Renters became a majority in 23 cities over the past decade even as ownership increased, according to a new study by Rent Café.
“We looked at 10 years of U.S. Census housing data to determine where we stand now in terms of renter and owner population. Renting made significant gains in the last decade but dipped in the latter half, reaching a 7-year low in 2019. In the meantime, ownership rose to an all-time high, slowly rebounding after the great recession,” Rent Café said in the study.
Renters took over 23 cities with more than 100,000 residents between 2010 and 2019. Established hotspots such as Seattle or up-and-comers like Memphis and Pittsburgh transitioned from an owner to a renter majority.
In a surprising turn, Chicago, Sacramento, Reno, and Baltimore are among the 12 new owner-majority cities.
Looking at the cities with the fastest-growing share of renter population, four of the top 10 cities are in Texas. Frisco and Plano are in the lead with a 41 percent and 59 percent change since 2010. On the other side, ownership gains were much smaller; Hartford, Conn. saw the largest increase in owner share, 27 percent.
Renting made significant gains in the past decade but dipped in the last 5 years
The renter population grew by eight million in the last decade, and is now 107 million strong.
Specifically, renters currently make up 33.6 percent of the U.S. population — up from 33 percent in 2010. However, the latest numbers are far from the 2015 peak in renting, when 111 million Americans rented their homes for a 35.5 percent share. In fact, the number of renters reached a seven-year low at the end of the decade.
The number of renters entered a downward trend while ownership has been slowly rebounding
The start of the decade saw a sharp rise in the number of renters – following the housing crisis of 2008 – which climbed by 3.4 percent in 2010 and continued to increase by more than 3.0 percent until 2012.
However, by the time renting peaked in 2015, the growth rate had slowed to 0.9 percent. In 2016, the number of renters dipped – the first time since 2004 – by a slight 0.1 percent. Since then, the renter population has been on a downward trend, decreasing by 1.0 percent in 2019.
Renters took over 23 cities in the past decade, including Seattle
However, renting was still the decade’s winner among the nation’s large- and mid-sized cities.
Despite the recent downward trend, 23 cities with more than 100,000 residents transitioned from an owner to a renter majority in the last 10 years — from job hubs such as Seattle to up-and-comers like Boulder, Colo.
Summary
Overall, the housing trends of the past decade suggest that renting is maintaining its popularity in the nation’s large- and mid-sized cities, while homeownership has and will continue to rebound. But, with Gen Z entering adulthood and millennials settling down, the coming decade will likely see more shifts in the housing landscape.
This week the question for Ask Landlord Hank is about a non-paying tenant, who was already a problem, who has now filed a COVID-19 form. Remember Landlord Hank is not an attorney and is not giving legal advice.
Dear Landlord Hank:
Our 20-acre privately owned rental duplex community is only experiencing one non-paying tenant, for which we are very grateful. We do have one problem tenant who received an eviction notice between the last two moratoriums’ time frames.
This man submitted the required form for COVID-19 job loss, but as yet, refuses to identify his new employer or the income he and the mother of his child are receiving from her job. They have not paid rent since September. They are allowing dog feces to pile up on the common lawn between them and their neighbor, a lease violation. We live in Garland County, Ark.; the sheriff’s department is not processing evictions during the moratorium.
Is there any hope for us to evict this couple, or must we wait, and pray, the moratorium is not extended again?
Thank you so much for any guidance you may share.
-Diana
Dear Landlady Diana,
You have been very lucky you only have one bad apple.
If the sheriff’s department is not processing evictions and setting tenants out, then you are stuck.
I would call a landlord/tenant attorney in your area just to make sure, and also talk to the county court division that handles evictions – often magistrate court – and see what they say.
I think that if your tenant has filed the COVID-19 forms, you’ll have this tenant until the moratorium has been lifted. Good luck.
Sincerely,
Hank Rossi
On the question of a problem non-paying tenant and covid-19 form Hank says, “If the sheriff’s department is not processing evictions and setting tenants out, then you are stuck..”
Ask Landlord Hank Your Question
Ask veteran landlord and property manager Hank Rossi your questions from tenant screening to leases to pets and more! He provides answers each week to landlords.
Veteran investor John Wilhoit blogs this week about the four reasons a rental property may look beat-up and not be getting the attention it should from the owner.
A rental property may look beat-up for several reasons as rental property assets can fall into disrepair in many ways and for many reasons.
Often, just walking or driving by an asset will show signs of disrepair or a lack of care all without stepping on property!
Why do people allow potentially valuable assets left to fall back into the sand? There are a myriad of reasons, of course.
Following are the categories that most often result in assets looking like they have been beat with an ugly stick. The next time you see one it is probably due to one of the following factors.
No. 1 – Inattentive Ownership
Owning real property assets is not the same as knowing how to manage real property assets.
This distinction is clear every day. To me, it is in the same category as making a baby versus raising a child; these are two completely different skill sets, yes? Thus, if ownership is unconcerned about operational efficiencies, property presentation and safety, then all is lost (eventually).
Ownership that has a stake in asset operations on paper only requires professional property management to succeed. Of course, asset owners are not required to be professional property managers, however, they should be engaged in the selection of quality management for their investment to have and maintain future value. Institutional owners hire professional asset management for this function.
The success or failure of an investment beings and ends with management expertise.
There is professional management and then every other type of management; piecemeal, unqualified, inexperienced, half-baked, etc. Knowing that management is a key component to successful operations; why not deploy the professionals? Some will say that it is too expensive. Well, so is incompetence and on-the-job-training for the ill-equipped. The property suffers, yield suffers, turnover increases, expenses are untamed. Non-professional management brings no upside potential.
No. 3 – Antiquated Financing
Getting the capital stack right is no small task, particularly in an ever-changing marketplace.
Considering that appropriate leverage means different things to different people, the best approach is to align the financing package with the long-term objectives of the primary owners. With this structure, you are applying the same perspective to individually owned assets as you would institutionally owned assets.
Each property should have its own plan for achieving asset-level goals, first, followed with guidance about intended term of ownership and how the asset-level goals fold into investor objectives.
No. 4 – Changes in Market Dynamics
Markets do shift.
Markets do deteriorate for all sorts of reasons. Changes to the number and type of jobs within close proximity to residential assets has significant affect on the value of these assets. If a “boatload” of jobs disappear there is little a property can do in the short run to usurp this. Earlier this decade every class of apartment property in Houston Texas had specials including two-months free with a twelve month lease.
This changed with the oil boom returning. Then the hurricane. Same for Detroit metro with auto makers going from producing 15M cars a year to 11M. That type of free-fall decimates entire submarkets.
So before making “absolute” assumptions about why a particular property is looking dowdy (or worse) consider the cause could be any one of the above or a combination of these with other factors sprinkled in. Remember the bed bug scare in New York City? Flooding in New Orleans? The “assume” word runs in the same circle as “if”. These are seldom good words on which to make sound business decisions.
HUD is charging Post Presidential Property Owner, LLC, and Post Commercial Real Estate, LLC, the owner and manager respectively of Presidential City Apartments in Philadelphia, with disability discrimination.
A tenant with a disability requiring an emotional support animal reached out to HUD alleging that she had been denied a reasonable accommodation to have pet fees waived at the apartments for such an animal.
The Fair Housing Act prohibits housing discrimination based on disabilities, including denying reasonable-accommodation requests for the waiver of pet fees for assistance animals and rejecting requests for a designated handicapped parking space needed by a person with a disability.
The complaint said “the tenant received an email from apartment’s counsel stating ‘a landlord is entitled to charge pet fees for an emotional support animal, which is considered a pet, unlike a service animal’.”
Based upon this evidence, HUD recommended testing the subject property.
The tests focused on reasonable accommodations relating to designated accessible parking and emotional-support animals for prospective tenants with disabilities.
According to the complaint, several testers were told there was a $250 pet deposit required. One tester who visited and toured the property told leasing specialist Dayanna Reeves she was looking for an apartment for her niece. When Reeves asked if the niece had any pets, the tester said that her niece had an emotional-support dog. Reeves told the tester about the $250 refundable deposit for the animal and the monthly pet fee of $25.
Leasing director Crystal Ayers confirmed that the apartments had a policy that it would not waive pet deposits and monthly pet fees for tenants with emotional-support animals. Ayers further stated that respondents applied this policy to all the properties it owned and managed, according to the complaint.
“The department found that respondents denied reasonable accommodation requests of testers representing prospective tenants with a disability-related need for an emotional-support animal.”
The Fair Housing Act was violated, according to the complaint, denying testers’ reasonable accommodation requests for designated parking and the waiver of pet fees for emotional-support animals for prospective tenants with a disability.
“Reasonable accommodations enable persons with disabilities to fully utilize and enjoy their homes and shouldn’t be denied,” said Anna María Farías, HUD’s Assistant Secretary for Fair Housing and Equal Opportunity, in the release.
“HUD will continue taking action to protect their rights by ensuring that housing providers meet their obligations under the Fair Housing Act.”
Landlords and tenants are facing rent delinquencies due to covid-19 so here are some thoughts to help from a veteran property manager.
By Justin Becker
Property Manager
There is no denying that right now, COVID-19 continues to affect the real-estate and rental market.
If you’re a property manager or landlord of a multifamily housing community or complex, navigating these waters for the last eight months has been somewhat challenging.
Nevertheless, with no real end in sight, mass unemployment, fluctuation in available job opportunities, and the ongoing pandemic, it is still very difficult for tenants to be able to pay their rent and still afford their other monthly expenses.
Working with tenants who are experiencing economic hardships due to COVID-19 has been par for the course for these last couple of months. Moreover, with most property managers’ and landlords’ hands being essentially tied in regard to legally dealing with late rent payments or lack of payments, it is not too surprising that people are starting to get creative by finding proactive ways to deal with rent delinquencies.
Other than being more flexible, many property managers are not sure what else they can do during these uncertain times. But the good news is that there is definitely more that can be done.
That said, here are the five best ways to deal with rent delinquencies right now.
No. 1: Build Proactive Partnerships
One of the best things you can do as a property manager right now is to collaborate with your tenants to ease the pressure and address financial hardships.
Obviously, open lines of communication are key here, and looking for a win-win solution to the problem makes everyone walk away from negotiations feeling a little better. A prime example of building proactive landlord-tenant partnerships is deferring a portion of rent and establishing a reasonable repayment plan.
Alternatively, you can decide if a low rental rate moving forward is a feasible option for tenants affected by the ongoing pandemic. This may be a better option for property managers who have mobile homes for rent or those leasing single-family dwellings. Otherwise, if you have apartments for rent, you may need to consider if finding new tenants is more cost-effective in the long run.
No. 2: Invest in Tenant Loyalty
Yet another proactive option for dealing with rent delinquencies now is to invest in tenant loyalty.
For instance, if you know tenants and residents are struggling during this time but are still finding a way to make the rent, why not acknowledge that?
Invest in tenant loyalty and reward action where you can.
Try hosting appreciation events that get the community out and having fun (using, of course, the CDC guidelines). This allows your residents to relieve some stress but also breaks down walls between landlord and tenant.
Similarly, providing tenants with incentives to stay even after all of this is over, by giving a small rental credit or even a gift basket with needed supplies (masks, hand sanitizers, etc.), can lead to long-term retention. Such incentives can also be effective if you manage a community with mobile homes for sale. Here, homeowners can easily relocate their manufactured home once their lot-rent lease is up; thus, it pays to invest in these particular tenants especially.
No. 3: Paying Close Attention to Future Changes
It is also beneficial to keep your ear to the ground.
Apartment-eviction moratoriums did not spring up overnight, and there was definitely talk of what local and state governments might do before they happened.
Therefore, as more and more people are falling ill to COVID-19 and businesses continue to close their doors, paying closer attention to what the future of renting and leasing holds is crucial.
Furthermore, it is important to note that landlords and owners are not without a voice right now. Becoming actively involved, as much as you can, may just help save your business and keep roofs over your tenants’ heads.
So, stay apprised of relevant industry organizations and support those that will end up playing a role in how things look, legislatively speaking, and moving forward.
No. 4: Offer Job Postings
Along those same lines, if you know of potential job openings or industries that are hiring during COVID-19, why not share it with your tenants?
There is a whole host of employment opportunities online for remote workers, essential workers, and healthcare providers. So, if you stumble upon jobs that are perfect for any of your unemployed residents, it might be worth the mention.
And, since you are still actively keeping lines of communication open, you can send job-posting emails, as well as adding a section to your website page for local employment opportunities. In fact, little things like this will help your tenants feel like they are not alone in this and will help to foster positive relationships within the community.
No. 5: Provide Assistance Information
Making it easier for your tenants and residents to get in touch with agencies that are providing much-needed assistance is another way to make a difference.
Helping your residents secure food, homeschooling supplies, affordable medications at NYGoodHealth, cleaning supplies, utility-payment assistance, and so on makes their financial responsibilities a little easier to manage.
This, in turn, is likely to increase the chances that your tenants or residents will be able to pay rent or adhere to their new rental agreement and payment arrangements. Leasing-office staff can help take it a step further by helping to set up appointments with delinquent residents so they can contact the necessary parties via phone with a property management team member.
Remember, at the end of the day, you and your tenants are truly a community; thus, working together in this manner should not be difficult because when your tenants are good, by extension, so are you.
Likewise, you may even want to consider partnering with local charities and non-profit organizations if you know a large sector of your community could benefit. For example, if you have several tenants that are veterans or many residents with kids, then it does not hurt to see what is available in the way of assistance for them right now.
Bonus suggestion: Early-Payment Raffles
Lastly, a bonus suggestion that property managers and landlords may want to consider is hosting early-payment raffles.
This is a great way to show appreciation to tenants that are still meeting their financial obligations. Moreover, early-payment raffles can be a wonderful incentive for people who are torn between paying rent in full or allocating a portion of those funds to something else. Plus, the entire raffle program can be done without requiring anything additional from your residents or making management team members’ jobs harder.
Everyone that pays a month in advance will automatically be entered into a raffle each month to receive money off the following month’s rent. What’s more, you can up the stakes by offering anyone who pays two months’ rent upfront a guaranteed $100.00 off their rent the next month.
Final Thought on Rent Delinquencies
Real estate or rental housing is fundamentally a relationship business, even in the midst of an ongoing pandemic.
While no one can truly predict the future, people need housing. As a result, looking for viable or proactive solutions to keeping people in their homes is what matters now. That said, property managers or landlords also have financial obligations to meet and their own housing costs.
So, it is imperative that we all work together to weather the storm. Through effective communication and landlord-tenant collaboration, collective anxiety and distrust can be diffused. By following these suggestions mentioned above, you can help curate solutions that will bridge the shutdown, which means landlord-tenant relationships ultimately can be preserved, and on-time rental payments will no longer be a thing of the past.
About the author:
Justin Becker is a property owner in the state of Michigan and has a passion for managing communities. He owns apartment complexes and mobile home communities, and has been writing his own blogs for his properties for several years.
Seattle rents declined 4.2 percent over the past month, and are down sharply by 12.2 percent year-over-year, according to the latest report from Apartment List.
Currently, median rents in Seattle are $1,483 for a one-bedroom apartment and $1,849 for a two-bedroom.
This is the seventh straight month that the city has seen rent decreases after an increase in March. Seattle’s year-over-year rent growth lags the state average of -4.0 percent, as well as the national average of -1.4 percent.
“As the COVID-19 pandemic and its ensuing economic fallout continue to overwhelm renters across the country, our monthly rent estimates paint the picture of a protracted national slowdown and uneven recovery,” said Chris Salviati, Housing Economist at Apartment List.
“Our national rent index is down 1.4% year-over-year, but there is tremendous regional variation beneath the surface. San Francisco and New York City continue to lead the nation in pandemic rent drops, while smaller markets like Boise and Colorado Springs are heating up,” Salviati said.
Rents rising across the Seattle Metro
While Seattle rents decline, rent prices in the rest of the metro are seeing the opposite trend.
Rents have risen in 6 of the largest 10 cities in the Seattle metro for which Apartment List has data. Here’s a look at how rents compare across some of the largest cities in the metro.
Lakewood has the least expensive rents in the Seattle metro, with a two-bedroom median of $1,382; additionally, the city has seen rent growth of 0.4 percent over the past month, the fastest in the metro.
Seattle proper has seen the biggest rent drop in the metro.
Redmond has the most expensive rents of the largest cities in the Seattle metro, with a two-bedroom median of $2,131; rents went down 2.3 percent over the past month and 6.9 percent over the past year.
A property manager who added rooms and walls to rental properties without the owners’ consents has been ordered to pay $585,000 in restitution, according to a release.
A King County Superior Court Commissioner in Seattle ordered an Auburn property management company to pay after the company’s owner hijacked the homes of people who hired his company by adding new walls and rooms without the owners’ knowledge or consent, and refusing to pay homeowners.
In addition to financial penalties, the commissioner also barred company owner Travis A. Jackson from marketing property management services without first obtaining a license; making unauthorized modifications to homes; and making false and misleading representations. The court intended for $256,000 to go toward restitution for people affected by the scheme and an additional $252,000 in civil penalties. The civil penalties go to the Washington state general fund. Jackson must also pay just more than $76,000 in attorney costs and fees.
In March, Washington Attorney General Bob Ferguson asserted Jackson formed a property-management company, NW Property Solutions, without getting a license. He then began preying on homeowners who wanted help renting out their homes, according to the release.
Jackson advertised his property-management services for free, then pressured homeowners to sign contracts the commissioner described as “unfair” and “unconscionable.” The contracts gave him sole control over the properties in exchange for monthly rental payments to the homeowners. Those contracts contained provisions hidden in fine print that gave Jackson’s company the right to withhold rental payments if the owners attempted to contact Jackson via phone about issues at the properties.
Without telling homeowners or obtaining their approval, Jackson built new interior walls to expand the number of bedrooms in the rental properties he controlled. For example, in one case, Jackson built three additional bedrooms into a home zoned for no more than six people, then packed the home with 14 tenants. When local government officials imposed fines and penalties, Jackson then refused to pay and left homeowners to foot the bill.
The order noted that Jackson’s conduct was deceptive and “substantively ‘unconscionable’ and unfair.”
“Our office has a robust team of attorneys who protect Washingtonians from scams,” Ferguson said. “The court described this scam as unconscionable. If you feel like someone is taking advantage of you, please let my office know.”
Washington Attorney General Bob Ferguson said, ““The court described this scam as unconscionable. If you feel like someone is taking advantage of you, please let my office know.”
Jackson also operated a separate house-cleaning business. In October 2019, Ferguson filed criminal charges against Jackson for $33,000 in unpaid wages in connection with his ownership and operation of the cleaning service.
Other than one telephonic conference with the court, Jackson never responded to the charges and he never produced any information requested by the state or court. Because Jackson failed to provide information, the attorney general’s office is unaware of the full scope of his scheme, except for the half dozen people who complained to the office about incurring thousands of dollars of repair bills, unpaid rent and unpaid utilities due to Jackson’s mismanagement of their property, according to the release.
Property manager left homeowners helpless
The property manager, Jackson, was routinely late in paying rent to the homeowners and in many cases simply stopped paying altogether. When homeowners contacted him with concerns, he accused them of violating the contracts and threatened to withhold additional payments and to take legal action against them.
One homeowner — a legally blind woman who owned a house in Tacoma — described her experience to the attorney general’s office. She noted in a declaration provided to the court she had found Jackson’s business online around September 2019 and contacted him because she wanted to rent her house out to tenants. Jackson informed her he was a real estate agent and had a license.
A month later, Jackson asked her to sign a new contract that covered additional parts of her house. Jackson had not paid the first month of rent and the homeowner said she would not sign anything until he paid. When Jackson continued to withhold payments, putting the homeowner at risk of defaulting on her mortgage, she signed the new contract and added the words “under duress” next to her signature.
Home inspectors who subsequently went into her house told her Jackson, the property manager, had turned her living room into multiple bedrooms and placed most of her furniture in the back yard. She noted she had lost thousands of dollars in unpaid rent and utility payments. When she placed her house on the market, an offer came in that was significantly less than an offer she had received before Jackson went into her home, reflecting the extent of damage to the home. She also has received a foreclosure notice on her house from her lender.
Another homeowner in the Bothell area said he contracted with Jackson in May 2019 after a friend recommended the service. Two months later, a city building inspector told the homeowner the house had far too many bedrooms and tenants for the home’s septic system to support. The inspector sent a letter noting the homeowner was liable for multiple penalties for the operation of a “congregate living facility.” Jackson denied the city inspector’s report, and told the homeowner only “five or six” people lived in his house. Jackson said he would not pay the homeowner at all if he kept calling.
The city gave the homeowner until October 2019 to reduce the number of bedrooms in the home or upgrade the sewage connection. The city charged the homeowner $22,000 in civil penalties and Jackson told the homeowner he would pay the costs. Jackson never paid. Jackson ultimately gave the homeowner a post-dated check in December 2019 to cover unpaid rent. A month later, Jackson told the homeowner not to cash the check. The homeowner switched to a new property manager, then worked out living arrangements with the tenants.
A resurgence of apartment leasing activity during the third quarter of 2020 yielded a strong demand for skilled professionals, according to the latest jobs report from the National Apartment Association (NAA).
The NAA Education Institute’s Apartment Jobs Snapshot showed job openings in the multifamily sector comprised nearly 44.0 percent of positions available in the real estate sector, surpassing the 5-year average of 30.9 percent.
Maintenance talent was the most sought after; with residents spending more time at home, the need for repairs and maintenance has increased significantly.
Dallas, Los Angeles, Washington, D.C., Atlanta, and Houston lead the nation for apartment job demand.
Leasing activity was also resilient in the student housing sector, as students are in search of housing near their campuses.
According to RealPage, net move-ins totaled 146,517 units in the third quarter.
Student housing apartment jobs
During the past 12 months ending September 30, 2020, demand for student housing management professionals was highest in College Station, Columbus, Louisville, Chicago and Austin.
Leasing consultants were in highest demand, representing almost 8.0 percent of all student housing job postings. Overall, the off-campus student housing sector remains resilient. Demand has been solid, mainly driven by students who prefer to live nearby their campus.
California voters rejected rent control In Tuesday’s election by defeating a ballot measure called Proposition 21 that would have rolled back state limits on rent control.
Proposition 21, which failed, would have allowed local governments in California to put rent control on all kinds of rental property. Although ballots are still being counted, the “no” votes accounted for almost 60 percent of the more than 11 million votes counted so far, according to reports.
Voters had rejected a similar proposal in the past.
The Apartment Association of Greater Los Angeles said Proposition 21 was soundly defeated by a large majority of California’s voters. “If it had passed, Proposition 21 would have imposed irreversible and adverse impacts on rental housing throughout the state,” said Daniel Yukelson, executive director of the Apartment Association, in a release.
“Proposition 21’s proposed, extreme price controls on virtually all of California’s rental properties would have exasperated our already existing housing shortages and affordability issues. The proposal would not have created even one unit of new housing, let alone a unit of affordable housing. Had Proposition 21 passed, it would have been nothing more than a ‘bankruptcy bill’ for the rental housing industry here in California,” the association said.
If you have a 1031 exchange coming up, you have multiple choices to reinvest the proceeds from your sale. That’s a good thing, because coming out of your prior investment, maybe you’re tired of the three Ts — tenants, toilets and trash — and you’d rather leave the day-to-day property management to others.
A 1031 exchange (also known as a like-kind exchange) allows an investor to defer capital gains, depreciation recapture and other taxes at the time an investment or business property is sold if the net equity from the sale is reinvested in a property of the same or greater value. Fortunately, “property” does not mean the proceeds have to be reinvested directly into another property that you purchase outright and manage on your own. There are multiple ways the gain can be reinvested to qualify for preferential tax treatment.
Here’s a look at four alternative 1031 exchange investment options for investors to know.
#1: Qualified Opportunity Zone Funds
Qualified Opportunity Zone Funds, which were enabled by the Tax Cuts and Jobs Act of 2017, offer benefits including tax deferral and elimination that many investors nationwide have utilized. A fund of this type can invest in real property or operating businesses within an Opportunity Zone, typically a geographic area in the U.S. that has been so designated because it may be underserved or neglected. As such, there may be a higher level of investment risk. Also, the time horizon of the fund may be as long as 10 years, which means tying up your capital for that length of time in an illiquid real estate fund.
If you seriously consider this investment option, be aware that these funds may have been set up to invest in only one property or business, in which case there is no diversification. But the opposite may also be true. With a fund of this type, there can be potential cash flow and appreciation, as well as positive economic and social impacts on a community. This fund option also works if you are selling other appreciated assets like stocks or businesses.
#2: Tenants-in-Common Cash-Out
In addition to using a 1031 exchange to defer taxes, some investors also want to improve liquidity so they can potentially take advantage of other buying opportunities in the future. With a Tenants-in-Common (TIC) investment, you own a fractional interest in a commercial, multifamily, self-storage or other type of investment property. The TIC cash-out is a specific strategy where the investment property is purchased using zero leverage so it is debt-free, with no mortgage, going in. Then, after a year or two, the property can be refinanced at 40% to 60% loan to value, effectively providing investors with a large portion of their initial invested principal tax-free in the form of a cash-out refinance. Under this scenario, the remaining equity in the investment stays in the TIC property, providing potential distributions to investors while they get to enjoy liquidity with a large portion of their funds.
#3: Direct Purchase of Triple-Net (NNN) Properties
With a triple-net leased property, the tenant is responsible for the majority, if not all, of the maintenance, taxes and insurance expenses related to the real estate. Investors utilizing a 1031 exchange often are interested in purchasing NNN properties, which typically are retail, medical or industrial facilities occupied by a single tenant. On the surface, these investments may seem passive, but there are three distinct downsides, namely concentration risk if an investor places a large portion of their net worth into a single property with one tenant; potential exposure to a black swan event like COVID-19 if the tenant turns out to be hard hit; and management risk.
Remember the three Ts I alluded to above. If you’d prefer a passive investment, the direct purchase of a triple-net property is not likely for you. Others may allude to triple-nets being management free. However, having owned dozens of net lease properties throughout my career I can tell you they are anything but management free. (Just ask my in-house legal counsel, and asset management and accounting teams.)
#4: Delaware Statutory Trusts
In contrast to the example above where you buy the whole property yourself, Delaware Statutory Trusts (DSTs) are a form of co-ownership that allows diversification and true passive investing. Most types of real estate can be owned in a DST, including retail, self-storage, industrial and multifamily properties. A DST can own a single property or multiple properties. In a 1031 exchange scenario, you can invest proceeds from the prior property sale into one or more DSTs (holding one or more properties) to achieve diversification.
DSTs often hold institutional-quality properties. The properties could be occupied by single tenants operating under long-term net leases, such as a FedEx distribution center, an Amazon distribution center, a Walgreens Pharmacy or a Fresenius dialysis center. DSTs can be one of the easiest 1031 replacement property options to access because the real estate already has been acquired by the DST sponsor company that offers the DST to investors.
Regardless of the approach you choose to reinvest the proceeds from your prior sale, the net effect of 1031 exchange investing is generally the same. The initial invested capital and the gain can continue to grow, potentially, without immediate tax consequences. Then, if and when the new investment is sold down the road without the equity reinvested in another exchange property, the prior gain would be recognized.
Dwight Kay is founder and CEO of Kay Properties and Investments, LLC, which operates a 1031 exchange property marketplace at www.kpi1031.com.
About Kay Properties and www.kpi1031.com
Kay Properties is a national Delaware Statutory Trust (DST) investment firm. The www.kpi1031.com platform provides access to the marketplace of DSTs from over 25 different sponsor companies, custom DSTs only available to Kay clients, independent advice on DST sponsor companies, full due diligence and vetting on each DST (typically 20-40 DSTs) and a DST secondary market. Kay Properties team members collectively have over 115 years of real estate experience, are licensed in all 50 states, and have participated in over 15 Billion of DST 1031 investments.
This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please read the entire Memorandum paying special attention to the risk section prior investing. IRC Section 1031, IRC Section 1033 and IRC Section 721 are complex tax codes therefore you should consult your tax or legal professional for details regarding your situation. There are material risks associated with investing in real estate securities including illiquidity, vacancies, general market conditions and competition, lack of operating history, interest rate risks, general risks of owning/operating commercial and multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. There is a risk of loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, potential returns and potential appreciation are not guaranteed.
Nothing contained on this website constitutes tax, legal, insurance or investment advice, nor does it constitute a solicitation or an offer to buy or sell any security or other financial instrument. If you are not the intended recipient of this message, any use, dissemination, distribution or copying of this communication is strictly prohibited. If you have received this communication in error, please immediately notify the sender and permanently delete all copies that you may have. Securities offered through Growth Capital Services, member FINRA, SIPC, Office of Supervisory Jurisdiction located at 582 Market Street, Suite 300, San Francisco, CA 94104.
