Multi-Family Investment | LD2 Development Inc.

#1 Tax Strategy for Real Estate Investors

If you’re in a position where you need tax benefits to offset investment income, Cost Segregation + Bonus Depreciation give you a powerful 1 – 2 Punch of tax savings!

I’m talking about Bonus Depreciation which is a way real estate investors and developers can accelerate huge passive losses on their properties in their first year of operation!

It’s been an incredible benefit, but it drops to 80% for 2023 and 60% for 2024. For perspective, it has been only 50% most of the prior 20 years.

The good news is that if you are an investor, you can still take advantage of 80% bonus depreciation right now by purchasing an income property that is put in service before the end of this year.

So Let me back up for a minute and explain how Bonus Depreciation works.

Most people are not aware that you have the option to use what’s called Cost Segregation to depreciate certain components of your property faster.

The way it works, you have a cost segregation study done by an engineering company that specializes in Cost Segregation.

They divide the value of your building components in to 4 buckets:

Land – No Depreciation

Structural Elements – 27.5 year depreciation

Personal Property – 5 years

Land Improvements – 10-15 years

Using 100% bonus depreciation you can take all the items that depreciate in less than 20 years, accelerate their depreciation and claim all of these passive losses in your first year of operation.

The personal property and land improvement items that qualify for accelerated bonus depreciation are commonly about 30% of the building value / cost.

In our example, with total improvements at $1,500,000, 30% = $450,000 in passive losses you can claim year one!!!

if you have substantial passive income from any investment source, this is going to give you huge tax savings.

Whatever you can’t use, you can roll it forward.

Also, if you or your spouse qualifies as a real estate professional, you can use it against any regular income.

There are some great opportunities to pick up qualifying properties right now.

These can be multi-family rentals or even a single family or other smaller rental property.

The Cost Segregation study itself can be done after the 1st of the year, but the property needs to be purchased and in service (ready for occupancy and offered for rent) before the end of the year.

The clock is ticking, but there are still some great opportunities available.

DM or call me to learn more.

312.380.9650

✅ Get New Book on Amazon: Don’t Buy Multi-Family! BUILD IT

https://www.amazon.com/gp/product/B09PSFMC6Z/

✅ Amazon Author Page: https://www.amazon.com/author/rogerluri _______________________

✅ Let’s connect:

YouTube: https://bit.ly/LD2YouTube Linkedin: https://www.linkedin.com/company/ld2-development/ Facebook: https://www.facebook.com/LD2Development/

Instagram: https://www.instagram.com/ld2development/

How Lenders Make Multi Family Deals Work at Higher Rates

Investors are just coming out of their state of shock over the recent jump in rates, so lets take a look at how the new reality affects multi family investments.

Just a couple months ago (before rates jumped up) I did a video about your lender’s perspective on risk in multi family investments and another where I go into detail on your lender’s view of LTC & LTV.

Here are links for these:

https://youtu.be/Tmr6l4acJmA

The way for investors to control risk is through using less leverage which means a lower LTC/LTV.

Now that rates have gone up considerably, we see this playing out in the market in 2 ways.

First, the good news (for landlords, not for tenants):

Rents are at all time highs and all indications are that they will continue to rise.

So with rents at highs and going higher, it’s still a great time to invest in multi-family, but here’s where we run into trouble.

With higher rates, debt service (mortgage payments) will be higher and this will reduce (or even wipe out) cash flow.

Given a fixed amount of rent income and expenses, the only variable that can reduce mortgage payments is a lower loan amount.

There are only two ways to achieve a lower loan amount. One would be a lower purchase price and the other is a lower LTC/LTV which means the investor needs to put more equity into the deal.

Demand for multifamily properties has been very strong which has kept prices high and pushed cap rates to historically low levels.

We are starting to see some pressure in certain markets, but overall, sale prices have remained strong.

In order to make cash flow and risk profile numbers work, lenders are beginning to offer smaller loans (Lower LTC/LTV). Some lenders who were lending 75% LTC or 70% LTC may now be willing to lend only 65% or 60%.

This means that Investors need to put up more equity and use a bit less leverage in their investments.

Because many smaller investors are a bit less flush with cash now that their stock market positions have dropped, they will naturally be less willing and able to do that, which we’d expect would mean less buyers in the market and eventually lower prices for multifamily properties. But with rents at all time highs and pushing higher demand is still very strong, so a drop in prices may never materialize.

The bottom line is that if you are in a position to invest, it’s a great time to do it.

Using a little less leverage may lower your returns slightly, but returns are still very attractive and you have less risk!

Commercial mortgages are always adjustable anyway, so it makes less difference in the long term than with a 30 year fixed residential mortgage.

✅ Get New Book on Amazon: Don’t Buy Multi-Family! BUILD IT https://www.amazon.com/gp/product/B09PSFMC6Z/

✅ Amazon Author Page: https://www.amazon.com/author/rogerluri

✅ Download FREE BOOK: http://ld2development.com/comm-mf-mixed/

_________________________

✅ Let’s connect: YouTube: https://bit.ly/LD2YouTube

Linkedin: https://www.linkedin.com/company/ld2-development/

Facebook: https://www.facebook.com/LD2Development/

Instagram: https://www.instagram.com/ld2development/

How Higher Rates Affect Multi-Family Deals

Several months ago before rates jumped higher, I did a video (link below) talking about controlling risk where I discuss the concepts of “Loan to Cost” vs “Loan to Value”.

https://youtu.be/Tmr6l4acJmA

With today’s higher rates and prices not really dropping (yet), lenders are improving the risk profile and viability of their deals by reducing loan amounts.

For example, if a lender was willing to lend 75% of value on a multi family acquisition loan before, they may now only be willing to lend say 65%.

This makes sense since rates have gone up substantially, the smaller loan amount may have a payment similar to the payment for larger loan amount at lower rates.

Assuming the same rental income numbers, if the mortgage payments and expenses are still the same, the cash flow from the deal would be the same.

The only other way to keep cash flow in an ecceptable range would be to lower the loan amount by lowering the sale price of the property.

In most markets, there has been so much demand that we just haven’t seen prices dropping.

So higher rates may mean that multifamily investors will need to put more equity into their deals to make the numbers work. This means less leverage and a bit lower returns. But It also means less risk for you in your deal, which is why I was recommending this in my prior video several months ago even though rates were much lower at that time.

With a lower loan amount and a bit more equity in your deal, returns are reduced a bit, but still attractive (especially compared to the stock market right now), so with rents at all time highs and with all indications still pushing higher, these deals still are in big demand!

✅ Get New Book on Amazon: Don’t Buy Multi-Family! BUILD IT https://www.amazon.com/gp/product/B09PSFMC6Z/

✅ Amazon Author Page: https://www.amazon.com/author/rogerluri

✅ Download FREE BOOK: http://ld2development.com/comm-mf-mixed/ _________________________

✅ Let’s connect: YouTube: https://bit.ly/LD2YouTube

Linkedin: https://www.linkedin.com/company/ld2-development/

Facebook: https://www.facebook.com/LD2Development/

Instagram: https://www.instagram.com/ld2development/

Chicago Neighborhoods for New Construction Condos

There are a lot of great neighborhoods in Chicago where people want to live in new construction and builders are putting up small condo and rental projects to meet the demand.

So why build in Lincoln Park?

Most of these other areas have lower land prices which allows building more affordably priced units.

When you look at building a standard 3 or 6 unit building on a standard single or double lot, regardless of neighborhood, the buildings are very similar.

The size limit is determined by the zoning district, so allowances are the same accross neighborhoods. Generally builders want to build as much as is allowed in order to maximize returns. But if you look at total returns for condo sales, they vary substantially.

For example, a condo project for 3 unit building on a standard lot in NorthLincoln Square/Bowmanville might have total sales of about $1.7M.

A very similar 3 unit building In the East Village area might fetch $2M to $2.1M in total sales.

In Lincoln Park, for a similar building, the units might achieve total sales of close to $3M.

Now of course land prices are higher in the more expensive areas and construction costs will also be higher for the more expensive units because they need to have upgraded finishes, but still, the higher sales numbers far out weigh the extra costs, so margins are considerably higher for the more expensive neighborhoods.

Another consideration is that buyers in these Class A locations like Lincoln Park are more affluent and are less affected by economic factors like inflation, etc.

When they want to live somewhere they have the capital to buy or rent there regardless of market conditions.

If the real estate market experiences a glitch and values begin to drop, we see that Class A locations/ projects generally tend to hold their value best and are first to recover.

From my years serving as a Bank director and on the loan committee looking at many construction loans, I’ve seen first hand that higher end projects in the best locations always tend to weather market turbulence much better.

✅ Download FREE BOOK:

Don’t Buy Multi-Family! BUILD IT

✅ Order New Book on Amazon:

Don’t Buy Multi-Family! BUILD IT https://www.amazon.com/gp/product/B09PSFMC6Z/

✅ Amazon Author Page: https://www.amazon.com/author/rogerluri

_________________________

✅ Let’s connect: YouTube: https://bit.ly/LD2YouTube

Linkedin: https://www.linkedin.com/company/ld2-development/

Facebook: https://www.facebook.com/LD2Development/

Instagram: https://www.instagram.com/ld2development/

Appreciation vs Depreciation

People often talk about houses appreciating, but what if I told you that this is actually a myth? What actually appreciates is the land that your house sits on.

The “sticks and bricks” and all the building components that make up your house itself actually start losing value as soon as they leave the supplier, just like any other items you buy new at the store and bring home to use.

The appreciation that you see in your home’s value over the years includes the appreciation in land value plus the affect of inflation on replacement value (which includes both labor and materials).

In other words, the cost to build a new house keeps going up, so an older house gets a bump from inflation.

Still, This value is actually reduced by the depreciation of the existing structure. As the existing structure loses value over the years, at some point, the value is equal to the land value.

When you are close to this point, unless you are talking about major renovations, any money that you put into fixing it up is basically down the drain because it will still only be worth land value.

The repairs / renovations will just not be enough for a buyer to think it’s in move in condition, so it will still only appeal to a buyer who wants to tear it down.

That’s why you always want to look at any major renovation project very carefully and extrapolate the future value of your home.

In other words:

1. Value today?

(Estimated renovation cost)

2. Value after planned renovation?

3. Value estimated upon future sale?

For #3 you’ll need to estimate how long you’ll probably stay in your home.

What we see is that when we renovate, the finishes seem new to a buyer for the first few years. After a few years, finishes begin to seem dated and negatively affect the price.

If you own a property that is in need of some major work, you’ll want to get a professional to help you to evaluate your options.

I find that often, people are surprised when they look at the numbers.

It can make a substantial difference to your bottom line.

✅ Get New Book on Amazon:

Don’t Buy a New House! BUILD IT https://www.amazon.com/gp/product/B09PRTVBMH/

Of course It’s going to take some effort on your part and it’s definitely not for everybody, but if you enjoy creating new things in your life and building wealth in the process, it will be a lot of fun for you.

✅ Amazon Author Page: https://www.amazon.com/author/rogerluri_________________________

✅ Let’s connect:

YouTube: https://bit.ly/LD2YouTube

Linkedin: https://www.linkedin.com/company/ld2-development/

Facebook: https://www.facebook.com/LD2Development/

Instagram: https://www.instagram.com/ld2development/