself investment spreadsheet. For more than 30 years, RealData has provided the best and most reliable real estate investment software to help you make intelligent investment decisions and to create presentations you can confidently show to lenders, clients, and equity partners. Find out more at www.realdata.com.

####

Copyright 2018,  Frank Gallinelli and RealData® Inc. All Rights Reserved

The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of RealData® Inc. The material contained in articles and blog posts that appear on realdata.com is provided as general information and is not intended to provide legal, tax or other professional advice or to substitute for proper professional advice and/or due diligence. We urge you to consult an attorney, CPA or other appropriate professional before taking any action in regard to matters discussed in any article or posting. The posting of any article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.

 

Update to REIA Express

Today we’ve released new build 1.18 of our Real Estate Investment Analysis Express edition.

This build contains a new feature in the Rent Roll: If you select a commercial property type on the General worksheet, it will hide appropriate columns on the Rent Roll, namely Number of Bedrooms and Number of Bathrooms. Placeholder names for unit types adjust according to property type that you select.

This feature is currently available in the Windows release only. We hope to roll out this improvement for Mac users in a few weeks.

Now earn a digital certificate with my video course, “Introduction to Real Estate Investment Analysis”

Professional education is a great thing. And being able to broadcast news of your success makes it even more valuable.

That’s why I’m announcing a new benefit to students who enroll in my course, Introduction to Real Estate Investment Analysis. I’m now awarding a digital Certificate of Achievement and badge to students who successfully complete the course.

Here are some questions you probably want to ask:

What does it cost? For my students: nothing. RealData is picking up the cost of issuing and hosting the certificate.

What do you mean by “digital certificate?” Your certificate will be hosted by Accredible.com, an industry-leading credentialing platform. As you’ll see below, it’s designed so you can share it easily.

Does that mean I don’t get a physical certificate to hang on my office wall? No, you also get a pdf version you can print.

What’s so special about this digitally hosted certificate?  So glad you asked. Here are a few things you couldn’t do with a traditional certificate:

  • You receive a unique url for your Certificate, so you can share it with employers, clients, industry groups, just about anyone.
  • You can share it on any of your social media networks with just a click on a toolbar.

 Your personal certificate page includes a dashboard, as shown at the left. From there you can…

  • Add it to your LinkedIn profile
  • Add it to your email signature
  • Get the code to embed it in your website
  • Email it to anyone
  • Download it as a PDF
  • Download a badge image, which you can attach to your email signature, put on business cards, etc.
  • Add “evidence” to your certificate to increase your credibility — examples of your work, videos about yourself, links to projects you’ve been involved with – and even more

How do I obtain my certificate?Within a few days after you complete the work to earn your certificate, we’ll send you an email with instructions to access it. If you believe you’ve completed the requirements but haven’t heard from us, please contact us at mailto:education@realdata.com

Terms of Use: Please review our common-sense Terms of Use

I believe our online video course provides a solid educational opportunity for those who want to learn about real estate investment and development. I hope this digital certificate will recognize your efforts and will benefit you for devoting the time and effort to pursue that education. I look forward to contacting you when you complete your coursework!

Frank Gallinelli

Learn by Example

I’ve seen a great deal of interest in the real estate investment case studies that are part of my investment analysis video course — so I’ve spun those cases off as a new mini course, one where you can learn by example.

The cases deal with three different property types:

  • apartment building,
  • mixed-use, and
  • triple-net-leased

They’re similar to those I cover in my grad-school course at Columbia, and I’ve designed them with several purposes in mind:

  • To give you practice working through bumper-to-bumper deal analysis. On what terms does each deal make sense to you?
  • To introduce special situations that you need to understand, such as expense recoveries and triple-net leases.
  • To give you an opportunity to put yourself inside the deal as if you were a real participant, to think as an investor thinks — beyond the numbers, beyond the surface data, as if real money were on the table.

Once you’ve learned about deal analysis with this mini course, you’ll probably want to take the complete course, covering detailed real estate investment metrics, partnerships, development, and more. So here’s more good news:

When you upgrade to the bigger course, you’ll get full credit for  this mini course.

Learn more about my case study course

Sharpening Your Pencil – Create Better Analyses With Published Real Estate Data

It’s tempting to rush through a property analysis by simply reviewing the broker’s sell sheet, plugging the data into your favorite software program and printing the results. You’re done, right?

Think again.

We’re not saying the seller isn’t providing accurate income and expense data, but is he or she giving you a complete picture of all the issues? Consider such questions as:

  • What is an appropriate cap rate for the market in which the property is located; and more specifically, what’s the prevailing cap rate for the particular sector, such as multi-family or self-storage?
  • What seems like a realistic assumption for revenue and expense growth over time?
  • How have vacancy rates been trending for the area, and what might those trends say about future leases, renewals, and demand for space?

You’ll probably need to look beyond the owner’s statement to build your best property analysis and thus create your best chance at a successful investment. Thankfully, you can find a number of sources online to help you achieve accuracy, and along with it, some peace of mind.  You can find data on:

  • Metropolitan and submarket area cap rates
  • Average rents by market sector
  • Vacancy rates
  • Number of units available and sold
  • Sales and rental comps
  • Custom reports based on your subject property

The following are some of the best-known sources of data:

 

Zillow

https://www.zillow.com/research/data/

You’re probably already familiar with this site, at least in regard to its home value estimates. The focus here is residential but investors can benefit from their extensive rental information, which is provided by county, metro area, city, zip code, and even neighborhood.  You download data in Excel format. We found their series of 5 to 7 years of data particularly useful for evaluating rental trends.

You can also learn about their methodology here.

 

Reis

https://www.reis.com/

Reis has been a source of commercial real estate data for nearly four decades, and say they are a “…source for property and market intelligence, including vacancy rates, rent levels, cap rates, new construction, rent comparables, sales comparables, valuation estimates, and capital market trends across eight major commercial real estate sectors.

You can get more info about their sales comps and rent comps services, including sample reports. There is also a link on those pages to request a free report.

 

Costar

http://www.costar.com

Really big data commercial real estate here, for owners, brokers, appraisers, lenders, even institutional investors

They say you can search up to 1 million sales records, across all property types at http://www.costar.com/products/costar-comps; or access property-level data, including vacancy, rents, sales comps for multifamily, office, industrial, or retail property at http://www.costar.com/products/costar-market-analytics.

 

Compstak

https://compstak.com/enterprise

Compstak serves up office, retail and industrial lease data for “leading institutional investors, lenders, and owners across the US and UK.”  Subscribe to their entire database or, if you are broker, appraiser or researcher, trade your own data for theirs and gain access to Compstak data for free.

 

Real Capital Analytics

https://www.rcanalytics.com/solutions-for/investors-owners/

From macro trends to extensive data on individual properties, Real Capital Analytics offers data on “$18 trillion of sales, recapitalizations and financings.”  Contact them for pricing.

 

Redfin

https://www.redfin.com/blog/data-center

Redfin is a residential brokerage firm but offers a wide variety of property sales and trend data.  Of particular note is their annual report of the “Hottest Neighborhoods in the US.”

While you may not be an investor in single family homes, consider that the market for your commercial property is linked to the health of the local residential market.

 

LoopNet

http://www.loopnet.com/salescomps/

Gain access to their database of 1.6 million sales listings.  Cost is $175 per month.  They also offer, at no charge, sales and lease trends for hundreds of localities across the US.  See http://www.loopnet.com/markettrends/

 

What data sources do you use? Share your thoughts by commenting below.